CFGAG News and Views   March 1, 2020

 

"SA Weather, Virus Negative. Anything Friendly Out There?" 

 

 With fears and emotions running high, the past week ended up one of the worst for the Stock Market, not only in the US, but world wide. Commodities also felt the brunt especially in livestock and energies, but nothing escaped the wrath of the "fear of the unknown", which almost always drives markets away from the long side. As long as emotions are running high, we cannot predict how long and how far prices might fall, but we also know from history that once the fear subsides, value seekers become buyers unless other negative factors have come into play. SARS and EBOLA were two relatively recent examples. We are not going to try to pick bottoms, but reflect back on historical facts to help us make some decisions, and if necessary, some changes to our marketing plan. We have to separate emotion from facts, fear from reality, and common sense from irrational behavior. We leave all the negatives to others to drive their decisions, knowing from experience that the media often overplays the emotional side and often distorts "facts" because some have another agenda. Given that, what are we looking for? Here is a partial list:

  

1) Coronavirus- how bad and for how long? How much damage to the Chinese economy and the world in terms of trade

2) Brazil and Argentina weather, harvest progress and safrina corn planting dates

3) US weather, spring outlook and early planting progress in the south

4) Weather in the northern plains, crops still not harvested, quality and quantity, and planting progress if and when they get it out  

5) Exports: corn has been lousy but is now improving, beans and wheat have been good but weakening as of late

6) Phase 1 agreement: any evidence that China is going to honor it and start buying? Or will the virus keep spreading and slow their economy further?

 

In the USDA Quarterly Grain Stocks and Crop Production Reports released on February 11th, USDA did not cut corn carryout at all, despite expectations they would at least slightly. They cut exports but raised ethanol use leaving no changes net. They did raise the Brazilian bean crop by 2 MMT to 125 MMT as compared to last years 117 MMT crop. Argentina continues to be on track for a sizable crop comparable to last year as well, and competition will be stiff unless something changes in the weather forecast that we don't see now. Funds hold sizable short positions in corn and beans currently as well, but certainly not record levels we have seen in the past. All these factors sound negative, and they are on their own, but in real world terms today, they are "old news", already digested and traded by the market. We need to remember that we have FUTURES markets, not hindsight markets, and the news FOLLOWS the market, it does not drive it. Fear and emotion that causes money to flow in both directions are the most powerful forces in price discovery, and high frequency computer trading that trades every headline and weather blip increases volatility and trade. Our job is not to try and out guess them, simply be in a position to act if and when profitable opportunities come back into play. We have to be ready for a variety of reasons to protect prices and put in price floors while remaining flexible to the upside in case we have anything similar to last years planting season. There will be much talk about the March 31st Reports that will cover Prospective Plantings and another Quarterly Grain Stocks Report. There are potentially big ramifications included in these numbers, and we want to manage our risk before their release if possible, and we are all well aware of how short these opportunities may be.

 

We mentioned above that much of what was bearish was "old news" but add to those negatives, also throw in the strength of the US $, the weakness of the Brazilian Real, the weakness in the energy market, and it seemed like just about everything bearish we could think of was thrown at the market. It wasn't until late last week we finally put in new lows in corn. Basis remains strong, and futures spreads are as tight as we can remember when looking at March-May and May-July. Normally these types of numbers indicate strong markets and higher prices coming, but not so with our situation today. Beans seem to only trade in a range, with buying surfacing on big breaks but selling coming quickly on small rallies. We seem to be looking for a bottom in all these markets, only waiting on some good news from the health officials as related coronavirus. You can bet the bottom pickers will be anxious to jump in after such a large break in the markets, as long as nothing else darkens the sky. In short, we need to be ready with realistic expectations and definitive plans to protect ourselves and our equity. Right now, South American crops look too good to be complacent if we get to our profit goal prices.

