CFGAG News and Views January 3, 2012
"Higher Prices: More Profit Or More Risk?"
It is by far a lot more fun to write this monthly article today rather than last August! The market has been on quite a run giving us great pricing opportunities, and depending on South American weather forecasts and the January 12th USDA Reports, there may be more to come. Higher prices mean profit potential, and most of 2020 was filled with doubt that we could come anywhere close to making money growing crops, and many were saying "if we could just get back to $3.80 December corn, and $9.00 beans..."
Oddly enough, there seems to be a lot more stress associated with these HIGHER prices, as we are all struggling to find out "where the high is", and as we all know, no one knows. The stress in our opinion comes from fear of the unknown, afraid to sell to soon and afraid to wait too long and let the rally collapse like it did last February after the Covid 19 break. These concerns are real! As producers we are conditioned to "get all we can get" but often watch rallies come and go so quickly that we miss out completely. This situation is a combination of weather markets in South America, and at least a perception of shrinking supplies in the rest of the world. Until the weather patterns change or the funds start taking some major profits, we may stay well supported going into the 12th, but with old crop prices as high as they are, it really makes some sense to enlist some price protection. We will try to look at all the issues driving price discovery and then offer some ideas and possible strategies going into one of the biggest reports of the year on January 12th.
Some of the factors going in are:
1) The US $ continues weak, now trading under 90.
2) Brazil started off very dry, but is now getting some rain at critical times. Is it enough for trend yields?
3) Argentina has been very dry, but has so far avoided long stretches of hot temperatures. Can those crops still come back to "normal"
4) Demand for corn has been strong, but will higher prices start to curb demand? Ethanol production has been dropping off and stocks have been increasing, less travel with the spike in virus cases and more states adding restrictions
5) Bean demand has been stellar, crush and exports continue strong. How soon can Brazil supplies come to market with enough supply to choke off US demand
6) Funds are VERY long in the grain markets, but so far have not shown any sign of giving up
Because of the big inverses in old and new crop bids, it is obvious that the market is wanting to own grain now, and significantly so given the uncertainty of increased Chinese demand combined with uncertainty of potential supply from South America. March corn trading 50 cents above December and March beans $2 over November are pretty big numbers. It would appear the market is attempting to "ration" supplies now rather than later. Our dilemma as well as end users is "how high is enough" before demand is cut enough to break prices?
We know that ethanol margins are weak at best, that livestock numbers are a little lower, and some cattle feeders are planning on moving cattle at lighter finish weights due to feed costs. Demand probably won't completely shut down, but at $4.84 corn, a gradual cut back should be expected. One of the charts we like to look at is one that overlays projected price over projected carryout. At the current projection of 1.7 billion bushels, March corn "should be" $4.50-$4.60, implying that the market is already anticipating lower production numbers from the 2020 crop, or increased demand from exports to lower the projected carry out. This is why the January 12 reports are so critical. IF we get lower carryout numbers, but not lower than is already factored in, could we sell off anyway? It is certainly possible, but there will be a lot of other important numbers to digest as well, including production estimates from South America. It promises to be one very exciting day!
Here is a list of what we will see in terms of reports and numbers:
1) Quarterly Grain Stocks
2) Final Crop Production, (corn and beans) for 2020 crop
3) Monthly Supply/Demand (includes world production numbers, demand estimates, and projected carry outs)
4) Winter Wheat Seedings
Quarterly Stocks are always important, as from these we get implied feed use and "residual" numbers which are always a topic of conversation. We generally compare these to previous years to see how they "match up" Final crop production will always be debated as surprises come often with adjustments higher or lower than expected, but the bottom line is always the supply/demand numbers. Will the projected carry out be higher or lower than expected? What does USDA see in terms of export potential and final numbers? Do we have a major rationing job to do, or has it already been done? Now that we have the "facts" in front of us, its time to make some decisions on how to position ourselves before the 12th.
For old crop beans, we are sold out, and have been, and certainly wishing we had owned some call options, but have put that behind us for now, but will file this rally in our memory banks to remember to own some if a big break comes. For old crop corn, we continue to enjoy or incremental sales approach, rewarding rallies with some sales, and after last Thursday, are 60% sold. We also own puts to cover the balance, but will roll the strike price up to "at the money" before report day. We feel strongly that these prices are just too good to pass up, and raising our price floor on unsold or unprotected bushels makes infinite sense to our business. We are not opposed to cash sales either, as punching numbers into our spreadsheet at these levels makes the 2020 bottom line look very good! Local basis and basis expectations going forward should determine how many sales to make as we have heard about some areas experiencing vomitoxin issues which may build a premium for "clean" corn in some areas. Make sure you are aware of any of these issues and any basis premium offers for low vomitoxin grain.
