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Market Plus: May 12, 2006

posted on May 12, 2006

Market Plus: May 12, 2006

Pearson: Welcome to the Market Plus page here at our Market to Market Website. Mark Pearson and Virgil Robinson with us this week. And, Virgil, I wanted to talk about a couple of things that I know you've, I don't know how many times you're out speaking to farm groups but it's a bunch all winter long, hedge to arrive. I heard people talk about it. The hedge to arrive got kind of a bad name a few years back but it can be a great device for getting a crop sold. What is your take on hedge to arrive in 2006?

Robinson: I agree, Mark, very viable tool and based on that experience a few years back there have been adjustments made, amendments made to the criteria for using hedge to arrive. Point I'd like to visit with you about, though, it begins often times, Mark, by establishing your futures fix or your futures price in the December, the new crop futures contract and then eventually rolling that forward and capturing the carry in the futures market. Each of the last two years that has worked exceptionally well. Now, unlike the last two years, this year is one where year over year U.S. ending stocks are not projected to grow but, in fact, decline and decline pretty significantly. So, for those who have this concept in mind and a couple of years good experience it would be my best opinion that instead of establishing that first leg in the December '06 futures contract it's probably wise to capture the carry that is currently in the December, for example, versus July '07 futures contract which is about 20 or 21 cents, Mark.

Pearson: Right.

Robinson: In years analogous with this when inventories decline year over year it is not uncommon but rather more common for that carrying charge spread to attain its widest levels in the spring of the year and then begin to narrow. So, the point I am making here is that December, excuse me, that July 2007 futures contract is around $3.10. So, establishing your short hedge with intent of storing your grain and then waiting for the basis in the spring of 2007 to narrow when, again, we think about going back to the fields and planting corn, I think is the right idea in lieu of the last two years the way the mechanics have worked. So, I think, Mark, instead of that, establishing that position in December just go directly out to that July 2007, capture the carry that is currently there and I think that is a good start for someone that has done nothing to this point in time.

Pearson: That's right and we talked about it on the show but those deferred contracts on corn, '07, '08 north of $3, a lot of people are talking about those. This might be one strategy for that.

Robinson: Yeah, Mark, it would be at least for the immediate and the near term, this fall's crop. And, again, the criteria is you have to have storage of your own, Mark, and you have to have the financial wear with all to sustain that inventory without need of significant cash inflow in between those, in the interim between establishing and executing the contract.

Pearson: Alright, real quick Virgil, we've got about a minute, soybeans as we mentioned on the show you're looking for maybe a 20, 25, maybe 40 cent rally in beans. You've talked about making sales, covering those with an options strategy, that's worked pretty good so far. What is your take going forward on bean sales?

Robinson: If someone has done nothing to this point, Mark, I still have a very strong respect for the seasonality and I know that seasonality is not necessarily predictive, but I still have a strong sense of seasonality in that market and it is not uncommon but rather more common for beans to peak in this May, mid-May, late-May time window than not. So, out of all due respect to the seasonality and the often time discussed fundamental structure of this U.S. and global market I would think very strongly about making some type of cash forward contract, some type of short hedge and attaching basis later. In the next two to three weeks, Mark, and I am of the opinion the bean market is capable of another 20-40 cent rally from tonight's close.

Pearson: Okay, there you have it. Virgil, thank you so much, some great insights. Thank you so much for being with us and we thank all of you for joining us here at our Market to Market Website. And, of course, be sure to join us again next week. From all of us here on Market to Market, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news