CFGAG News and Views January 2, 2020
"Happy New Year And Get Ready!"
We gladly celebrate the start of a new decade and hopefully a less challenging weather pattern as we put 2019 behind us. With that said, what opportunity to price last years crop would we have had if spring weather was not so adverse? Looking back we remember last May when the funds were short over 350,000 contracts of corn! Why? South American crops were big and getting bigger as harvest results continued to push yields higher along with potential carry out. As long as the US had a reasonable start to planting, there was no concern about supply going forward, but almost daily rains and flooding finally caused the funds to cover shorts and go long in just a few weeks, which gave us the opportunity to sell at profitable prices. So why was selling so hard? Its pretty hard to sell something you don't have planted and the calendar says its June 1. No one wanted to sell, and those that had wanted to buy early sales back. We recall a trip to Ohio in mid July and corn fields were barely waist high. Crop production estimates were causing folks to push the panic button, and corn prices peaked out on a Sunday night at $4.715. The rest of the year was spent arguing about how many acres were actually planted for grain harvest, how many bushels were lost in the spring flooding and a constant drum beat that USDA was too high in both acres and stocks. It was not until September 30 and the quarterly Stocks Report that we found (or rather lost) over 300 million bushels of corn. USDA has been roundly criticized this past year, and methodology certainly can be questioned, but we look back on 2019 as a good lesson learned as we prepare for 2020. Here are our thoughts:
1) USDA may be way off or right on but its the market reaction and fund position that makes us or breaks us
2) Risk management is still key even if you are tired of hearing the phrase
3) Dealing with price reality is not always fun, but necessary
4) Protecting profit or at least taking some is ALWAYS important.
5) Put options are not popular, but we should be owning MORE
We want to focus on puts this year. We need to look at ourselves with some serious honest assessment. As producers, (and we are here as well) we are always bullish. NO one that invests the dollars we do, works as hard to raise maximum yields, and competes in the world market as we do can be bearish. As the author of this monthly newsletter, it is important to be as honest and up front as humanly possible, and share the mindset that goes into each sentence. I will tell you that 20 years ago, I was convinced that I was smart enough to know when to sell and when to buy and I certainly didn't need put options, spending money to protect the downside. Reason? I was always bullish, prices had to go higher, and I didn't want to miss out on any rally. Reading market analysts, I would always look for what I WANTED to hear and disregarded the rest as unrealistic. I was more concerned with "money left on the table" than maximizing profit on the entire farm. Selling on rallies seemed like a waste unless the market immediately turned lower after the sale. In 2012, $5 corn sales were roundly made fun of as we raced up to over $8, and put options were again the subject of scorn as wasted money. However, every year since has shown the value of well timed put option purchases. We don't need to sell the high, or worry about what USDA is going to report next, we simply need to protect a good price, and put options do exactly that. Those following us last year remember the idea of buying short dated, August expiration 460 puts and possibly selling December 5.00 calls at a credit. The idea was to put a floor in and also a ceiling that we felt was reasonable, but also with the caveat that IF the market took out the 4.71 high, we would look to exit the short calls and possibly roll up the puts. With carry outs still projected as comfortable, and with South American weather still favorable overall, we will be looking at buying puts on ANY good rally this winter.
Timing is always important, but most important to cover high risk times like USDA reports. We really don't know, and now many question the accuracy relative to timing in an instant message world. Buying puts ahead of a major report is never a bad idea for producers because of the increased risk. Put options are often scorned because they expire worthless, when that is exactly what we hope will happen IF we are prepared to make sales when they do. If a put is purchased at a strike price that at expiration is 20 cents less than current futures, your bottom line is better than when it was purchased. Sure, it would have been better in hindsight not to have spent the money, but the peace of mind and security is worth something! In most cases, markets fall after pollination, (if not before) when more is known, and by that time a producer is more certain of being able to make actual sales. The put bridges that gap of uncertainty with the security of a profitable price. The upcoming reports present a wealth of uncertainty!
