CFGAG News and Views October 1, 2020
"Big Surprise Report, Now What?"
.The Quarterly Grain Stocks Report issued yesterday was a shocker with September 1 corn stocks coming in 150 million bushels BELOW the LOWEST trade guess. Either last year's crop was overstated, or we used up a lot more grain in feed or industrial use. No matter what the reason, corn futures screamed higher along with wheat and beans that also had friendly numbers as well. A game changer to say the least, as compared to just a few months ago, corn carry out was projected to be more than 3.3 billion bushels and now with these new stocks numbers we are looking at something closer to 1.7 billion and a good chance to sell $4 corn both this season and next. Basis levels have been indicating corn supplies may not have been as large as one would think given previous reports, and there is plenty of chatter on how inaccurate some of the reports have been leading up to these big surprise days which confound and confuse marketing plans. Our job is to not dwell on the chatter but focus on the opportunities at hand. We now have profitable price levels to deal with instead of red ink to worry about. We cannot lose our chance to take or at least protect these prices! No rally lasts forever, and while we are not saying this one is over, it is time to reflect on your yields and what price gives you the return you need and DO something. One thing to remember about the Stocks report, they do not count grain that is in transit, and there are many ships loaded with grain on the water, so especially bean numbers could be questioned as possibly too low. There are other factors we will be watching closely:
1) Weather and yield reports will remain price drivers, dryness in South America and Russia as well as our harvest weather
2) Corn basis remains strong; will farmers increase selling? At what price level?
3) Next week should be peak harvest pressure for beans, will we see increased selling from the field?
4) China continues buying large amounts of US grain. Will they continue to buy? Will they in fact take what they bought?
5) Will the election have any impact on grain prices?
6) With Covid 19 relief payment 2 along with ARC/PLC payments coming, there should be less selling pressure early on, our opportunities may come early, last half November and December?
.We also need to recognize the fund position, which is estimated over 200,000 in beans alone. Spec money owns over 1 billion bushels of beans that they do not use. They are also long corn and wheat, but not nearly as much as beans. We have mentioned this many times, when the funds get big positions, we need to seriously look at the other direction. We cannot simply assume that all is bullish, and markets will never go back down. A lot can happen in the next few weeks leading up to an election and without getting into conspiracy theories, let's just say that anything can and probably will happen. Being complacent with profitable prices for this year (and next) could be costly! A futures market is always looking ahead, so developing dryness has already been somewhat factored in to today's price, as well as weather forecasts for the rest of the world. While yesterday's surprise was a good one, it will soon be old news and new developments will take over. Our next report will be the monthly Supply/Demand report on October 9th, where yesterday's numbers will be factored into next year's carry out. along with updated yields and demand projections. A lot can change between now and then! A continuation of the rally into that report may call for some put protection at the least if not cash sales. Remember there is little to no carry in beans, meaning no reason to store beans unless basis is unacceptable, and even then, will it get much better later? There is some carry in corn, but now we have December gaining on the back months as end users and importers cover some needs. We are watching closely the spreads and basis combinations to see if we may want to move corn in late November or early December. Our main objective now is to reward rallies and increase our average price which is now much higher than expected 2 months ago!
On our farm, we finished pricing all our new crop beans, and have bought November puts to cover next year's production. We bought the 10.10 puts for 12 cents looking for a selloff with harvest pressure. A 12-cent risk with a plan to see if November 20 sells off to be even or less than November 21 at which time we would exercise the puts into short 10.10 futures and then roll the November 20 to November 21and be hedged at the $10 level.. We can then manage or defend the hedge with July options if needed. We can also use the Nov-Nov spread, buying November 21 and selling November 20 at about 60 cents premium the 2020 and look for them to come together as either harvest pressure or fund rolling or both to make this happen, and hopefully net out $10 beans for next year.
On corn, we bought more 360 calls on the last break, fortunately before yesterday's report, and after the report have rolled up our 3.30 and 3.40 calls to 3.80's. This adds 30-35 cents to our sale price. We have also added a small hta sale to get started, as we like to reward rallies! We have also put an order in to sell a small increment of 2021 production at $4.00 hoping that our first sale is our worst, but with input costs lower, we feel making a profitable sale is where we like to start and will build on this as we go forward.
In conclusion,. Things look so different than a few months ago, and we now have some better opportunities to price grain. When looking at government payments and higher prices, we can all feel much better about the future of farming, but we also have to remember it is our job not only to grow it but also to sell it. Reducing risk is our main objective, and now we are developing more downside risk with every up day. They will not go on forever and we need to start getting some price protection if not already done so. Let's look at some put options at least, but preferable a complete plan to sell cash in advance of need and a re-ownership plan if warranted. We pray for safe and productive harvest for all, and call for specific planning!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- October 9th: Monthly Supply/Demand, Crop Production
- October 23rd: Cattle on Feed
- October 23rd: November options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193