"A New Year, A Fresh Look"
As the calendar turns into 2019, we look ahead just 10 days to a very important USDA report day that as of now, is in question. With the government "shut down" we do not really know if USDA will issue final production numbers for 2018 crops, monthly supply/demand numbers, and wheat acres seeded. This is a lot of information that is very price sensitive and will likely set the tone for price action opportunities for the next 2 months. We hope that all will be resolved in time for a normal release, but we also want everyone to be aware that there may be a delay and be prepared with orders in case target numbers are reached. In the mean time, continued watch on negotiations with China and other trade issues along with South American weather will likely create the most impact on price direction. We know for sure that China has purchased around 3 million metric tons of beans so far, but that is well below the rumored 5-8 million tons that has been talked about for weeks. We also know that cumulative exports are still much below what is needed to make the USDA target level, and the days are going by quickly. Harvest has begun in Brazil, and sufficient quantities for export will soon be available. We remain skeptical that we can reach those levels, and remain sellers on rallies of old and new crop, looking for a good basis to move cash grain. It has been a long time since we have seen a higher stocks/use number on beans, and our carry out projections have never been this high. With world carry out projected last month at 115 million metric tons and China demand slipping lower due to African Swine Fever, the outlook is not bright at this time. There are a lot of beans to sell out there, so getting in front of the herd may be well advised. Put options in place before the next USDA reports are advised if basis is not acceptable.
For corn and wheat, we are not as negative, corn from a demand perspective, and wheat from a potential supply issue. Some acres intended for winter wheat seeding did not get planted, we will not know how many until we get those numbers from USDA. We also know that a good share of the wheat that did get seeded was put in late, and development is well below what is desired. It doesn't mean that the crop is dead, but the next few months will be very important as to what the potential actually is. With any kind of weather threat, we feel wheat could stage a nice rally giving us a much better opportunity to sell so we will remain patient before selling any more old or new crop. For corn, we seem to be stuck in a 17-18 cent range, with ample supplies now to keep a lid on any good rallies. Exports have slowed some lately, but we are still way ahead of last year and the USDA projections for this year. Export competition from the Ukraine and later on South America will be important items looking ahead, as well as the development of the wheat crop around the world to determine just how much cushion we have in the feed grain supply. We are projecting a demand usage of 15 BILLION bushels this year, so any real threat to supply should get us a decent rally to get our price targets hit that at least make us a little profit this year. Make sure you know where your price target is! Other reasons we are more friendly corn at this time include the following, some of which are repeated from last month:
1) Fertilizer prices are higher, other inputs subject to tariffs are as well
2) Fall weather has not been good for fall tillage and fertilizer application, possibly limiting corn/corn acre increases
3) Price ratios for beans/corn not really leaning either way, yet.
4) Logistics and higher finance costs for more corn on "marginal acres"
5) Demand remains strong, although ethanol has backed off with the drop in crude oil
6) Argentina is now "very wet" in key growing areas, and some replanting may increase bean acres, less corn
We also add the following which in part is also repeated from last month:
Given what we know, and being reluctant to speculate on what we don't, our feelings on the grain markets can be summed up as follows:
1) We would be rewarding the rally in beans with sales or at least put protection on old crop
2) With November 2019 beans over $9.50 we would start selling, doing an HTA contract, or looking at short dated puts
3) December corn over $4.05, if profitable for you, should be considered, although we are looking at $4.15 to ramp up protection, keeping flexible through March 31 acre reports.
4) Wheat has many questions as to acres planted and slow development, we would be patient on new crop wheat sales for now
5) Courage calls on corn are now being recommended, using March $3.80 calls for 6 or 7 cents, and short dated December, July expiration $4.20 calls for 8 cents.
6) Bean calls could also be used if sales are made and one wants to make sure a "China rally" comes into play. We would rather own beans on paper with limited risk than keep them in the bin with unlimited risk as long as basis is reasonable.
