Commodity Marketing Alternatives ASFMRA Denver, Colorado October 29, 2009

1. Commodity Marketing Alternatives ASFMRA Denver, Colorado October 29, 2009

3. Available Marketing Tools • Cash Markets • Forward Cash Markets • Hedge to Arrive Contracts • Futures and Options Contracts • Managed Programs

4. 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.

5. 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.

6. 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.

7. 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

8. 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

10. 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. Don’t let ego get in the way • ** Evaluate Market Performance

11. 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?

12. 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 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.

13. 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 everyone’s costs are the same • Remember that the market does not care what your costs are

14. 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. Don’t let ego get in the way

16. 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

18. Fundamental and Technical Analysis

19. 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

20. 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

21. 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

22. 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

24. 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

25. 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.

26. 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

27. 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, risk:return, government programs, lagged effects Trendline yield crop conditions yield est

28. 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)

29. 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

36. 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

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

38. 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

39. 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

40. Open Interest Change Increase Price Change Decrease

41. High Low Close

42. Market Trends Up (Higher Highs and Higher Lows) Sideways Down (Lower Highs and Higher Lows)

45. Market Reversals Indicates a change in the direction of the trend

46. Key Reversals Bearish Key Reversal Market is in an Uptrend High is higher than previous day’s high and low is lower than previous day’s low Close below previous day’s close Bullish Key Reversal Market is in an Downtrend Prices are higher than previous day’s high and lower than previous day’s low Close above previous day’s close

49. 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)

50. Corn Five-Week Rule