Market Plus: Sue Martin

Dec 2, 2016  | 13 min  | Ep4215 | Podcast

Podcast

Pearson: This is the Friday, December 2, 2016 version of the Market Plus segment. Joining us now is Sue Martin. Sue, welcome back.

Martin: Thank you, Mike.

Pearson: We are glad to have you. We did not get a chance to discuss the cotton market on the program. We've just heard the story on the show about the drought and the severe weather that has swept through a lot of the Southeast. Of course it's a little late here in the cotton season, we're not seeing a price bounce. Where does cotton go from here?

Martin: Well, I think cotton can still have a little bit more of a correction here before we set the stage to move higher again. Cotton, besides being a fiber it is also an oil seed, and global oil seeds are extremely tight supplied right now so oil seeds in general I think are going to have some better times here, which means bean oil has some better times as well. But also China is back to importing cotton and imports from the U.S. are up this year. So I think cotton has got a better year next year but, again, I don't see next year as a barn burner runaway kind of a market unless this drought escalates further.

Pearson: Okay. Now you mentioned China is importing cotton again. Do we have any idea what happened to their supposed mountain of cotton supplies? They just quit talking about it and now they're buying fresh cotton?

Martin: Well, I don't know if you can ever really believe their stats. They've never been very open about their stats or transparent, let's put it that way. So I'm not sure but at one time they did supposedly it was estimated the owned 80% of the world's cotton. Well they went through a situation where their industries, the global economies were slowing down, people weren't buying cotton. But you've got India's economy percolating really well, it should be at least 6.5% this coming year and China all of a sudden their indicators for producers manufacturing index and various other indicators are showing that they are for the first time probably since 2011 having some better times. And so I think things, again here's that optimism, I think things are kind of changing and as they start putting people to work back into these factories and of course they could grow on themselves if they ever wanted to, I think that we're going to see that demand for cotton start to really come back again and that might be part of what they're doing.

Pearson: Okay. So now as producers are making that decision here looking at profitability levels, looking at rates of return, a lot of folks are thinking beans or cotton. Where does Sue Martin fall? Which has a better forecast for 2017?

Martin: I would probably still go soybeans. But here's the thing, when you've got new crop beans that have hit $10.35 already it's giving you an opportunity. If that's the worst price you sell at you're going to have a gorgeous year. I would probably say okay, go ahead and plan on some more beans but then also, if for nothing else, get puts put in place or something, do some strategies. You can do put spreads, buy a put, sell near the money and then go sell some $9 puts or $8.50 puts. $8.48 is the low on the bean market. So you can do that, try to cheapen them up a little bit and then have yourself protected. Now if I'm right on this 84 year cycle coming in when I think then what that tells me is that probably going to want some ownership back on what you're making sales on. And so that would be my take is we do want to make sales, we've already recommended 20% sales up here for producers on our website. So I would say make some sales, this is not a bad price, it's a good price. Brazil could come out full bore and produce. Argentina could surprise us if this weather doesn't gratify, not gratify but haunt them with some hot, dry weather then we're going to have a lot of production.

Pearson: Now, as far as reownership goes, we've got a question here from Will in Jasper County, Iowa. He's asking, should farmers be aggressive on new crop '17 beans sales? And it sounds like they should be. And on the reownership side, would you wait to reown them until we get closer to that mid-January 84 cycle timeframe? You wouldn't reown the sale day?

Martin: No, I would not reown right now just because of everything I've looked at just isn't really tied in real well. I would think that -- for just a step back on the cotton another thing that is helping out for demand by China is the fact, or manufacturing, is the fact that their yuan is so low that demand, it's cheaper to use them. But in the meantime yes, I would reown back what I sell on the board. Those I would want to do in call options. If I was talking corn I'd probably say own it back on the board on the futures because your basis is just --

Pearson: But in beans you feel there's enough value in buying all that additional time premium out to November?

Martin: Yeah I do. But again, to cheapen that a little bit, remember $8.48 was our low here. Are we coming down to $8.48 this next January? I don't think so. But I could sure see $9.19 on the board, for a lead contract it could be $8.80, $8.90. We could do something like that. What's going to be telling is how we close the end of the year out. Do we close higher than 2016, or '15? Or do we close lower for the year? If we close lower for the year then that January timeframe could even be more negative than I'm thinking. So we'll just have to see.

Pearson: And we're on track now to close lower.

Martin: Yes we are. But I do think, well we're a little bit over the close of 2015 right now but not majorly. So I do think that 2017 is going to hold some opportunity and we may see an opportunity to get higher highs on the new crop beans over this $10.35 area but I would be using some rallies. I would not be selling into that low because -

Pearson: Don't panic sell at $8.48 or $9.19.

