2009 commodity marketing alternatives asfmra denver, colorado october 29, 2009

2009

Commodity Marketing Alternatives

ASFMRA

Denver, Colorado

October 29, 2009

2009

Available Marketing Tools

Cash Markets Forward Cash Markets Hedge to Arrive Contracts Futures and Options Contracts Managed Programs

2009


Cash MarketThe simplest and easiest alternative.Good option if you expect the cash market to

fall and basis to weaken. Forward Cash Market

Also a simple alternative.Subject to production risk and counter-party

risk.

2009


Hedge-to-Arrive Future price is set on the contract date, but basis is

left to be determined at a later date. Production risk and counterparty risk is not

eliminated. Good option if you expect the cash market to fall and

basis to strengthen. Traditionally, cash and futures tend to converge into

expiration, but this is not guaranteed. Basis may act differently in one area of the country vs. another.

2009


Futures and Options Contract price is set when hedge enacted, but basis is not

affected. Counterparty risk is eliminated via exchange clearing. Futures may require margin deposits to keep hedges in effect. Contracts are of standardized size and length, making them

easy to exit should your hedging strategy change. Options may have tax/legal implications making them

inappropriate for some managers. The number of futures contracts held cannot exceed expected production or tax implications will result.

2009

Best-Fit Alternatives for Different Market Conditions

Adapted from NCR 215-4, “Developing Marketing Strategies and Keeping Records on Corn, Soybeans and Wheat”, John Ferris, December 1985

2009

For Farm Managers

•Cash sales are most simple and easy•Forward contracts and HTAs should be considered on up to 50% of production•Futures and options normally not a good alternative….little peace of mind

2009

1. Establish a realistic goal

2. Identify your decision-making environment

3. Identify your beliefs

4. Develop a price outlook

5. Consider cost of production

6. Consider risk-bearing ability

7. Avoid emotional decisions

8. Don’t let ego get in the way

** Evaluate Market Performance

Developing a Marketing Plan

**Directives**

2009

1. Establish a realistic goal

Define what success means to you

2. Identify your decision-making environment

Who can second-guess your marketing decisions?

Which risk management tools do they understand and/or not understand?


2009

3. Identify your beliefs (biases)

Examples for the grain markets:

The Chicago Board of Trade is fixed. No way a farmer can win in that game.

I know as much as anybody about the market because I grow the crop. ‘If I don’t know it, it ain’t worth knowing.’

No need to worry about marketing. As long as I grow a big crop, the government programs will keep me in business.


2009

Determine your fixed and variable costs

Write your outlook down and update it as needed

Have a price outlook for both the short-term (now through 6 months) and long-term (6 to 18 months out)

4. Develop a price outlook

5. Consider cost of production

Remember that the market does not care what your costs are


Remember that not everyone’s costs are the same

2009

6. Consider risk-bearing ability

A highly leveraged producer will look differently at marketing than a producer with a low debt-asset ratio


7. Avoid emotional decisions

Outsourcing this function of the business to a professional or advisor is the simplest way to avoid unnecessary emotion if this is an issue

8. Don’t let ego get in the way

2009

Helps you maintain focus on principal goals

De-emphasizes speculation

Provides a tool for discussion

Provides a way to track our performance

Evaluate Market Performance

Most IMPORTANT step


2009

Market TRAKCompany Name: Jones FarmsCommodity: CornCrop Year: 1988/89Production: Bushels

Cash Activity Futures Activity F & O Summary Summary

DateCash Price

Units Sold Price

Del. Period

Cum. %

SoldCum. Val.

SoldContract Mth/Yr.

