"In Like a BEAR?" 

We happily say goodbye to February, a month that has ended with a big selloff to new lows in corn and wheat for the move, and left producers feeling disgusted and depressed. We know that feeling, when we have prolonged selloffs it seems like prices will never rebound, and with planting time coming soon, it does not make for high expectations and excitement as we make preparations. It is times like these that we step away from the negatives, revisit our price targets and expectations, and see if we need to change our marketing plan as we move through the "too season", when market premium is usually added over concerns of too wet, too dry, too hot or cold to get a crop established. Some basic facts before we add our outlook:

1) February averages for Crop Insurance will be approximately $4.00 for corn and $9.55 for beans, making the corn bean ratio just under 2.4-1 which is neutral

2) South American weather is non-threatening, harvest in Brazil is above average progress as well as Safrina corn planting. Argentina crops are good, much better than last year.

3) US weather is not ideal, too wet in the Delta for an early start to planting, and the NW Corn belt is concerned over deep snow pack and much below normal temperatures which look to stay around through most of March at this writing.

4) Export sales remain good for corn, slightly below what is needed for wheat, and still lagging in beans compared to USDA projections

5) Funds are now "short" a fairly large number of contracts in all grains combined

6) March 29th will be a VERY big day with the USDA Planting Intentions and Quarterly Grain Stocks Reports

We look at the end of March as one of the most critical report days of the year, as expectations for crop size and eventual carry out supplies will be calculated by comparing the grain stocks with expected production, subtract projected usage, and see if we have a comfortable supply, excess, or a potential shortage developing. These numbers tell the market if we need to add or subtract weather premium and how quickly that needs to happen, or if we can just get by doing nothing. We need to be ready to reduce our risk levels if possible during the next 4 weeks, and make sure that if we have profitable price opportunities during this time, we take some or all of our price risk off the table. Looking ahead, knowing there is some movement on the China trade talks front, there is still no firm agreement, although tariff increases have been put on hold that were slated to be imposed March 1. We really have nothing but rhetoric, some promises to buy, but as of this writing, nothing definite on paper. Given that, we are still concerned that bean prices have the most downside risk from where we stand today, and are still more optimistic longer term in corn and wheat. We would (and are ourselves) be doing the following:

 

1) Selling old crop beans on any rally, we are concerned about weakening basis and potential downside risk in futures

2) Given the recent high in November beans of $9.71 we would be sellers of new beans in the 9.55-9.65 range, and not buying calls to defend unless we have a sharp break or a close over 9.71

3) We are buyers of "courage calls", call options for July to cover old crop and short dated, July expiration December calls to sell against if and when we get a rally. We want to make sure we sell enough if and when we hit our profit targets, and having a cheap call in our pocket makes us more likely to sell when emotions get high, or we get too busy to react. We also want to keep our upside open "just in case" something extraordinary develops. More on this below.

4) We believe the sell off has been technical in nature for wheat and corn, therefor are willing to buy calls to defend sales later.

5) Basis on corn and wheat are improving in many areas, we may want to do basis contracts now, and set futures for a later date depending on cash flow needs

6) We are concerned about bean prices, both futures and basis. We have a record carryout in beans, and getting basis to narrow much may be a challenge. We are also concerned that 2019 bean acres may not be reduced as much as some think, as the price ratio, weather issues, fertilizer prices, farm economic stress and simply a desire to maintain rotations all argue against a big shift in our minds. This in one of many big issues that will be answered on March 29th.

 

The concept of courage calls has gained favor over the past few years, especially for producers who are quite busy and not able to "watch" the market. The basic idea is to acquire call options as cheaply as possible in advance of the "too season". We buy short dated, July or August expiration  December calls at a strike price we feel reasonable, and given price history over the past 5 years, we feel $4.15-$4.20 is quite reasonable remembering last year we topped out at $4.30 and our carry out numbers are slightly below last year. Today, 4.10 short dated calls can be bought for 8 cents, so simply put, an 8 cent investment now gives a producer the ability to enter sell orders at any price they are profitable, say $4 and up, and the calls will defend the hedge, and keep the top side open. If sales are executed, either in cash, HTA or futures, we now have a solid floor price, a profitable year protected, and also have the flexibility to add to our profits by managing the call options, capturing carry in the market with storage, and the ability to possibly roll hedges into next year once cash sales are complete. Call us to go over these ideas as individual decisions need to be made as to strike price and option cost, but think about this: I can own these calls, put my sell orders in, and relax for a few weeks, let the market do whatever it wants, and revisit before the March 29th reports. It will be unusual for us not to rally on something between now and then, but if so, then we re assess and change our orders if necessary.

 

In conclusion, we as producers are just as frustrated as anyone with market action of late, money flow selling never seems to end, but eventually it does, and if funds get too short, we often get a quick and hard rally as short covering. Our problem as producers we often mistake a short covering rally for something much more meaningful and we don't get enough sold or protected. If we use a combination of call options and sales with some put option targets, we can have the bulk of our production covered at profitable levels and still maintain upside potential just in case we have a major weather problem. We have to remind ourselves it has been 5 years since we have had a major issue with production losses, trend yields continue to climb and the market may be getting a little complacent with expectations. With demand of around 15 billion, we really can't have a 5 bushel below trend yield without prices moving substantially higher than today. We are not wildly bullish, but are not sellers yet in corn until we get more into the "too" season. We can see the possibilities if production is threatened either by weather or lack of planted acres and want to be ahead of the herd if that happens. Make sure you call and visit about how these ideas could work for you, and make sure you have unwanted risk covered before March 29th!

 

Dates to Remember:

Every Monday: Export Inspections

Every Thursday: Export Sales and shipments

March 8th : Monthly Supply/Demand Report

March 22nd Cattle on Feed, Cold Storage Report

March 29th: Prospective Plantings and Quarterly Grain Stocks Reports

 

Mike Daube: 888-391-6330 or 574-586-3784

Allen Gard: 573-221-9234