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Market Plus: Feb 01, 2008: Tomm Pfitzenamaier

posted on February 1, 2008

Market Plus: Feb 01, 2008: Tomm Pfitzenamaier Pearson: Welcome, this is the Friday, February 1st, 2008 version of market plus. Glad you've joined us here at our Market to Market Web site. I'm Mark Pearson. With us one of our senior analysts, Tomm Pfitzenmaier. Tomm, all this volatility and I'm talking to a lot of producers at meetings all around the country, over in my home area of Waseca, Illinois this week people were saying, you know, what do we really need to do here? And literally people who have been going through, you know, a farm program that gave us LDP's where we really did a lot of our marketing at the local FSA office who are maybe rusty or maybe have not used hedging tools this may be a year where you really need to get that done, get some insurance coverage don't you?

Pfitzenmaier: Yeah, we alluded to it a little bit on the show but there's one of the things -- one of the things you want to do in your marketing program is I think maintain inventory. And people say well how do I do that, I've got to make a sale, I've got to get some money, how do I do that? And there is another consideration you have to make and that is what do you think the basis is going to do. If you think we're going to have a moon shot here, if we're going to take a big jump up, and most people think we're at least going to move somewhat higher, if you think we're going to have a big jump up and the basis is going to widen that is a situation where you have to say to yourself where is the most advantageous place for me to own this grain. And in that case the most advantageous place is for the owner on the board. And probably the best way to do that is calls. So, you're going to make a cash sale now while the basis is relatively narrow, convert that into a call, you've got the cash, you've got the money in the bank so you can pay your bills and do whatever you need to do but you also have maintained ownership of that inventory in a vehicle that will participate if the market rallies. If the market doesn't rally you still have the cash sale and you've got the money in the bank. Now, if you're in the situation where you think wow this basis is fairly tight but I think it's going to get tighter, I think ethanol plants are going to be out buying my corn, we're going to go higher but they're really going to have to bid up and narrow that basis up then you're in a situation where you want to buy puts because in that situation cash is going to be king. Again, go to the one that is going to be the strongest, that is the cash, maintain your cash but protect yourself by buying puts to protect against a down trend. So, depending on what your outlook is and what you think is most advantageous for your farming operation you have to choose between those two strategies I believe.

Pearson: Alright, here's what I'm hearing from people. Oh, I have to buy a put, that's pretty expensive, you know, right now if I want to buy something that is close to being in the money it's pretty high. Are there some ways we can offset that cost that maybe don't require as much risk?

Pfitzenmaier: There's strategies you can use, yeah. For those who want to sell some corn and buy a call I'm saying that option premium is high, I think they make a good point. But you can offset that some by buying a $5 call and selling a $6 call or buying a $5.20 call and selling a $6.40 or set some upper limits because most people don't think we're going much above $6 to $6.40 so set your upper limit up in an area where you think, wow, I'd be amazed if we even got there and buy some premium and sell some premium to offset it. On the puts that's a little more difficult because you lose some of your down side protection if you do that. So, in that case you probably just have to buck up and pay for the put. I don't know of too many strategies that are going to really offset and give you the kind of protection that you want.

Pearson: And both those option strategies involve a fixed cost without the concern for margin. With this volatility, Tomm, I mean, that's what is keeping a lot of people from doing anything.

Pfitzenmaier: Yeah, even in that bull call spread that I'm talking about on buying a call, selling a call you only have, the only cost you have is the cost to buy the spread, there's no additional margin or anything to do with that. Yeah, I mean, you're in volatile markets, it's going to cost more money. I mean, that's just part of having $4 and $5 corn is you're going to have option strategies that are going to cost you a little more.

Pearson: I heard a couple of farmers say if they don't get, you know, $4.60 to $4.80 for some of this corn, $10.50 to $11.00 on their beans they've got some profitability issues with these inputs.

Pfitzenmaier: Yeah, well, that's why I think a lot of people are looking pretty hard at making a cash sale. You know what you've got, you know you've got that money to pay your bills and then go ahead and re-own it with a call option. That's why I think a lot of people are choosing that option because they're right, if you don't have the money in the bed at some point you're going to have to make a sale. Sometimes the rubber has to hit the road in this marketing plan and that's the way to do that and you can go out and buy those bull call spreads, not spend a lot of money, 30, 35 cents and have the ability to participate in that rally if it does take off on you.

Pearson: Absolutely, alright, some great ideas, some great strategy ideas, in a volatile trading year like we're in right now hopefully get some people up and, again, take advantage of these markets while they're strong.

Pfitzenmaier: Yeah, absolutely.

Pearson: Thank you, Tomm Pfitzenmaier. That will wrap up market plus. Thank you for being with us. Be sure to tell your friends and neighbors to join us here at our Market to Market Web site. And from all of us on Market to Market I'm Mark Pearson, have a great week.

Tags: agriculture commodity prices markets news