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Market Plus: Mar 31, 2006

posted on March 31, 2006

Market Plus: Mar 31, 2006

Pearson: Welcome to the Market Plus page here at our Market to Market Web site. Mark Pearson with you and, of course, John Roach, our senior market analyst joining us this week. And John, I want to talk about something you alluded to on the show in terms of the strategies that you're utilizing for producers. And the fact that you're kind of changing your mix a little bit, particularly on corn. And, of course, corn is on everyone's mind with the surge we had Friday in the market and also the idea that, as you said, the market is going to have to bid up to buy some corn acres maybe.

Roach: Well, the market wants to take corn higher it seems to us. I mean, it's been that way all year long. When it looked like the corn market would go one way or another it seems like it's always been an up move this year. And that is because of the heavy speculative influence that we're getting from the various commodity funds and from the index traders, the people who put big pools of money into commodities in general and part of those dollars end up over into the corn pit. That gives us a very explosive kind of a market compared to normal because it's more money than we've ever seen there before. And so we think that is a reason to change our mix a little between the number of bushels we contract, the number of bushels that we ensure. For a lot of years we've told people that they should stay consistent with their forward contracting, that each year during March, April, May and June they should forward contract a certain percentage of their crop and that percentage should stay relative the same year in and year out so that that way you sell some forward, you sell some after harvest and the averages will work out. The problem would be, of course, if you sold everything forward the wrong year or didn't sell anything forward the wrong year. And so we like to keep the percentages pretty similar. But this year we're suggesting that producers reduce the percentage they contract and increase the percentage that they ensure using put options. Put options have a very good track record of being a successful insurance product when they are purchased in the spring and held into the fall. Prices tend to decline from springtime until fall but this year, if we were to get a weather situation similar to last year where let's say it just happens in one region, we have dry conditions and it starts to get a few people excited, markets will go further this year than they did last year with the same amount of stimulus. So, we think that is a good reason to use an option strategy so that you keep a little more powder dry, you'll still keep protection, but a little more powder dry to be able to pounce on a big market should we get one.

Pearson: That's right, so we're insuring our down side, utilizing a put strategy and of course, if you get some up side you're covered.

Roach: You're covered. It's certainly possible that the put could erode and become a worthless piece of paper. However, in the process if the market were to say go up 30 or 40 cents a bushel that leaves you in a much more favorable position than had you contracted the corn the day that you made, that you purchased the put.

Pearson: Every year my house doesn't burn down my insurance premium does the same thing. Same strategy and I think that is one way we need to look at put strategies but it's a great way to utilize a product out there that may cost you something. And right now what are those puts going to cost you?

Roach: We'll spend about 15 cents a bushel on a corn put and we will buy whatever strike price on December corn that we can get for about that price. The range may run from 13 to 16 cents a bushel, just depending on when we're able to do it, and we like to buy puts when we get the surge up in the market and we get the market overbought and generate one of our sell signals. That is the time we like to do the contracting and that's the same time we like buying the puts.

Pearson: Great strategy, great insights. John Roach, thank you so much. That will wrap up this edition of Market Plus. Thank all of you for joining us. Be sure to tell your friends or neighbors to join us here at our Market to Market page as well. For all of us here on the Market to Market show, I'm Mark Pearson. Thanks for being with us. Have a great week.

Tags: agriculture commodity prices markets news