For new crop corn and beans, it is a little tougher, as described above, the inverted markets make it harder to sell $4.34 new crop corn when March is 50 cents premium. One may get the idea that if March is that high, then December should get there as well. We have to remind ourselves that EVERY producer out there will make every effort to maximize yield, and total production. South American farmers will plant more and later than normal if forced to by weather to try and produce as much as possible, as will those in Argentina. Our spring weather will be important as usual, but we have a big head start on spring with much fall tillage and fertilizer application already done. We would expect the fewest prevent plant acres in years given the price incentive, with only very adverse weather possibly limiting planting. We also recognize that there may well be a "battle for acres" price wise, but without a wider ratio between corn and beans, would doubt any major changes to normal rotations, only maximizing all available acres. We would also anticipate Delta farmers responding to any shortfalls in supply with early planting and early harvest on as many acres as reasonable to capitalize on great basis potential. With all this said, we certainly see possible higher prices, but are reluctant to do nothing. On our farm, we concentrate first on bushels we do not feel we can store, and incrementally selling those on these rallies. Our thinking is getting these bushels protected with HTA contracts removes the most risk, risk of low futures prices combined with a bad harvest basis. If we "find" some extra storage, we can always roll these contracts later if the market will pay us to do so. We also feel that using old crop put options, (March puts expire on February 19th, May options expire on April 23rd) could be a cheaper way to cover new crop for at least that long, getting us through the reports and a big chunk of weather in the Southern Hemisphere. Call us for prices and specific strategies that line up with your plan and goals.
For new crop beans, we put our first order in for $11 cash beans, on the bushels we want to deliver at harvest, and will cover the balance of our anticipated production with March or May puts before the 12th. We feel that at this point in time, downside risk is greater in old crop than new, and will at least protect a price that offers a nice profit. If in fact the market decides we need more bean acres, then we should see deferred contracts gaining on old crop unless Brazil is unable to meet foreign demand. With the incentives out there, we doubt that Brazil or Argentina will not try to do everything possible to meet that demand. Both nations need the money flow that grain sales generate, and producers should be incentivized as well. The prolonged dock strike in Argentina has been extremely costly, and probably contributed a great deal to the price inverses we see now. With the settlement, a large number of ships should soon be loaded, and a more normal pace of grain movement in the near future. We would never advise against sales at these levels, knowing that our production costs are lower than last year, and we can certainly see good profits here. One may consider making some sales, and look to own calls on any decent correction or profit taking event. Call us with your ideas and profit goals to see if we can put together some combination of ideas that give you some comfort going into the 12th.
In conclusion, we cannot emphasize enough the importance of the reports coming out on Tuesday, January 12th. These numbers set the tone for price discovery, with only weather and production updates from South America left, until the next big ones on March 31st when we get another Quarterly Stocks Report, and Planting Intentions. We have to remind ourselves that this IS a futures market, and sometimes lower numbers are already priced in BEFORE the actual report, hence the old saying "buy the rumor and sell the fact". We certainly recognize the potential upside IF South American weather is bad and Chinese demand is greater than already anticipated, but also must consider the possibility that prices have already reflected at least some of this. Another "old wise trader saying" goes something like this: "if bullish news cannot rally the market, its time to sell" and vice versa, if bearish news cannot break the market, its not". Make sure you take some time to consider what these price levels mean to your operation, and call or stop in to get the plan together. It is not often we are looking at potential highs this early, in fact very seldom, but as upside down as 2020 was in terms of price action and normal timing, would it surprise us to put the highs for the year in early? Not at all. What we do know is normally prices do not stay at very profitable levels very long, and instead of "hoping for higher" we would like to be "protected and comfortable", putting fear away in exchange for the peace of mind that long before the planters roll, we WILL be profitable this year.
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- January 12th: Monthly Supply/Demand, Crop Production (final 2020) and Quarterly Grain Stocks
- January 22nd: Cattle on Feed
- January 22nd: February options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-769-4193