Market Plus: Chris Robinson

Mar 24, 2017  | 15 min  | Ep4231 | Podcast

Podcast

Pearson: This is the Friday, March 24, 2017 version of the Market Plus segment. Joining us now is Chris Robinson. Chris, welcome back.

Robinson: Good to see you.

Pearson: We're really glad to have you here. Thanks for making the time to come in almost last minute and step up. I thought that was a good conversation during the show.

Robinson: Thank you. It was my pleasure.

Pearson: But we're not done yet. We’re not getting you out of that seat quite yet. We did not get a chance to discuss the cotton market. It was another one of those markets in the red on the week. Have we flipped that over? Are we moving back into a downtrend in cotton?

Robinson: I would be careful to call a top in cotton. It has been on a really good move for quite some time. Beginning of the year you saw a big move and now the managed funds own it. They're long about 110,000 contracts, which is half the crop. So you saw a big move at the beginning of the year, they brought all commodities, all physical commodities trying to get ahead of this inflationary idea, some of them have paid off better than others, they were long soybeans and now they've probably gotten flat soybeans. They lost money being long crude oil. But they have made money being long cattle, they've made money being long cotton, they've made money being long believe it or not copper. And that’s all this is, these guys make a blanket bet. So I think fundamentals are running secondary to anything else. Right now they're your friend and look at where we were a year and a half ago, down below 55 cents, guys saying what am I even doing this for? So now we're approaching most guys it's 77 to 80 cents that is profitable, it's actually profitable enough even if you set a hedge right now, there are some good hedges out there where you can go not spend a whole lot of money and protect because when it does correct, and it will, if I knew where it was going to correct I wouldn't be sitting here. But typically we see that, the market climbs up the escalator and it corrects down the elevator shaft. So it may correct, it's probably going to be something that nobody expects. They'll be like, why did that happen? So if I'm a cotton producer I'm just happy right now that it's going my way and I would not do anything to lock out the upside because it could have a lot more to run. It's very sensitive to China. China is the biggest producer and the biggest end user and I think again this may have been some concern about us getting into some sort of a trade issue with China. That hasn't developed yet so for now I think that if I'm a cotton producer I'm just setting my hedges and I'm not getting overaggressive getting sold.

Pearson: Yeah, closed the week at 77.47 on the nearby, you're right, there's some time, there's some pricing in there to buy a put, cover yourself. Are we expecting any big news on cotton from the acreage report next Friday?

Robinson: Not really. But you may see, again, with where soybeans were and now you may see some acres move actually towards cotton, that would be kind of the surprise. But at the end of the day the market is well supplied, the demand is good, we have better quality than China. That was the real issue too, China has got a lot of cotton stored but they haven't taken care of it. So when they want quality cotton they've been quietly coming here and hopefully that continues.

Pearson: Yeah, hopefully it does. Now, we talked about on the show the Brazilian beef issue really moving the live cattle market higher, we've seen feeder cattle follow along very, very nicely but we're in an environment where the cash fat cattle are trading higher than the feeder cattle futures.

Robinson: Yeah, that basis is out of whack.

Pearson: It's way out of whack. Is that going to help, are we going to have cattle feeders with money spilling out of their pockets for the first time in two years run this feeder cattle market higher?

Robinson: Well, it just depends on I think this Brazilian thing. If it continues to go, again, it's not a freight train I want to step in front of. A lot of our guys use puts, some of my guys trade the board, it's no fun when you have to send in all that money every week or every day, more money, more money. So I think that this was a surprise move. My guess is I've been doing this long enough that when it turns that will be a surprise as well. The rubber band can only stretch so far. But, again, can it continue to go higher? Yeah. the same people are telling me that it can't go higher are the guys that told me that we'd never go below $150 feeders back a year and a half ago, two years ago. So I stay away from doing that. I've been doing this long enough to know that if you're a cattle rancher you're long. Enjoy the fact that you're long and you're making money. Don't get in a situation where you're hurting yourself trying to be a hero because at the end of the day you're making money and look where we were six, seven months ago, a lot of depressed guys, we had fat cattle under the buck and guys talking about going back down to 80, 70. So this is a gift so you don't look a gift horse in the mouth, you protect against it and I hope it keeps going. I hope that every time we set a hedge we go higher.