 

Our strategy going forward, until March 30, the eve of the big USDA reports, is to try to put price floors in before the major risk time, March 31. Ideally we would have our price protection in place, but if no opportunity is there, we will go day by day the week before the report to see if some cheap puts are warranted. For the four trading weeks before the report, here is what we will be doing on our farm:

 

1) For old crop, we have basis contract orders in to sell both corn and beans for spring delivery, and are targeting $4 May futures for corn and $9.40 May beans for sales. We will add put protection to any unprotected bushels going into March 31st on any decent rally.

2) We are buying short dated, July expiration calls for November beans and December corn to re own old crop sales and defend new crop sales if targets are hit, $4.10 December corn and $9.60 November beans. This may be a good time to do this, as if we do rally, we want the comfort to sell into a rally rather than wait for it to end before we react

3) We are selling new crop corn via HTA contracts on bushels we may not be able to store starting at $4.10 and adding increments every 5-10 cents.

4) We are buying short dated, July expiration puts covering most of our production on any rally above $4.10, and will consider selling full December $5.00 calls if price and timing are in line with current expectations

5) We will cover 100% of unsold beans with short dated August expiration bean puts on any rally to $9.75, and consider selling 10.60 November calls if price and market conditions are reasonable

6) On any large, unexpected rally in either crop, we will utilize sell stops in either the cash or futures market to make sure we get more sold at higher prices than expected. We will also consider rolling up puts to increase our floor depending on time value, days to expiration, and price action.

 

It has been said that the best defense is a good offense but in our marketing world this year, we prefer defense first. The American Farmer has demonstrated incredible ability to deal with adverse weather, plant disease and other issues to produce yields that 20 years ago none thought possible. We simply cannot discount this ability, as the marketplace has accepted it as absolute, you just cannot underestimate our potential to produce, and the driving force that makes it happen. This fact forces us to be defensive with our price targets, but we also want to have upside potential. The best example we can give is a put option. If we buy 4.10 puts and the market rallies to 4.50, should we be sad?? No, we protected our income level, but now have the opportunity to INCREASE that level of profitability! We need to reward that rally by either selling cash or rolling up puts, accepting the fact that hindsight never makes good sales, only gives us reasons not to sell in the future. Worrying about "leaving money on the table" rarely leads to good selling attitudes for the future, when the focus SHOULD be on selling every bushel at prices at or above target levels of profitability. Knowing where that price is that gives you the level of profit is where it starts, if you know where that is, then selling becomes much easier, and the decision to add becomes a simple math equation solved in seconds once the emotion and fear are removed. Our goal is to get more of our decisions to that direction!

 

 

In conclusion, we remind ourselves that fear and emotion are powerful price drivers, and sometimes the media outlets fall all over themselves trying to out do one another. We don't know how long or how bad coronavirus is, but we do know that it will pass someday and "normal" life will return. Being positive in the face of the negatives gives one the ability to see opportunity in every scenario, and we need to look no farther than fuel and fertilizer prices, along with every item we use related to energy costs. It was reported that travel restrictions to China saved 42,000,000 gallons of jet fuel PER DAY on just that travel alone. Crude oil and heating oil are as low as they have been in a long time. We have opportunity to lock in savings from our original budget and trim our costs. If we are positive enough to see these things and be ready to cover price risk if/when the chance comes, we may look back on this event as a non event in real terms. We pray for those affected, and for all those suffering the effects, and we also pray for guidance and direction in terms of wise decisions on things we can control. We can put ourselves in a good position in terms of our business, but only if we thoughtfully consider all our risks and manage them wisely. Lets get together soon before March 31 gets close and make a plan!

 

Dates to Remember:

• Every Monday: Export Inspections, Crop Progress
• Every Thursday: Export Sales and shipments
• March 10th : Monthly Supply/Demand Report, Crop Production
• March 20th: Cattle on Feed
• March 27th: April Options expire
• March 31st: PLANTING INTENTIONS AND QUARTERLY GRAIN STOCKS

 

 

Mike Daube: 888-391-6330 or 574-586-3784

Allen Gard: 573-7694193

 

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