Commodity Marketing Alternatives

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Commodity Marketing Alternatives ASFMRA Denver,
Colorado October 29, 2009
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Available Marketing Tools

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

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Available Marketing Tools

• Cash Market
• The 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.

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Available Marketing Tools

• 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.

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Available Marketing Tools

• 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.

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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
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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

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Developing a Marketing Plan Directives

• Establish a realistic goal
• Identify your decision-making environment
• Identify your beliefs
• 4. Develop a price outlook
• 5. Consider cost of production
• 6. Consider risk-bearing ability
• 7. Avoid emotional decisions
• 8. Dont let ego get in the way
• Evaluate Market Performance

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Developing a Marketing Plan
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?

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Developing a Marketing Plan
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 dont know it, it
  aint worth knowing.
• No need to worry about marketing. As long as I
  grow a big crop, the government programs will
  keep me in business.

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Developing a Marketing Plan
4. Develop a price outlook

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

• Write your outlook down and update it as needed

5. Consider cost of production

• Determine your fixed and variable costs

• Remember that not everyones costs are the same

• Remember that the market does not care what your
  costs are

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Developing a Marketing Plan
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. Dont let ego get in the way
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Developing a Marketing Plan
Evaluate Market Performance

• Most IMPORTANT step

• Helps you maintain focus on principal goals

• De-emphasizes speculation

• Provides a tool for discussion

• Provides a way to track our performance

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Fundamental and Technical Analysis
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Fundamental Analysis

• Assessment of underlying supply and demand
  variables and the changes in those relationships
  as a means to project prices
• Steps
• Projecting future supply usage
• Project prices based on future supply usage
• Compare fundamental price to market price

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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

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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

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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

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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

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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 farmers 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.

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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

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Supply Side

• Production (acres planted loss ratio
  yield/acre)
• Concerned with acreage shifts between crops
• Expected crop price
• Expected price of substitutes
• Input prices, technological changes, riskreturn,
  government programs, lagged effects
• Trendline yield crop conditions yield est

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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)

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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

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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

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Technical Analysis

• Use of historic prices to predict future prices
  or direction
• Used to make timing decisions when the
  fundamentally over/under values

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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

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Volume

• Total Number of contracts traded on a given Day
• High Volume reinforces buy and sell signals

Open Interest

• Number of Contracts outstanding
• Indicates who is buying or selling

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Open Interest Change
Decrease Increase
Short Covering New Buying
Long Liquidation New Selling
Increase
Price Change
Decrease
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High
Low
Close
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Market Trends

1. Up (Higher Highs and Higher Lows)
2. Sideways
3. Down (Lower Highs and Higher Lows)

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Market Reversals

• Indicates a change in the direction of the trend

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Key Reversals

• Bearish Key Reversal
• Market is in an Uptrend
• High is higher than previous days high and low
  is lower than previous days low
• Close below previous days close
• Bullish Key Reversal
• Market is in an Downtrend
• Prices are higher than previous days high and
  lower than previous days low
• Close above previous days close

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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)

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Corn Five-Week Rule
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Soybean Nine-Week Rule
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Moving Averages

• Widely used by commodity funds
• Types of Moving Averages
• Simple
• Exponential
• Weighted

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Simple Moving Averages
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Simple Moving Averages
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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

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Other Technical Tools

• Gap Theory
• Flag Formations
• Price Strength Index

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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.

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Measuring Gap Objective
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Bear Flag
Center of the Flag
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For More Information on the Brock Report, write,
email or call BROCK ASSOCIATES 2050 W. Good Hope
Rd. Milwaukee, WI 53209 [phone] www.brockre
port.com rabrock_at_brockreport.com