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 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 ‘2014

CBT Corn, Dec. ‘2014

CBT Soybeans, Nov. ‘2014

Production ConsumptionEndingStocks

U. S.PriceYear

(Billion Bushels)

U.S. Wheat Situation

2007 2.05 2.32 .306 $6.482008 2.50 2.28 .657 $6.782008 2.22 2.02 .976 $4.872010 2.21 2.42 .862 $5.702011 2.00 2.23 .743 $7.242012 2.27 2.41 .718 $7.772013 2.13 2.42 .593 $6.872014 1.96 2.12 .574 $7.00

5-YR Avg. 2.17 2.30 .778 $6.49

World Wheat Situation

(Billion Bushels)

Production ConsumptionEndingStocksYear

2007 22.5 22.7 4.62008 25.1 23.6 6.12008 25.2 23.9 7.42010 24.0 24.1 7.32011 25.6 25.6 7.32012 24.1 25.0 6.42013 26.2 25.8 6.92014 25.8 25.7 6.9

5-YR Avg. 25.0 24.9 7.1

Wheat Relevant Numbers

U.S. Ending Stocks

World Ending Stocks

CurrentProjections Average

Billion Bushels

.574 .776

6.9 7.1

U.S. Corn Situation

Production ConsumptionEndingStocks

U. S.PriceYear

(Billion Bushels)

2007 13.0 12.7 1.62 $4.202008 12.1 12.1 1.67 $4.062008 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 11.1 0.82 $6.892013 13.9 13.6 1.15 $4.652014 13.9 13.4 1.73 $4.20

5-YR Avg. 12.52 12.68 1.16 $5.30

World Corn Situation

(Billion Bushels)

Production ConsumptionEndingStocksYear

2007 31.2 30.4 5.22008 31.4 30.8 5.82008 32.3 32.4 5.72010 32.8 33.5 5.02011 34.9 34.8 5.32012 34.2 34.1 5.42013 38.5 37.4 6.62014 38.5 38.0 7.2

5-YR Avg. 34.54 34.44 5.60

Corn Relevant Numbers

CurrentProjections Average

Billion Bushels

U.S. Ending Stocks

World Ending Stocks

1.73 1.2

7.2 5.5

U.S. Soybean Situation

(Billion Bushels)

Production ConsumptionEndingStocks

U. S.PriceYear

2007 2.7 3.1 0.21 $10.102008 3.0 3.0 0.14 $9.972008 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 0.14 $14.402013 3.3 3.4 0.13 $13.102014 3.6 3.5 0.33 $10.75

5-YR Avg. 3.2 3.3 0.16 $12.18

Production ConsumptionEndingStocksYear

World Soybean Situation

(Billion Bushels)2007 8.13 8.44 1.892008 7.79 8.13 1.582008 9.59 8.75 2.232010 9.70 9.25 2.592011 8.80 9.70 1.972012 9.84 9.53 2.102013 10.43 9.92 2.462014 11.02 10.31 3.05

5-YR Avg. 9.67 9.43 2.27

Soybean Relevant Numbers

CurrentProjections Average

Billion Bushels

U.S. Ending Stocks

World Ending Stocks

0.33 .16

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

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

• 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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