Like a lot of small towns, my hometown has an annual brouhaha each summer.
People come from across the country to meet up with old classmates, and
local residents travel from miles around to attend the bull-riding event and
the A-list country music concert Saturday evening. Since the festivities
usually get ramped up at about 4 o'clock in the afternoon, on a hot day,
they can sell a lot of beer. I mean a LOT of beer.
Unfortunately, the past couple of cool, wet springs have really challenged
their profitability. I know I, for one, drank a fraction of my 2009
performance during the past two rain-soaked concerts. Let's say they usually
sell 10,000 cans of beer at $3 a beer, but in 2011 they only sold 5,000 cans
of beer. That's a $15,000 cut in revenue. If only they knew about those
nifty weather options that can hedge against any kind of event -- hail,
drought, heat, frost, rain -- you name it. I got a quick quote from an
online weather options brokerage, and for a $9,600 premium, my hometown
could get a $15,000 "rainy event" option payout if it rained more than 1/4
inch during any three days of the week of their festival.
Honestly, that seems a little expensive, but over-the-counter weather
options can be tailored more specifically than that particular website
allows and they can typically be engineered to be cheaper, too. Regardless
of the price, it's a really smart way to guarantee some income if you're
counting on it and you're at the mercy of the weather. Here's an example
that might really pique your interest.
For a $44 premium per acre, a farmer in Saunders County, Neb., could own
what is essentially a temperature call for the last 10 days of July, which
would pay out if any one of those days saw temperatures over 95 degrees. If
there was one day over 95 degrees, the call would pay him $30 per acre and
effectively recompense 5 bushels per acre (at $6 per bushel) lost to poor
pollination. Two days over the threshold would pay $60 per acre, and three
days over the threshold would reimburse the farmer $90 an acre. That was
just a quick quote I dreamed up with some wild agronomic assumptions about
eventual yield loss from hot days during pollination, but it's not a
throwaway when a 70% RA (revenue assurance) insurance plan wouldn't kick in
until you've lost something like 40 bushels per acre in that part of the
country, from poor pollination or any other reason. That temperature call
would have paid out at least $30 per acre in six of the past 10 years, with
an average payout of $45 per acre.
Well, during my windshield tour of the past week and a half, I've seen a few
fields of corn that are just now starting to tassel in eastern Nebraska, so
you can see why folks (e.g. farmers, traders, and anyone who's planning on
being an end-user of corn in 2012) get antsy when the weather forecasts keep
showing a ridge of high pressure bringing record temperatures next week.
Monday's Crop Progress report showed only 14% of corn fields are silking,
which is less than half the amount at that stage of development a year ago
at this time.
So that means that while there are a lot of fields at greater risk of
hitting poor pollination weather at just the wrong time, there are also a
lot of late-planted areas that are actually benefiting from the quick
accumulation of heat units. I saw fields in South Dakota and Minnesota that
were, unfortunately, only knee high by the Fourth of July, but they've been
rapidly catching up to the calendar since then. In Iowa, even where the corn
isn't tasseling yet, farmers are concerned about hot nighttime temperatures
(around 75 degrees) inhibiting the plants' respiration, which can also lead
to yield loss.
As usual, it seems that each farmer's analysis of whether the market should
be bullish or bearish right now depends strongly on the view out his own
back door. And I'm no better: my recent crop tour and my interpretation of
the weather forecast may give me a long-term bullish bias right now, but I
obviously haven't seen the full picture. If it was in the Eastern Corn Belt
or the Southern Plains, I haven't seen it, and neither have I seen China or
Ukraine. Until I do, what else do I have to go on? The weekly Crop Progress
ratings (corn is still rated 72% good or excellent, the same as last week)
can't be expected to tell the whole story, because a field may be canopied
and green and beautiful, but be suffering untold yield reductions while it's
struggling to make nutrients in the hot air.
Therefore, commodities may be firmly in the throes of a weather market, with
wild swings and gyrations as the direct result of changing forecasts, but
nobody is really going to know how those forecasts are affecting yield until
harvest rolls around. Given the relatively tight stocks-to-use situation, a
hot late July or other yield challenges could still mean $8 corn ... or
given the massive amounts of corn planted, a lot of welcome heat units could
mean $4 corn.
I'm guessing most farmers will feel better about selling $6 corn now, even
if a chance at $8 corn rolls around later on, than they would feel about
selling $4 corn later if they could have locked in $6 corn now. There are so
many external factors threatening the overall investment environment right
now (Greece's debt, Italy's debt, Chinese demand, the Geithner/Obama/Boehner
debacle, just to name a few) that even a market bull like me wants to have a
firm backstop on a majority of my 2011 corn bushels and some of my 2012 corn
bushels. Enough time value has washed off December puts that I finally think
an options spread is the best risk management alternative right now.
And that's just a hedge against the futures prices, to say nothing of using
those snazzy weather options to boost your crop insurance as a hedge against
production losses. If you want to put up the capital, it's possible to buy
options against every type of production threat, all your futures market
exposure, and most of your input costs. That's something to think about when
you grab some cold beer, go outside on a hot night, and listen to the corn
grow.