The concept of "courage calls" is one we are asked about often. Simply put, we use them ourselves because they make decisions so much easier. Take the March corn contract for instance: we have been trading roughly between 3.70 and 3.88 for quite a while, currently on the low end of the range. With the 3.80 calls around 6 cents, we like owning them and then looking for a rally over 3.85 to possibly sell cash if the basis is good. If we do break out above resistance, you can also put a sell stop in on the cash grain and still have the call profit to add, and look pretty good for a net price. At any rate, for 6 cents, and a sale above 3.85 you can remove the risks of price, basis, and storage quality and still own the grain until the end of February, also generating cash flow and the ability to curtail interest payments. For the new crop options, we look back to a year ago when having those calls meant we could easily sell when December futures rallied above 4.20, in either cash or futures, and have the upside open until the end of June. We really like that potential this year, and we do not want to let that opportunity slip by because we are afraid to sell to soon. The most bullish attitudes are found in the "too" season when its either to hot, cold, wet, or dry to grow corn, essentially when there are the most "unknowns" to the market place. When the crop size is more defined, say by pollination time, the market has adjusted the price to the perceived crop size and carry out projections. That is why we use the short dated options, they are cheaper, (less time value) and are generally long enough to get a better picture on the "unknowns". Some years we may have to extend the time a month or two, but by then a month or two doesn't cost much to add on, and we can make a better decision on whether it is worth it or not then. The main point is, we get stuff sold at a profitable price, and defend it through the major risk times. Period. Give us a call with specifics, as each individual has different prices and basis numbers to work with, but seriously consider getting a plan together that uses these options as a foundation for a total plan. We believe in it, and use them ourselves or we wouldn't talk about them.
In preparation for the next USDA report, when ever that comes out but slated for January 11th, we would certainly advise reducing downside risk, especially in beans, with put options. If corn would rally back to the top end of the range, say over 3.85, we would also cover that price with puts as well, just because we don't know what the USDA will come up with, and it follows our logic that at the low end of the range we would own calls, the top end we buy puts until proven wrong by a break out either way. If you have puts in your pocket, and the market drops sharply after the report, basis may improve enough to generate a cash sale, after which you can roll down your put to the current price and buy futures, essentially transferring the physical unlimited risk to the amount invested in the put. Again, you still own the grain, but also have cash flow and a lower risk of storing grain longer. If you have unlimited storage and cash flow, then covering downside with puts and capturing the market carry out to July or September may net you more. That is why each case is different, but the concept of doing what you want when you want to do it applies to every one. You can use the marketing tools to build whatever plan you want, deliver what and where you want to almost anytime. It just takes some planning and forward thinking to accomplish this, and that's what we like to do. Wild market price moves un nerve those unprepared, but those with a plan to react often get the most reward and lose less sleep in the process!
In conclusion, when we look back at 2018, there were some tremendous yields out there, but also some real harvest challenges, and some acres yet to get in. We don't know how much if any production numbers may change from November, but we do notice corn prices are above a year ago now, and hopefully we can get some more reason to rally and give us more profit potential. Because we don't know..... is the reason to reduce risk whenever a good opportunity is there. That is why preparing for the release of the USDA reports is so important. It may be the best chance we get for a while, and if cash flow is needed soon, then actions need to be taken. We are starting our winter meetings now, and are always glad to visit with groups if desired, but also enjoy meeting with individuals over the winter to construct detailed plans suited for you alone. If there is a time good for you, let us know and we will see if what we do is applicable to what you do. It really is simple once you get a handle on all the tools, and know your costs. Market noise, emotion and fear are the biggest challenges to a good marketing plan, and that's what we like to eliminate as much as possible. Here's wishing you all a happy, healthy and prosperous NEW YEAR!
Dates to remember this month:
Export Inspections every Monday at 10 am
Export Sales and Shipments every Thursday at 7:30 am
Crop Conditions and progress every Monday at 3 pm
January 11th: Monthly Supply/Demand and Crop Production
January 25th: Cattle on Feed
January 25th: February Options Expire
Mike Daube 888-391-6330