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Market Plus: Don Roose, Market Analyst

posted on June 10, 2011


Market Plus: Don Roose, Market Analyst

Pearson: This is the Friday, June 10, 2011 version of Market Plus. Thanks for joining us here at our Market to Market website. I'm Mark Pearson and with us this week Don Roose one of our long time market analysts. And boy, Don, there is a lot going on right now. We were both at the World Pork Expo this week in Des Moines, Iowa, talked to a lot of producers, a lot of suppliers. A lot of pork producers very concerned about securing cash corn needs, cash feed needs, particularly after the first of July through the new crop coming in.

Roose: Yes it is a big concern and I think the wake up button really hit when old crop supplies are now larger than new crop supplies and old crop was really tight. So what do you do about this if we're going to have two years of tight supplies and we think that you have to really take a look at some of the risk management used in some option tools.

Pearson: Talk about option strategy and let's take it out further obviously beyond this old crop here but we're going to be looking at stronger prices for the next twelve months. What should we be doing?

Roose: Well, you certainly have to cover some corn needs in case the worst case situation happens and that would be if we went into a dry droughty pattern on top of all these other problems. But seasonally things can start to improve and a balance table can improve and so I think you have to say seasonally that is what happens and you have to trade accordingly. And so what we think is options where you - window contracts were you buy calls like seven twenty, September calls for short-term needs and sell eight twenty and even nine twenty on top of that. So give yourself some coverage without a lot of cost involved and go more on a hand to mouth basis on the cash is what we really advise right now.

Pearson: Talk about the flip side for these corn growers out there. Talked to a lot of people. They are out of old crop corn for the most part. You hear a few stories here and there of some gambling bushels left that are getting booked at some pretty high levels around the country to livestock producers. But in terms of these prices right now versus where we could be, now granted USDA has painted a pretty bullish scenario this week, but if I am a producer out there and I'm concerned about what I am going to have yield wise, my corn may have been a little late, may not have quite the - I want and so forth, what do you do to mitigate some of the risk of that on these new crop sales?

Roose: Well, I think the first thing you look at what did the government really say? What they said is next year we're going to have a bullish scenario. We are going to have six to seven dollar cash corn. Well, what they are really saying is that is six twenty to seven twenty on the board in this December corn. We went to seven twenty-three this last week. So try to use that as a bit of a guide and you can buy seven dollar puts on December corn covering your new crop. Sell eight dollar calls and you can do something like that for about thirty cents a bushel and that just makes good sense. If you want to open it up further you can sell nine dollar calls and then below it if you want to cheapen that up even further you can sell six dollar puts, do that whole package for eight cents. So in other words you can have coverage from seven to six with an eight side upside for eight cents and that makes good sense.

Pearson: That's pretty cheap insurance in this volatile world. Soybeans, are you concerned about that? I mean it is kind of a negative picture from the USDA?

Roose: Yes our demand has definitely slowed down. Our - has slowed down. Our export demand has slowed down. China was the big elephant in the room and they have slowed down here. Looking at South America and even slowed down that pace. So I think very much the same thing if you look at the government numbers again they put us at a thirteen to a fifteen dollar cash range. You can buy some fourteen dollar puts and sell some fifteen or sixteen dollar calls and cover the government's numbers and you can do that for somewhere around thirty cents. So I think that is another good strategy.

Pearson: All right. Some great ideas on covering risk the biggest problem that we have always faced on agriculture and we have a lot of them in 2011 going into 2012 already.

Pearson: Don Roose appreciate your insights. From all of us on Market to Market I'm Mark Pearson thanks for watching. Have a great week!

 


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