"Insurance Prices Set, Where Do You Want To Be On 3/31?"
With insurance prices set at $4.58 for corn and $11.87 for beans, we can start looking forward to what we feel is the next major league risk day for producers, and end users, which will come on March 31 with the release of the Prospective Plantings Report, and the second Quarterly Grain Stocks Report of the marketing year. Yes, there is the monthly Supply/Demand Report that will be issued on March 9th, when we will get updated on South American Production as well as what USDA sees in terms of exports and finally carry out supplies. Many analysts have already taken bean and corn supplies down to very tight levels, in fact some say unsustainably low levels for beans, but it may be too early to say with much confidence yet. Brazil has a problem, first delayed planting and dryness issues, now too wet in many areas that would like to be harvesting beans and planting the Safrina corn crop, causing delays in planting that MAY reduce yields and production.So far, the folks we listen to in both countries say that the numbers are good, yields are as expected, and they will catch up and get the crops harvested and planted as price incentive is just too great to leave anything undone. Progress will be watched closely and volatile price swings are likely as reports come in and new weather forecasts issued. We feel the following questions will determine price activity from here to month's end:
1) Can producers in Brazil and Argentina attain production equal or better than USDA's last forecast?
2) Can they get the harvested grain to the ports and local end users in a timely manner, satisfying demand?
3) Will China buy more grain from us, or start switching origin on sales from the US to other sources?
4) African Swine Fever is back in the news at least rumors of outbreak. How bad and how long?
5) Energy prices have rallied, will continued progress against Covid 19 get us back on track to more normal consumption, and keep ethanol production profitable?
6) Funds continue to hold large long positions in corn and beans and moderately so in wheat. Will they bail or add to those positions in the new month?
Because our focus here is hedging, we have to look at these prices and feel like at least some risk management is needed, especially as we approach the major risk that is associated with major USDA reports. We can easily see the bullish side, concern that South American production and their ability to get the product loaded on ships, concerns about our acreage mix and planting weather, and concerns about the drought monitor maps. These are all valid, but well known to the marketplace, and we probably have some level of risk premium built in to these prices. How much? No idea, but as a futures market, especially with large spec longs in the market already, there is considerable risk to the downside. Yes, we could have a repeat of 2012, and yes, we could have a warm and dry spring where every acre gets planted and then timely rains produce record crops. Both are possible as well as everything in between, and the uncertainty should keep at least some support in the new crop values at least. Should. But doesn't have to. How many times have we seen a market that looks like there is no end to the bullishness, (or bearishness) only to see some event trigger a major turn in trend. These are the memories that keep reminding ourselves that no price is guaranteed unless we sell, or protect that price through some other means, and that is what we will be focusing on with our clients this month. By using more than one marketing "tool", you can lock in some really good profits now, and still stay flexible and open to the top side. Selling cash grain on March 1 can be stressful if "too much" is sold, but by using options or combinations of futures and options most or all can be covered for a price. We will be looking at all these with you on an individual basis, as there are many choices, and no one size fits all in today's production environment. Here are a list of "some" of the choices:
1) Buy crop insurance by March 15. Prices are high, but so is risk, so expect higher premiums
2) Sell cash grain, if basis is good, do HTA contracts if better basis or more carry in the market is expected
3) Buy put options, (short dated are more affordable) but something
4) Buy put options, and sell call options to offset price of put. This puts a floor price in, but also a ceiling, and will require margin maintenance if prices rally.
5) Sell futures,
6) Sell futures, buy calls to defend the hedge and keep upside open.
7) Use spreads to cover a portion, like the December 21/December 22 currently 43 cents premium December 21. This spread is limited in what it will make or lose, but can provide a way of "waiting and seeing" as further rallies in December 21 will likely be offset by some gain in December 22, and cash sales can be made later at higher prices without the extra margin heat of a single futures position. Conversely, if December 21 falters, the gains in the spread will likely be offset by losses on the December 22 side. While not a true "hedge" in the textbook sense, it does keep our eyes on this spread, which can be a good indication of "topping" action.