Fuente: kub
People come from across the country to meet up with old classmates, and
local residents travel from miles around to attend the bull-riding event and
the A-list country music concert Saturday evening. Since the festivities
usually get ramped up at about 4 o'clock in the afternoon, on a hot day,
they can sell a lot of beer. I mean a LOT of beer.
Unfortunately, the past couple of cool, wet springs have really challenged
their profitability. I know I, for one, drank a fraction of my 2009
performance during the past two rain-soaked concerts. Let's say they usually
sell 10,000 cans of beer at $3 a beer, but in 2011 they only sold 5,000 cans
of beer. That's a $15,000 cut in revenue. If only they knew about those
nifty weather options that can hedge against any kind of event -- hail,
drought, heat, frost, rain -- you name it. I got a quick quote from an
online weather options brokerage, and for a $9,600 premium, my hometown
could get a $15,000 "rainy event" option payout if it rained more than 1/4
inch during any three days of the week of their festival.
Honestly, that seems a little expensive, but over-the-counter weather
options can be tailored more specifically than that particular website
allows and they can typically be engineered to be cheaper, too. Regardless
of the price, it's a really smart way to guarantee some income if you're
counting on it and you're at the mercy of the weather. Here's an example
that might really pique your interest.
For a $44 premium per acre, a farmer in Saunders County, Neb., could own
what is essentially a temperature call for the last 10 days of July, which
would pay out if any one of those days saw temperatures over 95 degrees. If
there was one day over 95 degrees, the call would pay him $30 per acre and
effectively recompense 5 bushels per acre (at $6 per bushel) lost to poor
pollination. Two days over the threshold would pay $60 per acre, and three
days over the threshold would reimburse the farmer $90 an acre. That was
just a quick quote I dreamed up with some wild agronomic assumptions about
eventual yield loss from hot days during pollination, but it's not a
throwaway when a 70% RA (revenue assurance) insurance plan wouldn't kick in
until you've lost something like 40 bushels per acre in that part of the
country, from poor pollination or any other reason. That temperature call
would have paid out at least $30 per acre in six of the past 10 years, with
an average payout of $45 per acre.
Well, during my windshield tour of the past week and a half, I've seen a few
fields of corn that are just now starting to tassel in eastern Nebraska, so
you can see why folks (e.g. farmers, traders, and anyone who's planning on
being an end-user of corn in 2012) get antsy when the weather forecasts keep
showing a ridge of high pressure bringing record temperatures next week.
Monday's Crop Progress report showed only 14% of corn fields are silking,
which is less than half the amount at that stage of development a year ago
at this time.
So that means that while there are a lot of fields at greater risk of
hitting poor pollination weather at just the wrong time, there are also a
lot of late-planted areas that are actually benefiting from the quick
accumulation of heat units. I saw fields in South Dakota and Minnesota that
were, unfortunately, only knee high by the Fourth of July, but they've been
rapidly catching up to the calendar since then. In Iowa, even where the corn
isn't tasseling yet, farmers are concerned about hot nighttime temperatures
(around 75 degrees) inhibiting the plants' respiration, which can also lead
to yield loss.
As usual, it seems that each farmer's analysis of whether the market should
be bullish or bearish right now depends strongly on the view out his own
back door. And I'm no better: my recent crop tour and my interpretation of
the weather forecast may give me a long-term bullish bias right now, but I
obviously haven't seen the full picture. If it was in the Eastern Corn Belt
or the Southern Plains, I haven't seen it, and neither have I seen China or
Ukraine. Until I do, what else do I have to go on? The weekly Crop Progress
ratings (corn is still rated 72% good or excellent, the same as last week)
can't be expected to tell the whole story, because a field may be canopied
and green and beautiful, but be suffering untold yield reductions while it's
struggling to make nutrients in the hot air.
Therefore, commodities may be firmly in the throes of a weather market, with
wild swings and gyrations as the direct result of changing forecasts, but
nobody is really going to know how those forecasts are affecting yield until
harvest rolls around. Given the relatively tight stocks-to-use situation, a
hot late July or other yield challenges could still mean $8 corn ... or
given the massive amounts of corn planted, a lot of welcome heat units could
mean $4 corn.
I'm guessing most farmers will feel better about selling $6 corn now, even
if a chance at $8 corn rolls around later on, than they would feel about
selling $4 corn later if they could have locked in $6 corn now. There are so
many external factors threatening the overall investment environment right
now (Greece's debt, Italy's debt, Chinese demand, the Geithner/Obama/Boehner
debacle, just to name a few) that even a market bull like me wants to have a
firm backstop on a majority of my 2011 corn bushels and some of my 2012 corn
bushels. Enough time value has washed off December puts that I finally think
an options spread is the best risk management alternative right now.
And that's just a hedge against the futures prices, to say nothing of using
those snazzy weather options to boost your crop insurance as a hedge against
production losses. If you want to put up the capital, it's possible to buy
options against every type of production threat, all your futures market
exposure, and most of your input costs. That's something to think about when
you grab some cold beer, go outside on a hot night, and listen to the corn
grow.
Fuente: kub
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