Qty. Hedged

Qty. Lifted Price Open P/L Closed P/L Cum. P/L Gross Value

Value/Unit

2/1 1.90$ Dec 04 190,000$ 1.90$ 3/1 2.00$ Dec 04 -5 2.20$ -$ 200,000$ 2.00$ 4/4 2.03$ Dec 04 (750)$ 202,250$ 2.02$ 5/2 2.08$ Dec 04 (2,000)$ 206,000$ 2.06$ 6/1 2.22$ Dec 04 (5,500)$ 216,500$ 2.17$ 7/1 3.35$ 25,000 3.35$ 25% 83,750$ Dec 04 -5 3.53$ (33,750)$ 301,250$ 3.01$ 8/1 2.78$ 25,000 2.78$ 50% 153,250$ Dec 04 (5,250)$ 287,000$ 2.87$ 9/1 2.60$ 153,250$ Dec 04 3,750$ 287,000$ 2.87$ 10/2 2.50$ 153,250$ Dec 04 8,750$ 287,000$ 2.87$ 11/4 2.40$ 50,000 2.40$ 100% 273,250$ Dec 04 10 2.60$ 13,750$ 13,750$ 13,750$ 287,000$ 2.87$

Summary StatementRange $1.90-$3.35Range Mid-Point $2.62Top 1/3 $2.87

Average Market Price $2.73Futures P/L $0.14

$2.87Carry Adjustment $0.12Selling Price $2.99

100,000

2009

Fundamental and Technical Analysis

2009

Fundamental Analysis

Assessment of underlying supply and demand variables and the changes in those relationships as a means to project prices

StepsProjecting future supply & usageProject prices based on future supply & usageCompare fundamental price to market price

2009

Fundamental Analysis

Believes in Market Efficiency…that the market price is always searching

for the true fundamental price/fair value Not practical to use in the short-term due

to various human factors Time lag exists for correction

2009

Balance Sheets

USDA reports their estimates monthly in the World Agriculture Supply and Demand (WASDE) reports

USDA and Brock Associate estimates can be found in the Brock Report

2009

Balance Sheets Most popular tool in fundamental analysis Constantly updated at new info is introduced Unit of analysis is marketing year

Corn: Sep 1 – Aug 31 Soybeans: Sep 1 – Aug 31 Wheat: Jun 1 – May 31 Cotton: Aug 1 – Jul 31 Oil & Meal: Oct 1 – Sep 30 Livestock: Jan 1 – Dec 31

2009

08/09 Est. 09/10 Est. 08/09 09/10 10/11 11/12ACREAGE (Mil. Acres)Planted Area 86.0 86.4 86.0 86.4 87.0 88.0Harvested Area 78.6 79.3 78.6 79.3 80.0 80.1Yield 153.9 164.2 153.9 162.5 163.0 164.0SUPPLY (Mil. Bushels)Beg. Stocks (Sep 1) 1,624 1,674 1,624 1,674 1,722 1,772Production 12,101 13,018 12,101 12,886 13,040 13,136Imports 14 10 14 12 10 10 Total Supply 13,739 14,702 13,739 14,572 14,772 14,918USAGE (Mil. Bushels)Feed & Residual 5,231 5,400 5,231 5,225 5,225 5,250Food/Seed/Ind 4,976 5,480 4,976 5,475 5,575 5,755 Ethanol for Fuel 3,700 4,200 3,700 4,200 4,350 4,500 Domestic Use 10,207 10,880 10,207 10,700 10,800 11,005Exports 1,858 2,150 1,858 2,150 2,200 2,200 Total Use 12,065 13,030 12,065 12,850 13,000 13,205STOCKS (Mil. Bushels)Ending Stocks (Aug 31) 1,674 1,672 1,674 1,722 1,772 1,713 CCC 0 0 0 0 0 0 Privately-Owned 1,674 1,672 1,674 1,722 1,772 1,713Stocks/Use 13.9% 12.8% 13.9% 13.4% 13.6% 13.0%Farm Price ($/Bu) $4.06 $3.05-$3.65 4.06$ $3.00-3.75 $3.00-3.75 $3.00-3.75

Brock Est.

US CORN SUPPLY AND DEMANDUSDA

2009

Complex set of variables impact crop prices

Acreage Yield Weather Exchange rates Consumer income Government policies Foreign production

Lack of adequate knowledge of demand relationships

Degree of inventory speculation

Constant change

2009

USDA Interagency Consensus Process Foreign Agriculture Service (FAS)

Foreign production, use and trade Economic Research Service (ERS)

Economic effects of prices, quantity supplied/demanded Farm Service Agency (FSA)

Current policy environment & farmer’s reaction to policies National Agricultural Statistics Service (NASS)

Current statistics and Ag Census every 5 years Agricultural Marketing Service (AMS)

Current price & marketing reports World Agricultural Outlook Board (WAOB)

Coordinate interagency process to produce WASDE est.

