The Rural Voice, 1989-02, Page 15MARKETS ... MARKETS ... MARKETS
seasonal tendency for rallies in the
meats at this time of year. Countering
this tendency in the bellies this year
are the record levels of frozen stocks.
It is expected that the stocks report for
bellies will number approximately 120
million pounds for January. Average
out -movement during January over the
past five years has run 6 to 8 million
pounds. Slicer demand has been
good, contributing to a rally in fresh
belly prices some 5 to 6 cents. The
spread between fresh bellies and
futures has narrowed to 400 points,
which has encouraged some slight
movement out of storage. Seasonal
demand should remain steady until
early February and cash prices will
move higher and likely remain at a
premium to futures. But the huge in-
ventory will limit the upside potential
of both cash and futures prices.
Since we last wrote about corn,
March futures advanced from $2.70
per bushel to $2.91. The total time for
this advance was 4 to 5 weeks. Today
March corn is trading at 2.69 per
bushel while only four days ago the
market was in the high 2.80s to 2.90.
The quick drop was precipitated by a
USDA carry-over estimate released
after the close on January 13. Their
estimate indicated that projected carry-
over stocks will be slightly higher at
the end of the current marketing year
than previously projected. Previous
holders of cash and futures positions
said to themselves, "If this is the case
then there is no real reason to hold
positions," and immediately started
selling into the market, thereby
driving prices lower.
The point here is the market can be
moved sharply and you as a producer
don't have the time and don't need the
aggravation of trying to keep track of
market reports, interpretations, and
market psychology. Using a combina-
tion of futures options, the futures
market, and knowing your basis (or
even having you basis locked in), one
can ensure that you have protection
from a price drop, have the advantage
of a price increase, and have limited
margin money tied up while not taking
the risk of having a delivery commit-
ment should a crop failure result.
Let's clarify by example. Cur-
rently, December 1989 corn is 2.73.
December 2.80 corn call options are
.20, and let's assume the new crop
corn basis is .90 over December
futures. By selling short December
corn and buying 2.80 corn calls, the
producer establishes the following;
(1) full protection on the price of
corn from 3.43 per bushel and down
(2) no price advantage or disad-
vantage from 3.43 per bushel to 3.70
(3) additional returns on price
levels above 3.70 per bushel.
Allan Kneeshaw and Paul Clarke
are commodity brokers with Nesbitt
Thomson Deacon Inc., Waterloo.
They welcome questions and com-
ments. Telephone 1-800-265-6148 or
519-886-3100.0
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FEBRUARY 1989 13