CFGAG News and Views December 1, 2020
"2020- A Textbook Of Extremes?"
We begin this month with a glance back at one of the most unusual marketing years in our memory. Remember last January when we came through harvest with strong basis and futures from start to finish? Everything looked great for old crop and the new one until February 21st. We had just made a new high in corn futures that week, but all of a sudden we were faced with the reality of the corona virus. We were told many things, most of them wrong, but the bottom line was a shut down of ethanol plants, packing plants, and any non essential activity for a few months. Grain markets fell sharply as funds sold aggressively and we wondered how anyone in commodities (other than toilet paper) would survive. Many good marketing plans that had worked well in the past were made worthless over the course of the summer as demand projections fell and good crop weather had prognosticators forecasting a 3.3 billion carryout and $2.75 corn. Everything was gloom and doom until the August Crop Report. Add in some adverse weather with the wind storm in Iowa and less than ideal rainfall in many areas of the corn belt through August and we had the start of a rally. Then the Quarterly Stocks Report on September 30th revealed far less in stocks than the trade was looking for and away we go. Many of us thought last year's crop was overstated, but no matter how the numbers came out, it was friendly to price, and then we increased prevent plant acres, and topped it off with the November Supply/Demand Report that cut yields, decreased acres a bit more, and also increased demand. China buying of everything edible added more fuel to the fire and we saw funds flip from a huge short position to a near record long in corn and beans. Even today they are still long in excess of 280k corn and 220k beans according to the CFTC report. As we have said many times, price is driven by money flow, and we could not point to a better example than price action this year as evidence. Overlay a chart of fund positions with a price chart and you will see clearly what we mean.
One thing we want to go over in a look back is what our plans were in general, and how they worked out. On our farm we trimmed corn acres in favor of beans as we only wanted to grow what we could store, and committed to selling beans off the combine. We were willing to sell them as there was no carry, in fact we had inverted markets so there was no incentive to store them. Corn on the other hand had carry, and with wide basis, made that choice to store all we could easy. Bottom line, we "sold beans too soon", and gave up a lot of price appreciation. We could make excuses, but the fact remains we "could have had" $2 more per bushel! (If we had not sold anything). However, by storing the corn, we are now over $1 per bushel higher with a better basis, and are willing sellers as our NET corn over beans is substantial. We may have "lost" $50,000 on our beans, but we "gained" $200,000 by not selling corn. We illustrate this on our own production to show that even though we may be kicking ourselves on the beans, its the total picture that is important, and we have to make choices based on our storage and cash flow limitations. In hindsight, we should have owned some call options to keep our top side open, but we will not condemn a marketing plan that turns a profit for any reason. What we learned (again) is being flexible with our plan can pay off in big numbers, but making sure we are profitable is number one!
We are now looking at a totally different attitude, psychology if you will, toward commodities. Demand is strong, virus vaccines are on the way, and South American weather is less than ideal. The big selloff yesterday may have been a reaction to month end profit taking, or maybe a better rain forecast for Brazil, but it may signal some buying fatigue, especially in beans. We will need to see continued moisture stress in the Southern Hemisphere to feed the bulls as the size of the fund long in itself could lead to a sizeable selloff, yet any extended dryness could easily take us right back up to challenge the highs. Other factors besides weather will also be watched:
1) The US $ has been under pressure, and is hovering around the 92 support level. Weaker $ is usually good for our prices
2) China demand, no bean sales for a while, but rumors abound with them buying corn
3) US farmer selling pace: watch basis closely
4) Corn and bean spreads: narrowing or widening?
5) Russian wheat crop, less than ideal conditions, possible winterkill threats down the road?
6) Funds: buying, selling, or rolling?
So we have a much better price structure to work with, now what? We have to remember that what went up could also go down and often before we are ready. We can certainly make a bullish case for grains going forward IF weather is adverse. We may need to ration supplies down the road, but for now, we wonder if the market has priced in much of the excitement. We are most likely in a weather market, with China demand (or lack of it) running second, but its the funds desire to either roll with the longs or take profit that can change the scene quickly. Our thought is to manage risk now, make sure we have price floors in place if sales are not made, and look to the charts for guidance on when to pull triggers. We think that IF rationing supplies is needed, it will come later, probably in the July contract, similar to previous years when supplies were tight. There is little doubt that very little corn was sold pre harvest compared to previous years, so that is a factor as well, and the pace of those sales will impact futures and basis. (See #'s 3 and 4 above) We may be a little gun shy about selling too soon after the recent rally, but realistically, we have to look at the downside potential as well. Could the virus (or some other mutation of it) cause another shut down of the worlds economies? Could La Nina weather pattern shift to cooler an wetter next month? Could funds start selling just because they can? All are possible...…..complacency is not advised!
For old crop, we are following a sale pattern in increments, with each rally being rewarded with sales of corn. We have also bought March put options when prices make or approach new highs. We like to have the floor set, not only for downside protection, but also to buy futures against re owning old crop bushels. We currently are about 40% sold via HTA contracts that have now been rolled to March, with the balance of our production covered with March $4.00-$4.20 put options. We will continue to sell on rallies, but will also own futures in the $4.20 range as our puts come into play in the money. We like the possibility that a trading range will develop, with good demand rallying price on weather scares, but sellers coming in to take advantage of that rally pushing back down. We could easily stay in a range for quite some time as we await further weather and demand updates.
For new crop corn, put options are quite pricey with this much time value, so we like selling December futures at $4.10 - $4.20 and defending the sale with old crop (March May or July) call options. The reason we like this is IF a major weather problem develops in South America, or even here in the US this spring, we feel that old crop will likely outrun new crop as the market attempts to ration what is left. Time value is much less costly with March options, and they are good until late February, so that may be enough time to see how their crop is looking down there. We see nothing wrong with new crop bean sales above $10.50, and would look to July options to defend those sales if desired. We are also looking at short dated put options as a choice as well, but so far are a little more than we want to spend and selling calls to pay for puts is not something we are comfortable with yet either. We are making a few HTA sales on grain we cannot store on this rally, and encourage you to look at the cost of storage (even your own) in making sure you have enough coverage. Our biggest risk is grain that must be moved at harvest, and making sure you have a floor under those bushels is very valuable to your bottom line. We can buy a lot of options with money we spend on commercial storage!
For old crop beans, if sales are not attractive to you, consider selling January futures and buying either July or November. We feel that IF weather is adverse, or demand too strong, we may need to rally July to ration and November to increase planted acres next spring. Make sure you call and discuss these spreads as they do carry risk, and that risk has to be acceptable to you. There are no sure things in marketing, except that complacency usually costs you money, but using these spreads as hedging tools can work well if the total concept is understood. We have time to visit at length on some of these ideas now that harvest is behind us and the lake effect snow has begun. Stop in or call anytime.
In conclusion, we look back on a year that held great promise, then devastating developments for the entire nation. We pray for those still trying to get their businesses back to normal and all those personally affected and infected. We are grateful for the promise of vaccines, but also very grateful for a price rally that has given us the chance to be profitable this year. We pray also for guidance in taking advantage of these prices, and for the courage to make decisions that are always under scrutiny. Most of all we thank you for your business, but most of all the friendships that have evolved over the years. We hope the Good Lord gives us many more years to work together, but maybe we also ask that 2021 be a "little bit easier" on our minds. Merry Christmas and a joyous and prosperous New Year to all!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- December 10th: Monthly Supply/Demand, Crop Production
- December 18th: Cattle on Feed
- December 24th: January options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193