2009

Construction of Fundamental Price

Build supply side

Build consumption or use side

Price then ties both sides together by rationing available supplies to competing uses

2009

Supply Side Production = (acres planted * loss ratio *

yield/acre) Concerned with acreage shifts between

cropsExpected crop priceExpected price of substitutes Input prices, technological changes, risk:return,

government programs, lagged effects Trendline yield crop conditions yield est

2009

Consumption Side - Corn

Feed and Residual Primary driver of prices, ~60% of total consumption Reflects any measurement errors & unaccounted use

Exports Little growth in last 25 years Largest customers: Japan, Mexico, Tawain, Canada

Food, Seed, and Industrial Sweeteners, construction starches, cereals, etc. Rapid growth last 20 yrs (ethanol)

2009

Consumption Side - Soybeans

Feed, Seed, and Residual Smallest component of soybean use Reflects measurement errors and unaccounted use

Exports Moderate growth last 25 years Primary customers: China, EU, Mexico, Taiwan

Crush Primary driver of prices, meal & oil prices Averages ~ 60% of total use

2009

U.S. CORN FREE STOCKS As a Percent of Use Vs. Average Price

10

0908

07

0605

0403

02 01 0099

98

97

96

95

94

93

9291 9089

88

87

86

85

84

8382

81

80

79

7877

76

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

Corn Ending Free Stocks to Use Ratio

Av

era

ge

Fa

rm P

ric

e (

Do

llars

/Bu

sh

el)

2009

Projected Average 2009/10 Marketing Year Corn Farm Price Given a Range of Possible Yield Outcomes

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

135 140 145 150 156 160 165 170 175 180 185

Corn Yield Possibilities for 2009 (Bushels/Acre)

US

Ave

rag

e 20

09/1

0 F

arm

Pri

ce

(Do

llar

s/B

ush

el)

Expected High End of Price RangeExpected Low End of Price Range

The average marketing year farm price is projected between $3.00 and $3.75 given the current Brock Associates acreage estimate of 86.4 million acres, yield estimate of 162.5 bushels/acre and 12,850 million bushel demand expectation.

2009

26%2008/09

2002/03

1996/97 18% 18%1988/89 2007/08 2001/02

1984/85 1989/90 13% 1990/91

1983/84 1987/88 2005/06 1982/83

1981/82 1986/87 2004/05 1979/80

1976/77 5% 5% 1985/86 1995/96 1973/74

1975/76 3% 3% 3% 3% 3% 1998/99 3% 1999/00 1978/79 1994/95 1972/73

1974/75 1997/98 1980/81 2000/01 1993/94 2006/07 1991/92 2003/04 1977/78 1970/71 1992/93 1971/72

September October November December January February March April May June July August10 1 1 1 1 1 2 1 2 7 5 7

Corn Seasonality

Percent Highs

1970/71-2008/09

Central Illinois

Year begins Sept 1.

2009

23% 23%21% 2005/06 2002/03

2007/08 2003/04 1997/98

2006/07 2001/02 15% 1991/92

2000/01 1994/95 1999/00 1988/89

1995/96 1992/93 1998/99 1985/86

1989/90 1990/91 8% 1996/97 1981/82

1987/88 1986/87 2004/05 5% 1993/94 1980/81

1978/79 1982/83 1972/73 2008/09 3% 3% 1984/85 1976/77

1977/78 1973/74 1971/72 1975/76 1979/80 1974/75 0% 0% 0% 0% 1983/84 1970/71


1970/71-2008/09

Year begins Sept 1.

Central Illinois

Percent Lows

Corn Seasonality

2009

28%2007/082006/072000/01

18% 1995/962008/09 15% 1994/951997/98 13% 2004/05 1992/931990/91 2002/03 1991/92 1989/901988/89 1999/00 1987/88 1979/80 8%1984/85 5% 5% 1996/97 1986/87 1975/76 2001/021983/84 3% 1998/99 3% 3% 1985/86 1993/94 1978/79 1973/74 1982/831981/82 1974/75 1980/81 0% 2005/06 0% 2003/04 1976/77 1977/78 1972/73 1970/71 1971/72


Soybean Seasonality

1970/71-2008/09

Central Illinois

Percent Highs

Year begins Sept 1.

