CFGAG News and Views July 1, 2019
"Another USDA Surprise"
Last Friday, USDA issued two major reports, Quarterly Grain Stocks, which was friendly in terms of expectations in all grains, and Planted Acres which was not friendly corn at all. Most traders were looking for the "survey results" to show much less than 91.7 million corn acres, and in all reality, we probably will at some point down the road, as what was intended may not have actually been planted. Certification of acres is July 15, and the USDA is going to "re survey" practically the whole country to see what actually happened. The result of that release was swift with corn futures trading down the limit of 25 cents before bouncing back to close about a dime off those lows. Going forward, we will be watching that $4.26 low to see if it in fact holds, as very few people, especially in the eastern corn belt believe the 91.7 number will actually be what our final acreage will be. We once again are reminded that USDA reports can hold a ton of risk, and managing that risk, no matter how much emotion is out there is important. While corn prices have dropped considerably, the price this morning is still one we would have loved to see back on May 14th. Lets look at the factors that could take prices either direction as we get ready for the now very important July 11th Supply/Demand Report:
Bullish
1) Weather, both here and around the world. Europe is experiencing some extreme heat now
2) Late planted crops need lots of time
3) While crops look better from the road, many problems are still there, just not as easily seen
4) Lower prices may get us back into some export business, and maintain current domestic demand
5) Proposed tariffs on China have been delayed as a result of the two Presidents meeting, talks are still on
Bearish
1) Warmer and drier weather have improved crop appearance in many areas this past week
2) Exports demand is still weak
3) Wheat harvest is under way, selling pressure is possible
4) End users may not be as anxious to cover needs quickly
5) Planters are still rolling, but now its beans
We are repeating the following from last month for reference as to our thoughts pre report and our next moves:
For months now we have advocated the purchase of "courage calls", cheap calls to make it easier to make sales against if a rally occurs. That has proven very useful now, and we have a lot of profit in them. Now we have to look ahead and see what we need to do. We have a major report coming June 11, a monthly S/D report and the first look at what USDA projects for crop production. This will be huge, as guesses will be all over the board and the final number is bound to surprise someone. Do we rally into it or sell off? More importantly will be the June 29 reports that include Planted Acreage and Quarterly Grain Stocks. Remember last March when USDA "found" 270 million bushels? They also said that any grain lost in the flooding events would be accounted for in the June Stocks Report. This sets us up for a very dynamic possibility of big surprises and price swings. In short, the spring weather has now set the table for wild price swings and huge risks for all. Producers and end users will face tremendous anxiety as these report dates become near. Our job is to keep emotion out of these events and focus on opportunities and most of all, reduce risk. As we have said often, no two operations are the same, so each of us needs to focus on what we need to do on OUR farm and not get caught up in the latest twitter feed or face book post. Here are some of our thoughts as of June 1, (always subject to change daily as more is known)
1) The market will rally until rationing is complete and some comfortable supply/demand numbers are priced in
2) We are doubtful that December corn can get through $5 without further bullish news. (see bearish items above)
3) With nearly a billion bushel bean carryout, and the possibility of more bean acres, we like putting floors in old and new crop above $9
4) Old crop corn and wheat should be incrementally sold on rallies, and good basis, and if desired, renowned with calls or call spreads
5) We need to protect EQUITY! A rally like this should not go unrewarded. Take profits on futures and long calls that will expire soon and replace with lower risk calls or call spreads. TAKE SOME MONEY OFF THE TABLE.
Planning is all important. Execution is next. Here is what we are doing on our farm.
1) Taking profit on long futures (that replaced earlier cash sales) and also short dated calls that expire on June 21
2) Buying short dated August expiration $4.50 calls and also selling December $5.00 calls for 5-6 cents
3) Sell old crop beans on any decent rally, and new crop above $9.10
4) OR, protect old or new crop beans by buying short dated August expiration November $9 puts and selling November $10.00 calls
5) Make sales via HTA contracts as comfortable, rewarding rallies in increments. (4.50 is not a bad starting point)
6) Protect equity in long positions by buying puts, also if sales are not made, protect what the rally has done for stored or planted grain
7) ALWAYS ASK YOURSELF, DO I WANT TO BE LONG, SHORT, OR NEUTRAL AT THIS PRICE (every day!)
As we look ahead, the above still applies. We believe that while the numbers were a shock to the trade, the actual numbers may be quite different when certification, prevent plant acres are counted, and USDA re survey is done. July 11th is the next report, and we are curious as to how they will handle these numbers. Remember that on June 11 they cut yield dramatically as well as acres and many thought that would lead to more cuts in July. Will they? We tend to look at days like last Friday and get really down, but that may be just as bad as getting too bullish. We have a lot of growing season to go, (and so do our competitors in the grain sales arena) and nothing is "made" yet. We need to focus on our own farm, our production potential, what a profitable price looks like given what we have. Refer back to the spreadsheet, plug in some numbers, and see what you need to reach a profit goal, and reduce price risk when that is reached. Very simple, yet very hard when emotions are running high. For those in the trade that were promising $6 corn, they look silly now, but we will not trash them, we don't know what will happen, and quite frankly, don't care about what "others" think in the extremes, we only care about protecting our profits on our production. Given that, we are looking to do the following:
1) Put floors in soybeans above 9.30. We are concerned bean acres could "grow" in future reports given our contacts and producers
2) Watch the 4.26 low in December corn futures, if it holds, we may want to own some calls
3) Establish floor prices in corn on rallies, use puts or put call spreads but always have an exit strategy in case of more "surprises"
4) We will not look back too long to remind us of "what we could have had", its a futures market so we look ahead, analyze risk, and act accordingly
5) Watch fund position closely, they are long corn now, short beans.
Make sure you call to go over any ideas on making sales, covering the upside on those sales, or using spreads. We want to make sure we are covered, but not limited. We are watching old highs of 4.73 and lows of 4.26 in December corn, and highs of 9.70 in November beans a while back, most recently 9.48. Making sales or putting floors in above 4.50 corn and 9.35 corn makes good sense to us.
In conclusion, we once again got some numbers that the market was not expecting. Whether they hold up over time is questionable, but its all we have now. Be ready for the July 11th Supply/Demand Report, as we have no idea how the numbers from last week will be used. It is important to note that the Stocks numbers were actually a touch friendly for all grains, so we are not ready to throw in the towel on the corn market just yet. There is a lot of time, weather, and world trade issues to deal with and China is still a major wild card. The market was too complacent/bearish in early May, and possibly too bullish in late June, and both caused some serious pain to those on the wrong side. We like being on the side of profitability and lower risk to our bottom line, and keeping too much emotion at bay. Hopefully we can maintain that in spite of a planting season we all will remember for a long time. Have a safe and happy 4th of July, celebrate the independence we have to make decisions on our own, and the freedom to exercise our craft as we see fit!
Dates to Remember:
Every Monday: Export Inspections, Crop Progress
Every Thursday: Export Sales and shipments
July 11th : Monthly Supply/Demand Report, Crop Production
July 19th: Cattle on Feed,
July 26th: August Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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