CFGAG News and Views April 1, 2019
"Bearish Report, Now What?"
Last Friday, the USDA issued one of the most bearish reports we have seen in terms of expectations. Stocks of corn were about 260 million bushels above expectations, (and we think the average guess reported was actually higher than most people, including us thought). This combined with projected plantings of 1.5 million more corn acres than expected was enough to discourage even the most stubborn bulls in the market. We are now looking at projected carry outs of over 2 billion bushels of corn, and beans, even with 2 million less planted acres anticipated, will be north of 900 million bushels on September 1 of 2020. Nothing in the reports was friendly, period. How did we, along with many others, get such a surprise?
1) We did not anticipate one of the lowest feed use numbers in the second quarter in the face of increased animal units in every category, and a winter that was less than kind. We are still trying to figure that one out, how did we use less corn and by that much?
2) Planted acre projections are based on a March 1 survey. Did we get too wrapped up in the flooding during March, assuming too much too soon? We are reminded that according to USDA, they only report what they have, and save speculation and anticipation for others.
3) Was last years crop understated? Hard to believe given every month last fall showed a reduction from the previous estimate, but certainly possible given late harvest and lack of information flow during government shutdown.
4) Are livestock feeders finding other sources of feedstock that reduces overall corn demand? A question we will be looking ahead to future reports for answers.
5) Have our assumptions been overly friendly corn given price action the past 5 years? Did we anticipate too much too soon?
We have told ourselves over and over to be cautious about major reports, to assess the risk and make sure we are not carrying too much risk given the possibility of adverse surprises. Lesson learned, again. Now we have to rethink our attitude toward the coming crop year, and make intelligent decisions based on what we know. We know what the news is from last Friday, its bad but its known. Its old news now, what the market will be looking for now is some reason that those numbers will change, and if its enough to move the market significantly. What will it take to make a big enough difference?
1) Unanticipated demand, maybe a China deal in the next few months? Will they buy enough corn and corn products to reduce carryout?
2) Adverse weather. Safrina corn in Brazil (70% of their production) is entering reproductive phase in April, and the weather so far has been relatively good. Will that change?
3) Flood damage has been reported on stored grain in the western belt and Northern Plains. How much? Planted acres intended verses actual planting depends on weather, how fast flood waters recede, and producer options. We have decreased incentive to plant more corn now, but what are the alternatives. Any better ones out there?
4) Now that corn price has dropped, will we get more export business? How much and how soon if we do?
At this point, a lot of the above may be "wishful thinking" but once the bad news is out there, it is old, and the market will be looking ahead. We will be watching basis levels closely this week, to see if the cash market responds or just waits to see if producers will throw in the towel and sell. We have seen big sales lately out of South America as currency values have dropped in the peso and real verses the dollar, so keep an eye on those values as well. Funds are short over 200,000 contracts of corn, and whether they add to that number or buy out will also be watched, but when or why will not be easy to determine. We assumed they would cover some given the flooding and what looked like a late start to the planting season, but "late" is not here yet for most of the corn belt. The next few weeks will be the definitive guide to "late". Given all of these factors we have listed, our attitude going forward is this:
1) Sell old crop corn on good basis opportunities, with "extra" carryout, rallies in futures are likely basis killers
2) Sell or protect new crop corn prices at $4 or more, we are slightly lowering our targets given report numbers
3) Sell old crop beans on any decent rally or basis pop, without a deal with China, we just have too many beans left
4) Sell or protect new crop beans on any rally north of $9.50 for the same reasons
We would and do have orders in at the elevator "just in case" we get a late night or early morning announcement of a trade deal. We do because we remember the 2:30 am announcement of the tariffs being imposed, and the huge drop in bean prices that ensued. We also remember how they came back in day trading later, gaining back a lot of what was lost. We would be out of luck if we did not have orders in, so are doing so now to sell any decent rally. Given the bearish impact of last Fridays reports, we feel stronger about having those orders in. Pick your price after looking at a chart, or call us for some ideas that we think are reasonable. We just have to focus on trying to sell at the best price we can until the outlook changes. We are NOT giving up on our "courage calls", the buying of cheap call options to sell against if we do rally, as many things listed above can change. We may have to lower our upside potential top side objectives a bit, but with the fund short as big as it is, we still feel $4.00 to $4.10 is possible in December corn, but are now more inclined to jump on sales a little harder with those calls in place. We are strongly advising protection or defensive positions on November beans above $9.50 and have a simple option spread idea to cover bushels you are not comfortable selling in the cash market. Call us to discuss that idea.
In conclusion, we have to sometimes get up from a beating, and dust ourselves off, and comeback with a positive outlook for the future, or the game is over. Last Friday was one day this author would love to forget, but because we learn from every setback, will not for a while. No matter how hard we work, think, analyze and plan, we can get knocked up side the head at any time. This is life, we win and we lose and producers know that as well as anyone. The recent flooding has made us all aware of the pain, most of us have lived it in some form or another, and our prayers go out to all those who have lost crops and livestock. Looking at those videos and news reports put all the pain of last Friday in perspective for me, we are very fortunate here not to be having to cope with such loss. As a former livestock producer, the loss of one baby calf was tough, I can't comprehend the magnitude of losses being discovered even now. The bottom line is we as producers accept and deal with great risk every day, and markets are a big part of that risk. We are painfully reminded that sometimes we are not right, and there is a cost to that, maybe planting too early, too wet, too dry or any other decision you have to make every day. We will accept the reports, readjust our targets to sell, and look for better opportunities ahead. They will be there! And most important this month, a Blessed Easter holiday to all.
Dates to Remember:
Every Monday: Export Inspections
Every Thursday: Export Sales and shipments
April 9th : Monthly Supply/Demand Report
April 18th Cattle on Feed
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-221-9234
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