Yeager: This is the Friday, July 6, 2012 version of the Market Plus segment. Joining us now is Mark Gold. Good to have you back here on the program, Mark.
Gold: Nice to be back.
Yeager: One of the things we talked about but didn't quite get enough into crop insurance. Is it too late to buy any crop insurance if you got that crop wilting in the field?
Gold: Oh yes. There is nothing you can do about that now. But what you can do is if you do have crop insurance and as we started to talk about it on the show, if you have got the revenue package for the insurance and you know you have lost bushels out there, you will be paid on an average between the spring price and the fall price. Well, right now that price today is a dollar and a half over the spring price. If we go back to that spring price you are going to loose a huge portion of that payment. So, in our opinion what you need to be doing is protecting that payment with a put option. A put option is - well, we like to call an insurance policy where you spend let's say 25 cents a bushel, that is the premium for this insurance policy in case prices do go back to $5.50 by the fall. If prices go to $10 then you are going to have the average between $5.50 and $10.50. You are going to have a much bigger payment. You have lost 25 cents a bushel for that insurance policy but now you have got a much higher average and much bigger payment on the check. So, we want to buy that put option as an insurance between $7 December corn and that $5.50 initial spring price to protect that dollar and a half bushel payment.
Yeager: So, insurance is really - it is an insurance on the insurance.
Gold: It is an insurance on the insurance is exactly what it is. But if you are going to be using these crop insurance products you have got to know how to use them properly and how to capture it. You can just buy that policy and say well, gee I didn't get a claim this year because prices went back down and it is not as big of payment as I thought it was going to be because we had $7.00 corn. Or you could be proactive about the marketing game and that is one of the great advantages of the crop insurance is it gives you so many more marketing opportunities. Here is one of the prime examples of that; buy those puts today to protect that insurance policy and that premium in case we go back down.
Yeager: All right. I want to get to a couple of our questions from our viewers. Doug in Washington, a loyal viewer, "Is it time to market some '13 crop of wheat and what should be your approach on that?"
Gold: You know at these kind of prices we push this wheat market up high because of the drought in the corn and the beans. Prices could certainly move higher. I don't know if I would be real anxious to be selling the cash, but I would certainly be wanting to buy those put options as an insurance policy underneath it. One of the tricks I have learned as a professional trader for 30-some odd years now, is I generally like to buy puts in the Chicago Wheat whether you are growing hard, whether you are growing protein wheat out in Washington, whatever varieties you are grown, White Wheat in Washington for example, even in Kansas City I would be using the Chicago contract to buy the puts. Because Chicago Wheat has a tendency over the last 30 years to go down fastest first. So, I want to own an insurance policy on the thing that has the best chance of going down which is the Chicago Wheat. It is generally considered a lower class wheat, if you will, because it doesn't have the protein that you will have in the hard wheat in Kansas City, Minneapolis, or in Washington. So, that wheat has a tendency to go down fastest first. So, I would certainly look at buying some put options on the Chicago contract. Go out to maybe July of '13 and get some put protection out there.
Yeager: All right. Doug, there is your question. Dan in Northwest Iowa. He wants to know do we have to assume demand will shut down this rally at $7.00.
Gold: No, demand won't shut down. We certainly see it is slow. Ethanol was already in trouble before we had this rally. You know there were talks about all the ethanol plants shutting down two weeks ago before the heat even hit. It is going to take - we are going to take another ethanol hit with these corn prices where they are. Now the one difference in that same two week period crude oil went from $78 dollars a barrel up to $88 back down to $84 today. But the fact of the matter we have had a little bit of an increase in crude oil. I don't think that is going to be nearly enough to offset the high price in what we are seeing on the corn market. So, it is not going to shut it off but we are certainly going to start to slow things down.
Yeager: Well, Pete in Canada was asking a little bit about what you were before we recorded today. If the ethanol mandate gets cut by 20 percent what impact will that have on the ethanol industry and the corn market. Do they go - are they in sync with one another or will one be up and one be down?
Gold: Well, if they do cut the mandates and as we talked about on the show that is harder venture to get done. It is a -- process state by state in most cases. Could there be a Presidential Executive Order? I don't know the answer to that. But let's assume that they could do it and it - some attraction out here. If you take a billion bushels off the ethanol demand and put that back into the carry out, guys now are looking at carry outs between 600 million and 400 million. With this drought we have lost a lot of bushels, tack on another billion, and all of the sudden you don't have corn. In my opinion we are $7.00 a bushel, it is much closer to $5.50 again. Another great reason for those insurance payments if you are loosing bushels to get that protection.
Yeager: All right. John in Columbia, Missouri. What percentage of sales do you recommend for '13 or '14 at these prices?
Gold: We haven't made any recommendations as of today on '13. So we obviously --- on '14. We don't like to go out that far. We will look at this year and next year right now. The only time we went three years was in 2008. We did '08, 09, and 10 in July of '08. I think it is a little bit different time and I don't want to go out. But I would look at two years. Again, I don't know that I want to be making cash sales on '13 now, but you can - there is some very reasonably priced puts. You can spend 25 cents and start to protect that 2013 corn. You can spend 40 cents on beans to protect the beans. About 35 cents in wheat. So there are things that you can do now to start protecting those prices. Don't wait until the barn catches fire to buy this insurance. Don't wait until we are back at $5.00 or $4.00 corn or $12.00 or $10.00 beans. Now is the time to get these insurance policies cheap while everything looks pretty healthy.
Yeager: Mark Gold, a good lesson in calls and puts today. More puts than calls but good discussion none-the-less.
Gold: Thanks very much.
Yeager: All right. Thank you. That is Mark Gold. Thank you so much and we also thank you for all of the questions that you have submitted us via Twitter and Market to Market and also on our Facebook page. We love hearing from you. Drop us a line and give us a hello from wherever you watch this program. We are always glad to have you and we will see you again next week. Have a good week.