CFGAG News and Views August 1, 2020
"How Low is Low Enough?"
After a friendly report last month, and a more threatening forecast early in July, the market rallied but failed on a change to slightly cooler and wetter forecast after the holiday, and its been downhill ever since. We were able to get some hedges on in the $3.60 area after failing to take out the $3.63 high in December corn that was made on June 30th. The reason we pulled that trigger instead of waiting for our $3.70 target was simple: when we could not take out the June 30th high with a hot and dry forecast for the holiday weekend, it was a "red flag". That doesn't mean the rally had to be over, but history has taught us to respect price action in relation to chart points and use them as our guide to either take action or be patient. In this case, instead of more hot and dry, some pretty good rains fell and temperatures were not as hot as advertised, to the selling continued, and yesterday we took out a double bottom on the September corn chart of $3.15. It is worth repeating again, a futures market does not trade "old news" but rather is always ahead of the news that tries to explain price action. It is important to remember that as we sit very near the lows in corn, as we feel the market is already factoring in a big crop, with a yield in excess of 180 nationally which would be a record. We look for the next Supply/Demand Report on August 12 to provide some interesting numbers:
1) What national yield and production numbers will USDA come up with, and how will the carry out be affected?
2) What will USDA use for demand numbers given the big buys by China in new crop corn and beans?
3) Weather in Europe, especially France but also Russia and Ukraine has not been ideal, and flooding in China has potential world numbers impact.
4) Watch average farm price projections for all grains to see if USDA increases, decreases, or stays the same
5) For soybeans, updated export demand projections and any change in crop size
6) Wheat export demand has exceeded estimates so far, and with the US dollar weakening, will they bump up export potential?
We also look at the fund position which is long beans, short corn, and basically neutral wheat. There is plenty of room to go either way on all three, which makes the next 4-5 weeks so crucial and why we feel the need to really get a plan in place. We could easily see the funds pile on the short side in corn and push it lower, or we could see at any time a short covering rally that would surprise a lot of analysts who are preaching the bear sermon. August 31 will be the end of the month and quarter which could easily see some profits banked on short positions. Likewise with beans, any weather threat could spark more fund buying and push us up to $9.50 or more, but a positive change in crop size on August 12 could bring selling which leads to $8.50 or lower. We feel the following are important steps in making that plan to maximize opportunity and flexibility:
1 We need to estimate yields as soon as reasonable, and determine storage needs, cash flow needs, and possible government and insurance payments
2) Determine what needs to be moved at harvest, and either lock in basis if favorable, or do a deferred basis contract to eliminate storage charges
3) Right now the market is telling us to sell beans (little to no carry in the market) and to store corn. We may want to get more aggressive with this
4) Changes in storage charges have made larger than normal "carry" a possibility, Dec-July corn is now 25 cents. Is 35-40 now possible?
5) Basis is still relatively decent, if your area is good, consider locking some in
6) Getting a handle on all the above makes planning a lot easier!
On our farm, we hedged all our beans on the latest rally over $9, and will look to set basis soon. Our concern is given the choice of $9 beans and sub $3 corn, the choice most will make is to sell beans and store corn, especially with the carry in corn and lack thereof in beans. We can always own calls if conditions change, and we probably will if we break 50 cents or more, but having something solid for a floor now seems prudent. We are well aware of the potential crop size going up given crop condition ratings and talking with folks across the Midwest. Beans look good, and with a few inches of rain this month, could be amazing. We are looking for a national yield in excess of 50bpa now, and it could easily go higher. Again, be ready for August 12 Reports if you agree, and at least get some puts bought. We like September $9.00 around 16 cents to put a floor in for the next 4 weeks. A lot will be known about the crop size by then.
On corn, we are down to bin sweeping on old crop, and have a large portion of new crop hedged at $3.60, and are going to be patient on anything else. We want to buy calls sometime in the next 2-4 weeks as we believe the lows may come early given the funds short position, an August 12 crop report that should reflect the highest yield estimates as well as the Pro Farmer tour that should all combine to give us the most bearish outlook. Once that is digested, and any old crop sales that are forced out, the list of sellers may be slim. The last few years it has been more likely than not our lows come in August, and we see no reason that won't happen again. Why buy calls? We want to own March calls, preferably the $3.50 strike price for 10 cents or less to have something to sell against later. IF basis comes back strong after harvest, or if we have a nice short covering rally, we want to be able to move cash early, core out the bins, generate some cash, or whatever reason, we can do that and still have the option to be long corn just in case. For us, it is a piece of mind investment that makes selling easy, and using this tool makes it simple! We don't know if any of this will happen, but we DO know that doing nothing usually gives us the same: Nothing.
In conclusion, we can easily get down with the market prices, but doing so is not really in our nature! It is a futures market, and looking forward there will be opportunity. We just need to be ready, and getting together soon to plan is important. Markets will shift quickly and sharply, and if we are not thinking ahead, we will miss a good chance to be profitable. Lets Do It!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- August 12th: Monthly Supply/Demand Report and Crop Production
- August 21st: Cattle on Feed
- August 21st: September Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193