Marketing Ag Commodities,
Grain and Cattle
Considerations
Rodney Jones
Oklahoma Farm Credit Professor
of Ag Finance
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 change
2
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 option
3
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)
Base your cash selling strategy on what you think basis will do
Capture overall (futures) market expectations in the futures or options market
4
HRW Wheat, Sept ‘2014
CBT Corn, Dec. ‘2014
CBT Soybeans, Nov. ‘2014
U.S. Wheat Situation
Year
Ending
Production Consumption Stocks
U. S.
Price
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
2.05
2.50
2.22
2.21
2.00
2.27
2.13
1.96
2.32
2.28
2.02
2.42
2.23
2.41
2.42
2.12
.306
.657
.976
.862
.743
.718
.593
.574
$6.48
$6.78
$4.87
$5.70
$7.24
$7.77
$6.87
$7.00
5-YR Avg.
2.17
2.30
.778
$6.49
World Wheat Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
22.5
25.1
25.2
24.0
25.6
24.1
26.2
25.8
22.7
23.6
23.9
24.1
25.6
25.0
25.8
25.7
4.6
6.1
7.4
7.3
7.3
6.4
6.9
6.9
5-YR Avg.
25.0
24.9
7.1
Wheat Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
World Ending Stocks
.574
.776
6.9
7.1
U.S. Corn Situation
Year
Ending
Production Consumption Stocks
U. S.
Price
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
13.0
12.1
13.1
12.4
12.4
10.8
13.9
13.9
12.7
12.1
13.1
13.1
12.5
11.1
13.6
13.4
1.62
1.67
1.71
1.13
0.99
0.82
1.15
1.73
$4.20
$4.06
$3.55
$5.18
$6.22
$6.89
$4.65
$4.20
5-YR Avg.
12.52
12.68
1.16
$5.30
World Corn Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
31.2
31.4
32.3
32.8
34.9
34.2
38.5
38.5
30.4
30.8
32.4
33.5
34.8
34.1
37.4
38.0
5.2
5.8
5.7
5.0
5.3
5.4
6.6
7.2
5-YR Avg.
34.54
34.44
5.60
Corn Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
World Ending Stocks
1.73
1.2
7.2
5.5
U.S. Soybean Situation
Year
Ending
Production Consumption Stocks
U. S.
Price
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
2.7
3.0
3.4
3.3
3.1
3.0
3.3
3.6
3.1
3.0
3.4
3.3
3.2
3.1
3.4
3.5
0.21
0.14
0.15
0.22
0.17
0.14
0.13
0.33
$10.10
$9.97
$9.59
$11.30
$12.50
$14.40
$13.10
$10.75
5-YR Avg.
3.2
3.3
0.16
$12.18
World Soybean Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2007
2008
2008
2010
2011
2012
2013
2014
8.13
7.79
9.59
9.70
8.80
9.84
10.43
11.02
8.44
8.13
8.75
9.25
9.70
9.53
9.92
10.31
1.89
1.58
2.23
2.59
1.97
2.10
2.46
3.05
5-YR Avg.
9.67
9.43
2.27
Soybean Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
0.33
.16
World Ending Stocks
3.05
2.27
Wheat Considerations
• U.S. wheat stocks are tight, but World stocks are very
adequate.
• Large World production
– U.S. < 10% of world wheat production
– World conditions prevail, big driver of the overall wheat
market (Futures)
– The other “driver” of the overall market is the other feedgrain
situation
• As anticipated, short crop in OK, KS, etc.
– Will not impact the futures market much, but is contributing
to current strong basis.
Feedgrain Considerations
• Large number of acres, it’s raining in the corn belt
(“rain makes grain”), could see very good overall yields
• What more needs to be said, right now the potential for
a good crop on a large number of acres is really
pressuring the overall feedgrain market, and there is a
spillover impact on the wheat market as well
• Local basis is strong (need grain in the short run)
Soybean Considerations
• U.S. and World ending Stocks historically large
• Biggest “surprise” in the recent acreage report
was the record large U.S. soybean plantings.
(Why should this be a “surprise” given the
price signals earlier this spring?)
• Local basis historically strong
Futures Market Considerations
• Everyone must form their own opinions regarding
probabilities
:
Basis
Local Wheat Price
Local Cattle Price
Local Soybean Price
-
Difference
Between
Two Prices
HRWW Futures Price
CME Cattle Futures Price
CBT Soybean Futures Price
21
Basis Considerations
• Local bids for wheat reflect relatively strong basis (short
crop), for fall crops reflect better than average basis
• Local Basis for wheat will likely remain strong, there is some
likelihood that Basis will weaken in the future for the fall
harvested crops
– That is a cash sell signal (for wheat, but especially for other crops) (sell
the commodity)
• This may be the year to be fairly aggressive with early sales on the fall
crops
– 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, switch to beans,
exports, etc.)
Live Cattle, August ‘14
Feeder Cattle, August ‘14
Cattle Markets (What Can I
Say!!!!)
• Record High Prices
– Small Increase in imports
– Exports also very strong
• Beef Demand appears to be very strong
– Remember, demand is not just consumption, it is
consumption at what price
– Consumption is down because supplies are tight, but
the price response has been unexpectedly solid,
consumers want this product bad enough to “pay for it”
– Will it last? Is the financial health of consuming public
strong enough to sustain this demand???
Even Finally Seeing Some Profits in Cattle Feeding
• Thank You
• Questions or Discussion !!!!
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