CFGAG News and Views October 1, 2019
"FINALLY A Friendly Report!"
This year has been incredibly challenging for producers, and it all started last fall with adverse weather prolonging harvest and leaving little or no chance to do fall tillage and fertilizer application. Then we come into the coldest and wettest spring in history and many fields either went unplanted or waited until June to be seeded. The market rallied sharply as funds covered shorts and end users tried to cover needs, but it was relatively short lived and the market actually sold off to a level LOWER than when we started the rally last May 15 thanks to a string of bearish reports from USDA. It looked like opportunity had come and gone in just a few short weeks.........until today, September 30th. The Quarterly Grain Stocks was a bullish surprise, with USDA numbers coming in over 300 million bushels less than the average trade guess. Beans were also below the average due to a reduction in last years crop. Suddenly carryout numbers are far less negative than 24 hours ago, and many questions are now in play for the October 10 Supply/Demand and Crop Production Reports a week from this Thursday. The following are some of them that we will be watching closely:
1) Given the drop in corn stocks, was last years crop overstated? If so, what will USDA do with the 2019 projected yield?
2) With the 2018 bean crop lowered, can we assume with late planting and weather challenges this year that the 2019 crop might be lowered as well?
3) With maturity and harvest well behind normal, will basis levels continue to strengthen?
4) Will funds cover significant short positions? If so, how fast? Will end users also try to increase coverage?
5) How soon will producers start selling into the rally, and how much?
6) What will USDA do with harvested acres and yields on October 10th given this will be the first actual field data used to ascertain yields. (Remember last month USDA used record high pod weights for soybeans)
So the report today was a "game changer" in the sense that previous numbers and relative security of ample supplies going forward is now in a little more doubt than yesterday. Early yield reports are a little disappointing, although there are few to go by and certainly not enough to make an intelligent guess yet. While bullish, we always want to look at the "other side" of the ledger as well, as a big drop in stocks does not necessarily mean that yields and harvested acres will be lowered, and USDA could also drop demand as well. We know export sales and shipments are running far behind last year, and some ethanol plants have already closed up. Hog numbers are good, but the question of how much wheat was fed remains a big question as far as corn demand. We still have a lot of questions on both sides of the ledger, including South American production with planting starting there. A rally in price will not discourage them to ramp up more production, although the political situation in Argentina bears watching with elections this month, as a return to a more "socialist" government may in fact discourage more corn and increase bean acres. More moving parts that keep our attention diverted to many things and the relative effect on price discovery.
It is NOW very important to remember why we are here.......not important to rehash what USDA did or did not do the past 4 months. We have a crop in the field, an insurance price guarantee, and the important task of setting both futures price AND basis levels both for nearby and deferred sales. With a 16 cent plus rally today, what will basis do this week? What is your elevator paying for nearby shipment verses deferred? How are storage and drying charges comparing to previous years? One of the more interesting numbers today was the fact that corn in commercial hands was actually DOWN 10% from a year ago. On farm stored grain was higher. Commercial stored grain is a very accurate number, their inventory has to match up. Farm stored grain is not as solid, as surveys and statistics are used to determine that number. This leads us to be very watchful on what basis does every day. IF prices get high enough and basis strong enough, how much will you sell? Using our sales and profitability tracker can be very helpful when comparing bids now verses costs later, comparing the cost of storage and interest against possible basis improvement and carry in the market. Try to get some numbers and call us for some ideas on how to use the tools to make a good decision.
We are repeating the following list from last month as a reference for the next steps..........
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.
Now, for our next steps, we will be doing the following:
1) For corn, we will be watching some gaps on the charts, the first one is around $3.92. With long futures and options in place, we will be looking at rewarding the rally by either increasing cash sales or cashing in on some longs depending on market action around these gaps
2) We will be placing protective stops under our longs that we hold, (including cash grain) to protect equity on further rallies.
3) IF basis continues to strengthen, we may choose to set some basis on corn we want to move post harvest. If storage charges are more than the cost of futures or options, we may choose to sell cash and re own using those tools. Our HTA contracts can be set or rolled depending on cash flow needs, storage limitations, and tax considerations. These are all moving parts that have real financial impacts.
4) For soybeans, with our calls in place via last months advice, we will look to basis first on HTA's, then determine how much rally we think is left. If the market takes out some resistance in the $9,20 area, we may exercise the calls into futures and place sell stops below that level while selling the cash beans, if basis is good and storage is not a good option. There is ample carry in the market to capture, but only if the costs of storage are reasonable and cash flow not an issue.
5) We will be looking at 2020 crop prices as well, targeting $4.20 for a start on corn, and seriously looking at November 2020 beans now over $9.50. We do this as a place to start now that we have our input costs coming in and the ability to lock some in, these prices are in a profitable zone and we feel like these would be great places to start and end up being our worst sales!
It is always dangerous to write an article immediately after a major report when big surprises are in play. We know from experience that the gains of today can be gone tonight with a sudden change in weather, geopolitical issues, or other unexpected "tweets". While China has been buying a lot of beans lately and the talks seem to be progressing, that can all change quickly, This is why we want to be ready with orders to sell, buy puts, or use sell stops on any more moves up. We saw what happened in June with a bearish report and some negative trade news, and we want to avoid missing a chance to sell when profit goals are reached. We reminded ourselves in last months conclusion that we need to be ready with orders to sell or buy puts in case of a bullish report or weather development that gives us a good opportunity. We double down on that advice to ourselves today.........get a price in mind, get orders in or at least tell us what you want so we can remind you if we get there. This rally today may be just a start of a good old fashioned harvest rally, or could be a flash in the pan only good for some short covering. With some more rain in the forecast, it might be a good time to take a few minutes and go over the plan and play "what if?"
In conclusion, today was a much better day, some light and maybe some real fire to get the market going. We will need to see follow through buying to keep going, funds will need to cover shorts, and end users will have to be willing to pay more. The basic formula of producers wanting all they can get and end users wanting to pay as little as possible has not changed, and correctly guessing what price will bring out more sellers than buyers when we "turn" the market higher is now "your guess is as good as mine". We repeat that there are some gaps on the chart, and how the market reacts when and if we get there will help us with some clues, but over analyzing can be frustrating as well. Simple if better, get that price in mind that makes you profitable and happy and let us know what that is........we will help you get it or protect it if it comes available, and also give you some ideas on how to use futures and options to expand your ability to be flexible. And don't forget to consider 2020 prices now, it may seem early but any real price rally has got to get the attention of South American producers as well as us, and making some incremental sales at profitable prices has to start somewhere. Maybe you want to bet on another bad planting season, but for us, we bet on normal and stay prepared for the extremes.........and speaking of extremes, we know this harvest season has the potential to be very challenging, late planting means later harvest and more chance of adverse weather. Lets work together to keep positive, optimistic, and if you have a spare minute, call and go over the latest ideas. We only write once a month, but are here every day to talk over new ideas or changes to our older ones, and staying flexible while profitable is still our number one goal! Safe Harvest!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- October 10th : Monthly Supply/Demand Report, Crop Production
- October 25th: Cattle on Feed,
- October 25th: November Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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