So which camp are you in? Does it make you crazier to sell and see prices go higher? Or is it worse for you to not sell and see prices go lower? This sounds a bit silly, but over the years not recognizing the emotional side of marketing has kept some good plans on the drawing board instead of being implemented. Neither camp is bad, but not dealing with those limitations are. I speak from personal experience. Being too bullish I was caught up fearing selling too soon and looking dumb to my neighbors, who at the "coffee shop" always had someone bragging about waiting and cashing in big. I refused to recognize the "red flags" I have written about the past 11 years, and paid the price. As producers, we are bullish or we wouldn't be so good at it. Optimism is a big part of being good at your job, and the American Farmer is all of that and more! We have to assume that other producers in other countries are the same, with optimism over today's prices driving more to produce more. Yes, weather and politics will play a major roll, but as I watch more and more irrigation systems built, more dollars spent on fungicides and biologicals, and more investment in precision planting equipment, it is clear why we see trend yields continue to increase, with this year maybe 180 on corn? The short message here is be realistic with both expectations and attitudes, be honest with yourself on strengths AND weaknesses, and then get that marketing plan ready based on facts and profit potential rather than the latest news from the local "table of knowledge" that has other agendas.
On our farm, we continued to add to our HTA contracts in September futures with the ability to roll that contract to December if and when the current inverse goes to a carry. We talked about this last month, how it is unusual to see September trading at a premium to
December, our latest reference was 2013 when the inverse turned into a 10 cent carry just before the contract went into delivery. There is no guarantee it will happen again, but we sure like the odds, given Delta producers should be harvesting, and any domestic needs should be made up by imports from South America. Shortages will be dealt with and logistical issues settled likely before the end of August, but even if we maintain the inverse, December at 4.70 is still acceptable in our cash flow. We feel it is worth a shot and have done so ourselves. If you cannot get a commercial in your area to write such a contract, call us and we can use the futures to do the same thing. We will also suggest a budget for margining these positions, as well as protecting them with options or option spreads. There are lots of choices, but we need to see what combination will get you where you want to be. Make sure we talk over all of them so your comfort level is high, and stress level low BEFORE we go to the field.
Since we have made new contract highs in new crop corn and beans since the last writing, we are reluctant to sell calls yet against long put positions, as we want to have a more comfortable management plan for this type of position. As the month of March proceeds, we will be looking at these possibilities, but with all trades, we want to have a clear idea on entry (why are we doing this) and exit (what prices will cause us to take profit or limit losses) as well as management plan throughout the season. We believe a solid marketing plan has these characteristics, and once in place, should only be traded when risk can be reduced, or the bottom line can be added to. Examples would be rolling calls up or puts down, exiting short positions when insurance coverage kicks in, and so on. These are all things to talk over when we construct the plan and invite any interest from lenders as well so all are on the same page. Make sure we know what coverage you have on crop insurance, as that level will impact the plan. There is no use paying twice for the same coverage, and crop insurance and marketing should work together, but are often overlooked.
For new crop beans, we made our first sale for fall delivery when cash hit $12, as we will need a little cash flow and hopefully more bin space We are still on the friendly side of new crop beans, and would seriously look at selling any remaining old crop beans over $14 and instead of taking the risk of downside any further, buy short dated new crop calls. We like the "2 fer" of re owning old crop sold at $14 with $12.50 calls with the ability of using those calls to sell new crop against later and have upside protection in case we don't get the acres or the weather or both to generate the bushels needed to prevent rationing. We have heard from our contacts in South America, and they feel the crops are still large enough to match or even exceed USDA numbers so far, so we would rather be more definitive with old crop in terms of sales, while putting our investment in new crop options where there could be a lot more excitement and opportunity. Call us for up to date prices of these different options if this appeals to you. We like to reduce risk whenever possible, and this may be a good place to start.
In conclusion, as risk managers, we always want to ask ourselves, at the current price levels, do we want to be long, short, or neutral? Count up the bushels you have on hand and you intend to produce this year, and realize that anything unsold or unprotected, is SPECULATIVELY long. You are betting on stable to higher prices every day. We often get questions about speculating, and that is fine if you are willing to take the risk and deal with potential losses. Here is when the emotion (and attitudes) come in, and possibly cripple a good overall plan. End users that are not covered have the same dilemma, and also need to reduce risk as well. In either case, we are confident that at 1:15 in the afternoon of March 31, there will be a lot of unhappy people, caught betting the wrong way or not reducing risk enough. The choice is yours and yours alone, how you feel about this price level, and what you are willing to sell or spend to protect the price. Let us know soon if you need some time, we expect to be very busy this month, and are thrilled to be busy! Its what we do, and hopefully we have earned the chance to work with you. The excitement is building as planting season is almost here, snow is melting, the sun is warmer and prices are better than we have seen in many winters. Let us go to the field with profits locked in and our jobs as producers easier because we can concentrate on growing a crop instead of worrying about increasing our line of credit!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- March 9th: Monthly Supply/Demand Report
- March 19th: Cattle on Feed
- March 26th: April options expire
- March 31st: PROSPECTIVE PLANTINGS AND QUARTERLY GRAIN STOCKS REPORTS