These reports will set the tone for prices for the winter, as the next "big ones" will be March 31, so unless South American weather turns threatening, it will be our projected carry out and level of comfort relative to supply. What USDA says on Friday will certainly make some news, as the debate rolls on concerning acres, yield, and stocks. You can find almost any guess you want, so some folks will be surprised. Bulls say that acres and yield must come down as late planted corn was light and poorer quality, and significant acres still remain in the field in the Dakotas. Add in that a trade agreement looks to be signed with China on January 15 and the doors are open for big sales. Bears say that there is plenty of grain out there, exports are way behind what we need, and the trade agreement with China will not change the landscape quickly enough given the potential size of the South America crops. We will as usual not offer a guess, we are more concerned with pricing opportunities if they appear. It will not be what USDA reports, but how the market reacts, and this is why we are focusing more on puts this year! We have already had some who purchased short dated March expiration $4.00 puts, which means a 4.00 floor on December corn that expires at the end of February for the price of a nickel. This is only an example, but IF you are planting more corn this year, and are concerned about the impact of the January 10 reports, is it worth your peace of mind to know that you cant do worse than 4.00 December corn futures? This same type of question will be asked every day in our minds: is it worth laying off the price risk for the specified period of time on at least a portion of our crop? Once the options are purchased, a simple management plan is then put in place to take advantage of market volatility and price appreciation. These will all be individual plans based on what you want to do in terms of cash sales, risk tolerance and profit goals, Make sure you plan some time to go over all options that are available and structure the tools and time frames that meet your needs.
As for markets now, we like rewarding rallies with cash sales as long as basis is favorable and here in Northern Indiana it is. We like reducing risks going into the Friday Reports, we like selling cash and re owning with either call options, futures with protective stops, or long futures with put option protection. Making sure we have covered all the downside risk we are comfortable with is important, and making cash sales on good basis replacing grain in the bin that may not store well with defined risk paper may be as important as anything else. Quality dockage can add up to much more than a few cents, and must be looked at as a "risk" just like futures and basis risk, as well as the mental stress of dealing with spoiled grain. We have all been there when the grain won't flow out of the bin and has that blue green color along with an odor we can all do without smelling............
With all this in mind, here is some of what we are doing on our farm:
1) For corn, we have set basis on our HTA contracts for fall delivery, taking advantage of the best basis we have seen at harvest in many years and own March futures with a 10 cent stop in place, now almost half of 2019 production has been moved
2) We are writing basis contracts now for Jan-March delivery on sales we need for cash flow.
3) We are still somewhat friendly on corn price going into the January Reports for the reasons listed above, we will maintain longs but may buy puts to protect those longs if we rally going into the report. If we rally 30 cents, we may just take the profit and go the sidelines happy!
4) For soybeans, we sold our calls for a decent profit, and used the good basis (even) to price out our hedges and deliver out of the field. Stored beans are now over 1/2 sold and priced at 9.60 or better
5) For new crop corn, we are targeting $4.10-4.20 for sales or put protection, for new crop beans, $9.70 or better for the same
In conclusion, we gladly bid farewell to 2019, a character builder if we have ever seen one! Still, with all the adversity the US producers pulled of a good crop in spite of it all. The market knows what you are capable of, and places there bets accordingly. This is why, unless very adverse weather or a major surprise comes on January 10th, we want to stress downside risk protection and right now that revolves around put options. There are certainly good reasons to be long corn, but there is risk associated with that position, and we only have to look back at where the funds were last winter and spring for a reminder. Money flow is key, and if they decide to pour more in to the short side, we could revisit some of those prices and find ourselves "hoping" for bad weather. We would prefer to lay off downside risk whenever profit goals are met, and being prepared to act is everything! Lets get together and find those price combinations that make your bottom line look good, and bring some peace of mind in the midst of all the chaos we will certainly see this year. As mentioned above, we had to face ourselves honestly, actually being proud to be bullish and a producer, but also accepting the fact that because we are bullish, we need to always ask ourselves just how bullish we want to be on any given day. For instance, if we rally this week ahead of the reports, do we want to stay there, or should we be taking some protection? On this farm we will be watching and acting accordingly, making sure we don't get too carried away with being bullish and ignoring the other side.........it can be very painful! Happy New Year and may it bring peace and prosperity for all!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- January 10th : Monthly Supply/Demand Report, Crop Production, Quarterly Grain Stocks, Winter Wheat Acres
- January 24th: Cattle on Feed
- January 24th: January Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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