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 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 ‘2013
CBT Corn, Dec. ‘2013
CBT Soybeans, Nov. ‘2013
U.S. Wheat Situation
Year
Production Consumption
Ending
Stocks
U. S.
Price
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
1.81
2.05
2.50
2.22
2.21
2.00
2.27
2.08
2.05
2.32
2.28
2.02
2.42
2.23
2.40
2.30
.456
.306
.657
.976
.862
.743
.746
.659
$4.26
$6.48
$6.78
$4.87
$5.70
$7.24
$7.80
$6.85
5-YR Avg.
2.24
2.27
.800
$6.48
What About Oklahoma?
World Wheat Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
21.9
22.5
25.1
25.2
24.0
25.6
24.1
25.6
22.7
22.7
23.6
23.9
24.1
25.6
24.8
25.5
4.7
4.6
6.1
7.4
7.3
7.3
6.6
6.6
5-YR Avg.
24.8
24.4
6.9
Wheat Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
World Ending Stocks
.659
.800
6.6
6.9
U.S. Corn Situation
Year
Production Consumption
Ending
Stocks
U. S.
Price
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
10.5
13.0
12.1
13.1
12.4
12.4
10.8
14.0
11.2
12.7
12.1
13.1
13.1
12.5
11.2
12.9
1.30
1.62
1.67
1.71
1.13
0.99
0.77
1.95
$3.04
$4.20
$4.06
$3.55
$5.18
$6.22
$6.95
$4.80
5-YR Avg.
12.16
12.38
1.25
$5.19
World Corn Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
28.0
31.2
31.4
32.3
32.8
34.8
33.7
37.9
28.6
30.4
30.8
32.4
33.5
34.6
34.0
36.8
4.3
5.2
5.8
5.7
5.0
5.2
4.9
6.0
5-YR Avg.
33.00
33.06
5.32
Corn Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
World Ending Stocks
1.95
1.3
6.0
5.3
U.S. Soybean Situation
Year
Production Consumption
Ending
Stocks
U. S.
Price
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
3.2
2.7
3.0
3.4
3.3
3.1
3.0
3.4
3.1
3.1
3.0
3.4
3.3
3.2
3.1
3.3
0.57
0.21
0.14
0.15
0.22
0.17
0.13
0.27
$6.43
$10.10
$9.97
$9.59
$11.30
$12.50
$14.30
$10.50
5-YR Avg.
3.2
3.2
0.16
$11.53
World Soybean Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2006
2007
2008
2009
2010
2011
2012
2013
8.72
8.13
7.79
9.59
9.69
8.80
9.89
10.48
8.29
8.44
8.13
8.75
9.26
9.41
9.51
9.93
2.31
1.89
1.58
2.23
2.57
2.01
2.29
2.71
5-YR Avg.
9.14
9.01
2.13
Soybean Relevant Numbers
Current
Projections
Average
Billion Bushels
U.S. Ending Stocks
0.27
.16
World Ending Stocks
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
:
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
• 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
Base your cash selling strategy on what you think basis will do
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Capture overall (futures) market expectations in the futures or options market
• Thank You
• Questions or Discussion !!!!
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