CFGAG News and Views November 1, 2020
"Big Rally, Big Fund Long,=Big Risk?"
Now that corn prices have rallied almost a dollar and beans about 2 1/2 bucks we see once again how fund money drives these prices. In corn, they went from over 200,000 short to over 230,000 long in about 6 weeks, driving prices much higher and causing once complacent end users to get with the buying program as well. With China buying along with many other importing nations like Mexico, a lot of sales have been put on the books in the past 2 months. Daily and weekly sales of corn and beans have been huge, and depending on how South American and Russian weather forecast pan out, could be even more. The market will be closely watching Brazil and Argentina to see if regular rains can change the very dry start to the growing season. We will also be monitoring yield reports as harvest wraps up to see if any adjustment in yields and carryout will be possible in the next supply/demand report. We see the following as price drivers over the next 30 days:
1) South American and Russian weather.
2) Daily sales, (or not) to indicate fresh demand
3) Basis levels for corn and beans
4) Corn and bean spreads: will front months lose or gain to back months?
5) Will the election have any impact on grain prices?
6) Funds buying or liquidating?
The delays in planting in Brazil have been a focal point of the rally, as delays in first crop bean planting compress harvest and strain logistics to move more beans to the ports in less time, as well as delay planting of Safrina (or second crop) corn, which makes up about 70% of their total production. Delaying corn planting raises more concern as typical weather patterns raise the odds of hot and dry during pollination, and with internal prices of corn in Brazil at record levels, each weather forecast will carry greater and greater weight and concern. Russia is in much the same situation with over 1/3 of the wheat belt too dry and winter dormancy is approaching. Our wheat prices have responded with rallies over $6 in the new crop July and French wheat is now cheaper than Russian wheat on the world market, which is not usually the case. Ukraine is harvesting a "below expectation" corn crop, and will probably not be able to export nearly as much corn as they have in the past.
All of this sounds bullish, and it is, but has been in the news and likely factored in to the current price. We often forget that the market does not follow the news, it leads it. Before the sell off last week, we seeming rallied straight up for 2 weeks, and it looked like we would continue. Basis was strong, futures were going higher, and the spreads were narrowing or inverted. We actually traded nearby December even with next July, when at one time that spread was over 27 cents! What is the market telling us to do? It is our opinion that the market wants grain now, and the market will not pay you to store it, and is not concerned at this time about running out of grain later in the season. For those without enough storage, this is a great thing. Move the grain and look to re own it later on a good break, while those with storage have to ask if binning the grain unprotected from a price fall is a good idea. While all things look bullish when we rally as much as we have, we need to remember risk management is now more important than ever! There is no guarantee that the funds will keep buying or end users will not find cheaper alternatives at some point in the price structure. We all will try to grow as much as possible, (We being all producers both foreign and domestic) Brazil is adding acres and increasing inputs to take advantage of big currency advantages and big prices. We will also go wall to wall with $4 corn and $10 beans next year here in the US as drier conditions and early harvest has allowed a lot of fall tillage, fertilizer application, and fence row work to get ready for a big push next year. We are producers, and produce we will with better prices as incentive! We really need to get the pencil out and do the math, and get price protection on at these levels.
Our risk is obvious, when funds are this long, we have potential selling at some point. No one really knows when or what will cause it, sometimes simple profit taking, maybe the election, maybe a weather pattern shift, could be anything. Why did we top out December corn around $4.22 and sell off to the low $3.90's? It seems like what two months to gain took only a few days to take back. Our take is simple, when the funds are big longs, we don't buy anything unless it is puts. When funds are big shorts, we don't sell anything, but maybe buy calls. We look at potential downside and at $4.20 corn, there is a lot of risk, as there is at $10.50 beans. We would much rather sell corn and beans at these levels, and look for corrections back to re own with low risk options or covered futures positions. This captures a really good price while allowing for more upside but at a much lower risk level. Pay the bills, put money in the bank, and still be in the market in case something more develops in the world. We have to remember there are concerns about Covid 19 and the effects of another shut down around the world, and what that means to the energy (ethanol) market. We cannot predict what policy may be if our election changes the makeup of congress or the President, but the market will act swiftly if negative changes to energy policy is in the works for the future. We simply CANNOT ignore price risk if we are realistic about our profitability potential going ahead. A lot of us sold beans at cheaper levels, bought puts that have now expired worthless, and now must look at prices that are higher that where we sold or bought price protection. Is this a bad thing? NO. We are able to sell the balance of this year and start next year at much higher levels. Being patient on corn sales has been huge in terms of profitability, but won't make a lot of difference if we don't sell at these higher levels or at least protect the prices. We have the tools to re own bushels that are sold, or protect prices if sales need to be delayed, so call us for ideas on any individual situation.
So what do we do? On our farm, we have sold out of beans, and have sold around 50% of our new crop corn using December hta contracts, as the spreads are very tight. By doing this, we have another month to see if the spreads widen back out allowing us to roll out for the carry, and also allow for basis improvement which we feel confident about once harvest winds down. We will have to decide by the end of November but that should be long enough to see if it will pay us to store longer or not.The weather concerns abroad are real, and should keep end users active securing needs. We like incremental sales above $4.00 and have followed that plan, which will resume if price rally back. We also like March $4.00 puts on anything unsold or unprotected, as this first protects the downside, but if prices rally up to sales targets, sell the cash and use the puts to back a long futures position if you want to re own the bushels, at a risk limited to the price of the put and any difference in strike and futures price. On beans, we are sold out but interested in selling January and buying November 21 beans as the spread has been over $1, now about 85 cents. This could be done as a hedge for old crop, selling January to make sales over $10.50, but using the spread to reduce risk and margin exposure. Stops can be used to limit risk as well, so make sure you understand all the possibilities of using this spread. Our opinion is simple, if we are really going to have to ration demand, then the July and new crop months are too cheap relative to the others in both corn and beans. If weather conditions go downhill, we should see more buying (or fund long rolling) to the July contracts, or new crop months. We will watch spreads closely to see if the market agrees with us!
In conclusion, we now have a much brighter picture to look at than just a few months ago! Prices are much higher and our yields have been better than expected combining for a much better bottom line projection, but only if we take these prices or protect them. We also have to look at 2021, in terms of input costs and crop prices, and get some orders in. We got our first small sale of $4 December corn done and will add in increments if we can. We like the possibilities of weather issues, but also acknowledge the risks ahead as well. Markets don't stay up or down forever, something always changes, but ignoring big fund positions has not been a good idea in the past, and we doubt it will in the future. Have a safe and bountiful end of harvest, make sure you weigh in on the government with your vote, and celebrate a Thanksgiving with gusto as we truly do have many blessings to count, and the price rally this fall has to be right up there, as long as we accept it with gratitude!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- November 10th: Monthly Supply/Demand, Crop Production
- November 20th: Cattle on Feed
- November 20th: December options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193