2009

31%

2004/05 28%

2002/03 2005/062001/02 2003/041994/95 1999/001992/93 1997/98

15% 1991/92 1993/942007/08 1989/90 1988/892006/07 1986/87 1985/861995/96 1982/83 8% 1984/851987/88 1977/78 5% 5% 1998/99 1981/821978/79 1973/74 1996/97 3% 1979/80 3% 3% 1990/91 1980/811970/71 1972/73 1971/72 2008/09 1975/76 1974/75 0% 2000/01 0% 0% 1983/84 1976/77


Percent Lows

Year begins Sept 1.

Soybean Seasonality

1970/71-2008/09

Central Illinois

2009

Fundamental vs. Technical

Fundamentals embraced by academia, economists, and other believers in market efficiency

General Rule: Use Fundamental Analysis for “what” to do and Technical Analysis for “when” to do it

“Fortune tellers live in the future. So do people who want to put things off. So do fundamentalists.”

Ed Seykota

2009

Technical Analysis

Use of historic prices to predict future prices or direction

Used to make timing decisions when the fundamentally over/under values

2009

Advantages Provides timing for establishing and lifting

hedges Less emotional than fundamental

analysis

Disadvantages

Enter and exit markets more frequently than fundamental analysis

May give conflicting technical signals

2009

Volume Total Number of contracts traded on a given Day

High Volume reinforces buy and sell signals

Number of Contracts outstanding

Indicates who is buying or selling

Open Interest

2009

Decrease Increase

Short Covering New Buying

Long Liquidation New Selling

Incr

ease

Dec

reas

e

Pri

ce C

han

ge

Open Interest Change

2009

High

Close

Low

2009

Market Trends

1. Up (Higher Highs and Higher Lows)

2. Sideways

3. Down (Lower Highs and Higher Lows)

2009

Market Reversals

Indicates a change in the direction of the trend

2009

Key Reversals Bearish Key Reversal

1. Market is in an Uptrend2. High is higher than previous day’s high and low is lower

than previous day’s low3. Close below previous day’s close

Bullish Key Reversal

1. Market is in an Downtrend2. Prices are higher than previous day’s high and lower than

previous day’s low3. Close above previous day’s close

2009

Technical Tools and Indicators Five and Nine Week Rules (Trend Following)

Five Wave Patterns (Reversal Patterns)

Moving Averages

Disparity (Overbought and Oversold Conditions)

Commitments of Traders (Position of Market Participates)

2009

Corn Five-Week Rule

2009

Soybean Nine-Week Rule

2009

Moving Averages

Widely used by commodity funds Types of Moving Averages

Simple Exponential Weighted

2009

Simple Moving Averages

2009

Commitments of Traders Report

When Large Speculators & Commercials are at opposite extremes look for a trend change

Categories Reported Large Speculators Commercial Companies Small Participants Index Funds

2009

Soybeans: Commitments of TradersFutures and Options Combined, as October 6, 2009

-250000

-200000

-150000

-100000

-50000

0

50000

100000

150000

200000

10/6/2008 12/6/2008 2/6/2009 4/6/2009 6/6/2009 8/6/2009 10/6/2009

5,00

0 b

ush

el c

on

trac

ts

Large Speculators Commercial Small Participants Index Funds

2009

Other Technical Tools

Gap Theory Flag Formations Price Strength Index

2009

Type of Gaps

1. Common gaps- Occur anywhere and have no significance.

2. Break-away gaps- Signal the beginning of a bull market after a bottom and the beginning of a bear market after a top

3. Measuring gaps-Occur at the halfway point of a move

4. Exhaustion gaps- Occur near a major top of near a major bottom.

2009

Measuring Gap Objective

2009

Bear Flag

Center of the Flag

2009

For More Information on the Brock Report, write, email or call

BROCK ASSOCIATES2050 W. Good Hope Rd.

Milwaukee, WI 53209(800) 558-3431

www.brockreport.com [email protected]

2009 commodity marketing alternatives asfmra denver, colorado october 29, 2009

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