Play Turner’s Take Ag Marketing Podcast Episode 286
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In today’s podcast we go over the US Federal Reserve increasing interest rates and tapering bond purchases. We also talk about Natural Gas and how high prices this winter could impact fertilizer prices and acres/yields next growing season. Make sure you take a listen to this week’s Turner’s Take Podcast!
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If you’ve seen a recent chart of Natural Gas then you’ll know what the subject of this podcast is referring. Wow! I thought NG could hit $6 this winter. I did not think it would happen by Sept 28th. Below are some charts for US, UK, and Dutch NG futures. When Natural Gas is in tight supply in the US it traded between $6 and $14 from 2001 to 2009. Those years of high prices brought out a lot of investment in energy resources and development, and kept the NG market well supplied for more than a decade.
Take a look at what is going on in Euro (Dutch NG futures) and the UK. Prices are higher across Europe and the United Kingdom has it the worst at the moment. On average Natural Gas prices are about 5 times higher than normal. In the US supplies are tight and this is the time of year when we need to be building inventory for the winter. Production is lower and part of that is from the slowdown during COVID shutdowns, but part of it is also from the move to clean energy. Natural Gas is in higher demand now and policy initiatives have discouraged the use of coal.
NG is going to be volatile. I doubt the move higher is over. For users of energy, natural gas and fertilizer, I like think you have two options. The first is you lock in as much physical as possible and then buy a put just in case the market crashes. If you don’t want to commit to physical purchases I would look into calls as insurance against higher prices this winter.
Speculators should look into buying futures and a put for protection. I also like buying Dec call spreads and collection some premium selling Nov put spreads.
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Grains & Oilseeds
Sticking to the NG theme I have a chart of Urea below. It could have been a chart of any type of fertilizer. They all look the same. The price of NG is increasing prices for fertilizer across the board. NG can make up to 60% to 90% of fertilizer depending on the type and how high natural gas prices are during manufacturing.
The big concern about high natural gas prices and the grain markets are two fold. The first is availability. The market needs a lot of acres next year for all major crop. We are tight in corn, wheat, and oilseeds. If input prices for corn are much higher than do we see more wheat and soybean acres? If we get record corn acres will fertilizer use be lower due to high prices or limited availability?
I would be looking to buy back new crop corn sales with futures in March and then buying a put for protection. For new sales I would look at the $6 March Corn Calls and then sell the March $5/$4.50 put spread. The whole package would cost about a nickel. For soybeans I would either buy the $14 March call for 25 cents or the $15 for 12 cents and then use those call options to sell into if we get a big rally during the South American weather season.
Buying physical inputs at these levels makes sense and then you can buy a put for protection in case the markets collapse. I think that works for corn, wheat, soybeans, meal, and oil. Grain and oilseed stocks will be tight for another year and the natural gas/fertilizer issue is not going away any time soon. If you can’t lock in physical inventory now I would also look into buying calls for future needs just in case we get a big rally this winter and spring. Call me for specific strategies based on your business.
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