Marketing Ag Commodities, Thoughts For The Rest Of 2013

Rodney Jones Oklahoma Farm Credit Professor

of Finance t

Strategies To Think About

• It’s all about assessing probabilities– What is the probability the Overall market will

move in a particular direction (Futures up or down)?• Has the market over reacted based on fundamentals,

and therefore is it likely to correct– What is the probability that basis will

strengthen or weaken?• Do you have some reason to believe that the local

relative supply- demand situation will change2

Strategies To Think About• If you think it is likely that Futures will go

up– And you think it is likely that Basis will

Improve• Delay pricing• Buy Put Options if you cannot handle the risk that

your predictions are wrong– And you think it is likely that Basis will

Weaken• Sell the commodity (cash or forward contract) and

buy a call option3

Strategies To Think About• If you think it is likely that Futures will go

Down– And you think it is likely that Basis will

Improve• Hold the commodity and Hedge (sell futures)• Or Hold the commodity and Buy a Put Option

– And you think it is likely that Basis will Weaken• Sell the commodity (cash or forward contract)

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Base your cash selling strategy on what you think basis will doCapture overall (futures) market expectations in the futures or options market

HRW Wheat, Sept ‘2013

CBT Corn, Dec. ‘2013

CBT Soybeans, Nov. ‘2013

Production ConsumptionEndingStocks

U. S.PriceYear

(Billion Bushels)

U.S. Wheat Situation

2006 1.81 2.05 .456 $4.262007 2.05 2.32 .306 $6.482008 2.50 2.28 .657 $6.782009 2.22 2.02 .976 $4.872010 2.21 2.42 .862 $5.702011 2.00 2.23 .743 $7.242012 2.27 2.40 .746 $7.802013 2.08 2.30 .659 $6.85

5-YR Avg. 2.24 2.27 .800 $6.48

What About Oklahoma?

World Wheat Situation

(Billion Bushels)

Production ConsumptionEndingStocksYear

2006 21.9 22.7 4.72007 22.5 22.7 4.62008 25.1 23.6 6.12009 25.2 23.9 7.42010 24.0 24.1 7.32011 25.6 25.6 7.32012 24.1 24.8 6.62013 25.6 25.5 6.6

5-YR Avg. 24.8 24.4 6.9

Wheat Relevant Numbers

U.S. Ending Stocks

World Ending Stocks

CurrentProjections Average

Billion Bushels

.659 .800

6.6 6.9

U.S. Corn Situation

Production ConsumptionEndingStocks

U. S.PriceYear

(Billion Bushels)

2006 10.5 11.2 1.30 $3.042007 13.0 12.7 1.62 $4.202008 12.1 12.1 1.67 $4.062009 13.1 13.1 1.71 $3.552010 12.4 13.1 1.13 $5.182011 12.4 12.5 0.99 $6.222012 10.8 11.2 0.77 $6.952013 14.0 12.9 1.95 $4.80

5-YR Avg. 12.16 12.38 1.25 $5.19

World Corn Situation

(Billion Bushels)

Production ConsumptionEndingStocksYear

2006 28.0 28.6 4.32007 31.2 30.4 5.22008 31.4 30.8 5.82009 32.3 32.4 5.72010 32.8 33.5 5.02011 34.8 34.6 5.22012 33.7 34.0 4.92013 37.9 36.8 6.0

5-YR Avg. 33.00 33.06 5.32

Corn Relevant Numbers

CurrentProjections Average

Billion Bushels

U.S. Ending Stocks

World Ending Stocks

1.95 1.3

6.0 5.3

U.S. Soybean Situation

(Billion Bushels)

Production ConsumptionEndingStocks

U. S.PriceYear

2006 3.2 3.1 0.57 $6.432007 2.7 3.1 0.21 $10.102008 3.0 3.0 0.14 $9.972009 3.4 3.4 0.15 $9.592010 3.3 3.3 0.22 $11.302011 3.1 3.2 0.17 $12.502012 3.0 3.1 0.13 $14.302013 3.4 3.3 0.27 $10.50

5-YR Avg. 3.2 3.2 0.16 $11.53

Production ConsumptionEndingStocksYear

World Soybean Situation

(Billion Bushels)2006 8.72 8.29 2.312007 8.13 8.44 1.892008 7.79 8.13 1.582009 9.59 8.75 2.232010 9.69 9.26 2.572011 8.80 9.41 2.012012 9.89 9.51 2.292013 10.48 9.93 2.71

5-YR Avg. 9.14 9.01 2.13

Soybean Relevant Numbers

CurrentProjections Average

Billion Bushels

U.S. Ending Stocks

World Ending Stocks

0.27 .16

2.71 2.13

Wheat Considerations• Current stocks are very adequate in U.S. and around

the World• Near record World production• Exports OK (but watch for glitches such as Egypt)• Local short crop

– Will not impact the futures market much, but is contributing to current strong basis (at least in short run)

Feedgrain Considerations• Current stocks are tight• Ethanol production has ramped up again• Huge planted acres• Near perfect growing conditions in much of corn belt• July “weather scare” will have to hurry up if it is going

to impact this market (currently counting on a very large crop)

• On a price positive note, Exports have been strong• Local basis is strong (need grain in the short run)

Soybean Considerations• Production (both U.S. and World) is expected

to be fairly large• Demand is strong, usage continues to grow• Looks like somewhat of a rebuilding of ending

stocks for the 2013 marketing year• Pressuring the canola market as well

Futures Market Considerations

• Overall Market influences– Once again, it’s all about corn (and beans)

• Historically, short crops are followed by large crops– Right now the market thinks this will be the case, and

indications support that• Expect continued volatility, conditions may change

through the summer• Must form your own opinions regarding probabilities

Difference Between

Two PricesBasis :

Local Wheat PriceLocal Cattle Price Local Soybean Price

- HRWW Futures PriceCME Cattle Futures PriceCBT Soybean Futures Price

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Basis Considerations

• New crop bids for wheat reflect much stronger than average basis, for fall crops reflect at least average basis

• There is some likelihood that Basis will weaken in the Future – That is a cash sell signal (sell the commodity)

• This may be the year to be fairly aggressive with early sales– There are numerous ways to maintain the ability to capture

an upside move in the overall market. Form your own probability assessment regarding the futures component of price

Grain Market Considerations• Sound marketing decisions are based on realistic

probabilities, not coffee shop talk• Right now watch (assess your probabilities to)

– Basis changes– Overall market drivers (corn crop, exports, etc.)

Strategies To Think About• If your like me, and you think there is a good chance Basis

will Weaken---– Sell at least the “Basis” component

• If you strongly think futures will go down, sell the commodity or forward contract the entire price

• If you think futures “might” go down, sell the commodity • If you strongly think futures will go up, sell the commodity and buy a

futures contract or a call option, or sell only the basis component of price in a forward contract, set the overall price later

• If you think futures might go up, sell the commodity or sell only the basis component of price, and use call options

• No opinion on futures price direction (equal probabilities) – still recommend locking in strong basis, either be happy with overall price, or buy a call option

27Base your cash selling strategy on what you think basis will doCapture overall (futures) market expectations in the futures or options market

• Thank You

• Questions or Discussion !!!!

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