Pearson: Now, you talked about the managed money has been a huge player in the live cattle market. Have they also been buyers in feeder cattle?

Robinson: Not as much. Their big play has been in the fat cattle, live cattle, long over 110,000 contracts there and we'll see if that continues. Again, these guys are your best friend when they're betting with you, but when they decide to head for the hills, look what happened in soybeans. They're there until they're gone and unless we get a weather issue or something like that, again, that's all tied up. Right now if you're a cattle producer you've got cheap corn. I don't know why you wouldn't be going out and taking upside protection just in case, what if corn rallies $1.50, you don't want to be looking back saying, oh we could have protected, you can buy $4 dry corn calls for six, seven cents.

Pearson: And that leads us right into our next question. Matt in Jones County has listed off, we saw $3.70 old corn, we saw new crop at $3.95, beans at $10.40, new crop beans at $10.12, milk was at $17. He wants to know, are those numbers all gone? Are they all in the rearview mirror now?

Robinson: Well, we don't know, nobody does. I will say this, especially I like to take the forest for the trees look. If you look at cattle and the cattle is making contract highs so that's kind of different, that's in a separate pile, but take a look at soybeans, look at new crop soybeans specifically. The low in August was like $9.03, the high in November when the Chinese were buying all the beans was $10.40. So that’s $1.40 move. Today's low, 70 cents back. We're sitting right in the middle, so we're halfway back. So you tell me, are we going to get a weather story and go back up? Or are we going to fall apart and see $7 beans like everybody told me we were going to see last year? So I don't know. Right now the market is giving you an opportunity. You talked about dairy, it took forever for dairy to get back up to $18, $17, $18, a lot of guys were waiting to hedge because they wanted to see $20. Low and behold we had this, it took eight months to rally up, it took about a month and a half to correct. So it looks like we've got some support in milk at $15. So I would base it from there. I'd say, okay, worst case scenario let's protect $15, $16 and if you're aggressive, if you're selling it and you're worried that it's going to rally back up to $18 there are strategies to reown it. You don't have to reown it on the board if you don't want to but you can go out and buy some 18 calls and then that way you sleep at night, you're not going to be kicking yourself if we do get that milk back up to $20.

Pearson: Right, China steps in and starts buying powder and it goes nuts.

Robinson: Absolutely, maybe they say the U.S. is our best friend.

Pearson: You never know where these things can go. So we've talked about 2017 prices. We've got a question here from Michael in Roland and he's got a very long question. I think we've addressed a lot of it. But at the end of the day where should the producer be looking to price in some options to get some hedges on and to make some cash sales? What kind of targets do you have in mind price wise? Do you like going ahead and locking in where we're at today with a hedge?

Robinson: For corn or beans?

Pearson: For beans.

Robinson: Soybeans even today, what are we set on, $9.75?

Pearson: Yeah, right in there, $9.77.

Robinson: Yeah, the market gave you ample opportunity to protect north of $10. We couldn't get through $10.30 about six or seven times. Our strategy, and hindsight is always 20/20. I'm not sitting here going look at us we're great. We made some cash sales when we were above $10, our guys are about 20% sold of guaranteed bushels. Don't let profitability fall away. So yeah, if this is profitable for you and you're worried, oh my God, what would happen if soybeans break down to $9? There's still 75 cents worth of risk there so do the math. What are you willing to spend to protect that 75 cents. And with these shorter dated options now you can do an option, a new crop November option, which is May dated, it will protect you through the report, which is this week, and then three weeks after and then you can look at see what level do you want to protect? For me with 75 cents worth of risk I don't want to spend more than 10 or 12 or 13 cents just from risk/reward. You don’t want to spend 30 cents to protect 70. I like those shorter dated options because they let you spend less money while keeping the upside open. In years past you would have to have gone out and bought 200 days’ worth of time with the Nov. If you want to do that, if that fits in with your plan, fine, go ahead. But I would say this, if you're selling anything I think you owe it to yourself to reown at least half. Be half right, half wrong because if we do get a weather issue this year, I don't know, nobody knows, if we get a weather issue you don't want to be looking where you've sold beans today at $10 on the board or $9.75. You don't want to be watching $12.75, $13.75 beans and you're pounding the table. So there are ways to do it. There are ways to do it where you can limit your risk and keep your reward side open. The only problem is, and this is why people don't like to hedge, there's no guarantees because if there was a guarantee we'd all just be virtual farmers, we would just trade and sit on the beach.

