CFGAG News and Views September 1, 2019
"Lots of Questions, Few Answers.....Yet"
The release of the monthly Supply/Demand Report on August 12 was widely anticipated as a potential market mover, as the general feeling was that USDA would lower yield projections as well as planted, or at least harvested acres potentially. They did not, actually raising yield 3 1/2 bushels per acre. More bearish news the market did not need. Funds have continued to sell, and according to last Friday's COT report, are now short just under 100.000 contracts in corn, and over 75.000 in beans. Lets put this in perspective just to illustrate how spec money can influence price. Remember last May? On May 15th, funds were short a record 350,000 contracts of corn, then the rally started and they went over 200,000 long when prices peaked out. Since then, they have sold almost 300,000 contracts to their present condition. Money flow does matter! We are now down in price basis December to within 7 cents of the low set last May of $3.63 1/2. Bad news for sure, and crop condition reports have been relatively stable the last 4 weeks when normally they are declining. Cool temperature and many areas getting decent moisture have led to a "non bullish" story line. To change course, we will need something for bulls to really grab onto, and some wonder if that will ever happen. Export news in corn is not positive, and there are no imminent frost threats at this time. Sounds like a recipe for lower markets, and that may well be in the cards with no improvement on the Chinese trade talk front, continued overall non threatening weather in the majority of the corn belt, and funds seemingly ready to sell more. These are the bearish factors we have to deal with, but is there any reason to be hopeful of higher prices? Always...........there are always two sides to the market, and the bulls will point out the following:
1) Basis levels for corn remain quite strong in many areas, the Eastern Belt especially. Selling is still slow, even with DP ending last Thursday
2) Concern remains on number of acres planted, how much will actually be harvested for grain, and the effects on final yield
3) Concern is also present in late planted areas on how test weight and quality will pan out, let alone when harvest might even start
4) Any major shift in weather patterns that suggest an early frost may trigger funds to cover shorts and go long again
5) September 12th the next Supply/Demand and Crop Production Report: will USDA change course on yield and acres once they get actual field work in instead of just survey results?
We will not try to outguess them, only try to be prepared for whatever is reported, and that means determining where our risk levels are and what we need to do about them. That starts with your crop estimates, your storage capacity, and cash flow needs. Next is the hard one, as it is so variable across our client base area........what is basis doing? What are your opportunities in regard to basis both old and new crop? In the East, it is still possible to find 50-75 OVER for old crop, and generally new crop is running 25 cents better than normal. Very remarkable if in fact we have a near 14 billion bushel crop coming, or maybe commercials are not convince we do yet? This is very important to your overall plan, taking advantage of good basis bids and selling the cash grain you cannot store is an option. You can replace sold bushels with futures or options if you believe prices will move higher once harvest begins, and at least you will have removed basis risk if in fact your area has unexpectedly higher yields and basis widens. Keeping risk manageable on the paper is important too, use calls or sell stops on long futures to manage that, and don't forget that stops can be rolled up protecting profits if we do rally, protecting any profit realized. With so much uncertainty it is easy to do nothing and wait, but waiting to reduce risk usually does not work out well. If you are concerned about lower price potential, consider December put options. They are not that expensive, and if you do have to sell cash grain, you can buy futures against those puts limiting your risk to the strike price purchased. Options can also be rolled up as you see fit, but make sure you are watching time value and expiration date if and when you do, excess rolling is very good for brokers, but not so much for producers!
Here on our farm, we using the following ideas going forward, as we are still friendly the corn market for all the over discussed reasons and neutral but cautious on soybeans:
1) We are buying December 19 corn/selling December 20 corn at 33-35 cents premium Dec 2020, risking about 8 cents to re own sold bushels
2) We also like buying 8.80 or 9.00 November bean calls to defend hedges and previous sales "just in case"
3) Scouting corn fields has been disappointing compared to a few weeks ago due to very little rain, but we will set basis on enough HTA contracts to cover what we may need to deliver during harvest
4) We are also looking at owning March futures this week with protective sell stops below May lows to sell cash grain against later this year, post harvest if basis remains strong and storage quality is determined to be a risky issue
5) Monitoring South American planting weather for potential problems, as well as harvest in Northern Hemisphere competitors.
6) Watching changes in trade talks, currency values in Brazil and Argentina, as well as political changes there as well.
We have a lot of ground to cover in the next few months, and being flexible while managing risk is still number one! We have been on the emotional roller coaster all year, and we doubt if that ride is over by a long shot. We learn more every year, experience more extremes in weather and yet the bottom line is still selling when prices or profitable or at least protecting that price some how, some way. Cash flow may not be an issue now with the MFP payments coming through, but at some point, cash flow will need to be generated, and we DO NOT want to sell bad futures AND bad basis. We cannot do anything about bad basis, so making sure you are getting all you can get in your area is a job you just don't want to put off. It costs a lot, and is usually avoidable at some point in the year. Plan now to market according to cash flow needs if prices or basis rallies to a level that gets you profitable, setting delivery at a time and place you want to rather than being forced to do anything else. If you have any questions on your local cash market opportunities as they relate to other areas, call and we can give you whatever information we have gathered. Sometimes we get clues from our commercial contacts that can indicate where basis may be going in certain areas. They are not infallible, but sometimes helpful.
In conclusion, we know there are many challenges ahead, we are especially concerned about the lateness of harvest, potential quality issues, drying costs and storage ability even if we do get the crop in. Harvesting soybeans in late October or November is usually never a good thing, short daylight hours, slow drying and heavy dew make getting many acres done in a day rare. Corn moisture higher than normal increases drying time and/or delays at elevators when wet storage fills up and wait times on dryers increase. Any adverse weather patterns bringing cold and wet will not be welcome, but certainly not unexpected this year! Working long hours in adverse conditions makes paying attention to marketing a fleeting thought, that's why we want to make sure you keep in tough, at least stop for a cup of coffee and check in this year. We all know that adversity brings opportunity, even when it doesn't seem possible, and there will be plenty ahead! Last May 15th there seemed to be no hope of any good price opportunity, but bad weather at planting gave us one. If anything similar develops this fall, will we be ready? If the Supply/Demand and Crop Production Report on the 12th or the Quarterly Grain Stocks Report on the 30th gives us a decent rally, will you have orders in to sell? Get a price target in mind and if nothing else, call us with your targets so we can at least give you a reminder call if they hit. Let's work on making the most of we have think positively. We WILL have opportunity, will be ready for it?
Dates to Remember:
Every Monday: Export Inspections, Crop Progress
Every Thursday: Export Sales and shipments
September 12th : Monthly Supply/Demand Report, Crop Production
September 20th: Cattle on Feed,
September 20th: September Options expire
September 30th; Quarterly Grain Stocks Report
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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