Martin: No, if you're going to sell, sell now and then while we're still over $10 or something like that, even if you're holding old crop beans you might want to do that. And then when we get into that January low come back and buy your calls then.

Pearson: Make some purchases. Well, Will had a second question for you, Sue, and it's similar. He's wondering, for farmers with cash flow requirements by March, so getting us out past that January timeframe, what strategies do you recommend for corn? Do you sell grain now and reown on the board?

Martin: Well, yeah, I guess you do. Boy it just bites, you know. I think that when I look at the corn feeling the way I feel about the March futures that I think they're going to come down into January and then your January low will be there, the problem is we have all this supply. And here's the thing, farmers are going to have to really be astute this next year because their bins are full, elevators are full, there's no place to go for it. And the ethanol plants, when they need corn they might bid a little bit for it to draw it out but they aren't going to have to go super hungry. And it seems like I think this next year is going to be a year where they put out a little bit of a carrot and all of a sudden they're just loaded up with corn. The farmer, if there's any hint that that crop is looking awful good they better be thinking because what are they going to do with it come harvest time this time?

Pearson: And you say thinking, what you mean is selling, getting it out of their ownership.

Martin: Yes, so if you sell now, okay fine, but then by the middle of January have your reownership back. The hard part is if you do options and with very much time you spend a lot of money and I know the conservative banker might tell you to do that, my thinking is if we're putting in a low here in January, depending on where we're at, you're better off probably, if you've got to do call options do them at the money and then turn around and maybe sell out of the money calls to cheapen them up, but you've got to manage those because if it goes through that higher strike you've got to start doing something.

Pearson: Then you've got a mad banker again.

Martin: Well, and here's the thing. You're going to have -- you've got the psychology set now that when we start to see corn come up this next year, if it comes to $4 a farmer is going to unload. The basis is not going to follow the board as close as we would like. I fear we've got a basis -- we've had some nice years where we had phenomenal corn and bean basis, I think we're at the extreme opposite of that now this next year because of so much supply. Thankfully we've got good exports, very good exports.

Pearson: Are those going to continue?

Martin: Well in corn I think they will. Beans we're going to slow I think a little bit mainly because China is already starting to show interest in South America already. This last week I think they took 11 plus cargos out of Brazil, we got 1. So we're going to see some of that. But Mexico has been a huge buyer of corn, huge buyer of pork, ham. So I think that when I look at the process here, boy, you've got to have I guess some reownership back. The problem is basis is going to come along but it's a board move. Therefore if you go too far out of the money on options, you get what you pay for, a cheap premium. But you might not get anything.

Pearson: It will be one of those 90% that expire worthless.

Martin: Exactly. So what I would say is try to get as close to the money as you can for a call, they're going to be expensive, but if you do them in January if I'm right on what happens here the attitude might be pretty dismal and you get them less expensive, and then turn around and go up and sell a $4.50 call or something like that knowing that that's been kind of our line in the sand. But mark my words, when we get up there farmers are going to unload, they're ready. They'll unload, the commercials will buy a lot of grain and the price will probably keep going.

Pearson: Alright. Sue, before we let you go, since we're talking options thi8s is a great question. What does it mean to sell some time premium in the option market? When folks are selling a put or a call and they're selling time, what is that, Sue? What does that mean?

Martin: Well, what you're doing is you're going, the more time that you have, so the more premium you've got, the option premium is higher. So what you’re better off, if you're going to do that and you go further out in time, say you're into December --

Pearson: Like I'm going to sell a December $4.50 corn call.

Martin: Well, put. Put. You're in the money, by the way, on that. So you've got all that premium plus you've got a lot of time value there. So you can sell a $4.50 put. Now that's a bullish thought process because you're thinking that the price at some point could come up to that $4.50 and you're going to get all that money. And that is not a bad thought either because it is in the money and that's another way to address this market when we get into January. If I'm right on this corn I don't think it goes out through $3.01, that was your September 1st low, but I do think it's possible we see $3.16, $3.09, who knows. And then of course like I say the basis is just horrible.

Pearson: It's not going to bounce back very quickly with all of this sitting out there. Well, Sue Martin, thank you so much for taking the time to join us.

Martin: Thank you.

Pearson: This week on the M-to-M podcast listen in on how one of our analysts looks to the written word to make stale market analysis a vibrant and interesting topic. And join us again next week when we explore a program that encourages young veterinarians to work in remote, underserved regions of the country. So until then, thanks for watching. I'm Mike Pearson. Have a great week. 

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