Pearson: Yes, everything would be fun. Now, Phil from Ontario, Canada had asked a question, he wants to know about soybean prices as well. I think we've covered them pretty darn well here this show. But I wanted to ask you, we did see continued or a little bit of continued weakness in the U.S. dollar this week. What is the trend in your eyes as we look out here take us through the report on into, when does the Fed meet again, well next April I suppose.

Robinson: Next April. Well that's interesting. The Fed pretty much told us in December that they're going to continue to raise rates. With a smile on her face she sat there, we got used to a decade, maybe not quite a decade, of no movement in the interest rates. So I think that is baked in. Whether they do a quarter point or not but they definitely want to do it and let's face it, they're raising rates and so far we're holding in there pretty good, the stock market hasn't taken a big swan dive, the U.S. dollar continues to be pretty well supported. Now, we had a big move really starting last May if you look at the charts and you can pull it up and look and see, you pulled the dollar index chart, we topped out after the election, the idea of being that U.S. dollar is going to continue to get stronger. We've had a little bit of a correction. A lot of people like to trade around the psychological number of 100 which is par. So right now we're bouncing over par. I think that the trend is still up. My experience with doing this for the last 30 years is that big trends like that, they're kind of like battleships and like an aircraft carrier, they don't turn on a dime, it's not a jet ski. So the trend continues to be higher. We could have continued weakness in the dollar and still be in a pretty good uptrend. So there may be some backfilling yet to go. But at the end of the day I think that big theme is still strong U.S. dollar and we'll see what happens with the Trump administration if they can get a tax reform thing through that will be huge because that's what everybody is really waiting for.

Pearson: Alright. Now our final question, Chris. And since this is your first time on the show with us, what we usually do is we like to ask our analysts to help define terms that get spoken repeatedly in the commodities trade. And we were going to ask you to define what is a trailing stop? What does that mean?

Robinson: Okay. A trailing stop, there's two ways to do it, you bet long or you bet short. We'll start with the betting long because most producers you're net long speculators, you're long all the beans and corn that you've got stored, all the beans you're going to plant for the next 20, 30 years. You're always long. So the way people would use a trailing stop is if you're trading on the board and suppose today you bought beans at $9.75 because you think this is the level I want to own them, you're speculating. You don't want to be in a situation where you're long beans from $9.75 and you watch them go to $9. So a trailing stop is very simply you can say, alright, I'm willing to lose 10 cents. So you're long at $9.75, you put a trailing stop at $9.65 and then you leave it, good until cancel, it works 24 hours a day, when you're asleep, when you're awake. And then oh, beans go to, hopefully beans go to $10 again, you can say hey, we just made 25 cents, I'm going to move my stop up now and since I'm long from $9.75 let's make sure I guarantee I'm going to always be long at $9.85, I'm always going to cover that, so then the market can continue to go higher. So it lets you ratchet up so as the market goes higher because sooner or later the market will correct and you don't want to be in a situation where you have let a potential winning trade turn into a losing trade. So it's just basis 101 risk management for trading and it's something I think that if you want to educate yourself look that up. But at the end of the day that's what it is, it's a mechanical way for you to lock in your risk and sleep at night and know that I can go to be at night and beans aren't going to be down and I'm hurt.

Pearson: I don't wake up in the morning with a margin call from my broker.

Robinson: Right.

Pearson: Alright, Chris, thank you so much for taking the time to be with us, really do appreciate it.

Robinson: Alright, it was a pleasure.

Pearson: Join us again next week when we convene a roundtable to break down the significant government reports and their impact. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week. 

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