CFGAG News and Views July 1, 2020
"FINALLY- A Friendly Report"
As this article is written the evening of June 30, it is a pleasure to finally comment on a friendly surprise in the USDA Planted Acres Report. Instead of the 97 million acres predicted on March 32, and the 95.2 million average trade guess, USDA reported only 92.1 corn and instead of increasing bean acres to a trade estimate of 84.7, actually reported a number of bean acres at 83.8. With the funds short 300,000 plus contracts in corn, the news sent corn futures sharply higher with December finishing up over 15 cents on the day. These numbers were a big surprise to most, but for balance we need to also look at the Quarterly Grain Stocks Report which was negative corn, (over 200 million bushels above the average guess, neutral beans, (right on the average guess), and wheat a little negative (about 40 million bushels above the average guess). Numerous calls today had the same questions: "how high can we go?" and "when should I sell some?"
Great questions because no human being can confidently answer them! Here is what we think going forward:
1) One of the main reasons we rallied sharply the last 2 days was a shift to warmer and drier Midwest weather. Will that continue to be the case?
2) We would estimate the funds are still short around 275,000 corn contracts. The question is, will they cover them and how quickly if they do?
3) Farmer selling will pick up as well as we go higher, again, how fast and how much at each price?
4) With a negative stocks report, old crop should weaken verses new crop, spreads and carry should widen
5) With the market closing early Thursday, and not trading again until Sunday night, the stage is set for some real market fireworks; What will the maps look like Sunday afternoon?
6) While a nice surprise, we need to really focus on hedging targets!!
This is where we get serious. It has been a long time (last February) since we felt like we had prices that were profitable. Everything since then has been negative, setting the stage for a rally like the last two days. A weather market can come and go very quickly, and not being ready to act can really hurt. We have to look at the reality that even with a large acreage cut, we could still be looking at a 3 billion carryout in September of 2021, and prices may not be anywhere near where we are today. The question we ask everyone we work with is: "where is your happy price?" or at what price are you profitable? Make sure you are ready with that answer and soon, we may only have a short time to act. We have often commented that fund money, or money flow is the dominate price mover, and we are witnessing it now. When the money stops buying, we will stop rallying. Period. Assuming they will duplicate last years buying spree would not make sense to us yet, as we will need a few more threatening forecasts to make that happen, so a more cautious approach is our choice. Going forward, these are our thoughts that drive our decisions:
1) Break evens have changed with the new government payments, and crop insurance + ARC/PLC payments have put a "synthetic put" option floor under us
2) Ethanol margins are the best we have seen in quite some time.
3) Feed demand may be in question with producers reducing herd and flock sizes
4) Weather forecasts are warmer and drier, but subject to change every 6 hours. Algo traders have computers set to trade these changes
5) Crop conditions are quite high, implying at least trend line yields so far
6) We will strive for "flexibility" in our marketing plan, allowing us to collect maximum carry and basis improvement when possible
The following section is repeated from last month, the ideas still apply even after a friendly report:
IF you are friendly the market and expect to rally more:
1) Hold off on sales, and buy calls or call spreads to sell aggressively against on any decent rally, maybe targeting 3.70 December corn and 9.00 November beans
2) Old crop calls are very reasonable right now, consider owning August calls to sell against later. July corn at 3.50 and July beans at 9.00 may be good targets
3) Make sure you are watching basis for any good opportunity soon to lock that in. The longer we go without major selling makes basis risk very real unless a major crop issue develops this year. We want to be well covered by the end of July
4) IF ethanol plants reopen, and soon, there may be a short term demand spike for coverage. This will be entirely a local issue, be prepared to act
5) Make sure you have orders in at price levels that are acceptable for either cash sales, HTA's, put options, or futures sales.
IF you are negative price and expect steady to lower:
1) Buy puts, and consider selling calls at price levels you would be happy to sell grain for this year
2) Make sales as you see fit, you can always buy calls if your mindset changes. Selling cash on a good basis is usually a good idea and replace those sales with low risk re ownership positions removes a lot of risk
3) Keep cash flow in mind, match sales months to cash flow needs and be flexible with option tools to keep upside open through high risk reports and weather
4) If you own puts, you can always buy futures against them to re own. Your risk is limited on the futures by the strike price of the puts you own.
5) If you buy puts, and the market rallies, they can be rolled up to raise price floor if enough time is left before expiration to justify the move.
On our farm, we rewarded the rally with a small sale today, and will clean up old crop soon. Basis is still decent and we don't want to extend old crop ownership too long given the stocks report. We can always buy the paper if the weather and crop conditions go south. For new crop, we remain optimistic about 3.70 as a target, but will watch fund activity closely especially going into the holiday. Owning puts is never a bad idea for producers, but timing is the challenge. Any hint of a weather change will cause us to buy some, just to make sure now that we are above where our insurance kicks in. While 3+ million acres is a very big cut from expectations, good weather from here on out could make up for a lot of that loss. We don't want to be with out some type of downside protection. Call us soon to see if put prices are acceptable to you, or if making some cash sales on bushels you can't store with some calls for the upside makes sense. You can buy a lot of calls for what you pay the elevator in storage charges in a year!
In conclusion, we all had a nice breath of relief today that the report was not a big downer, but now the sense of urgency is on us. It was easy to counsel folks not to sell anything because our downside was limited by insurance and government payments. Now it is on us, the producer to make some decisions. At what price do you want some protection? At what price to we make sales or buy puts? When and how much old crop is left and when do we sell some? The time to act (or at least put orders in) is now. We may have an opportunity that we didn't think possible 48 hours ago, it may or may not last. Call or stop in soon, we will make time to get it planned out. After getting that done, have a great holiday and remember those that had the foresight and planning ability to give us our freedom, independence, and CHOICES! Their wisdom is our blessing, and all those who defended it our ongoing blessing. Wave the flag proudly for this great nation!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- July 10th: Monthly Supply/Demand Report and Crop Production
- July 24th: Cattle on Feed
- July24th: August Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193