"Another Bullish Surprise: No Foolin!"

 

The March 31 Reports are out and once again, USDA provided a big surprise to the trade with much lower corn and bean acres than expected, slightly lower corn stocks, a few more bean bushels, and more wheat acres than anticipated. This will not take long to analyze, the implications are very plain. Given the numbers we have in terms of stocks, acres, and current demand, we need to have good weather in Brazil for the second crop corn, and good planting weather for the US. Markets responded with up limit moves in corn and beans, giving us another opportunity at $5.00 corn in the September contract. Once the ink is dry on the reports, more questions are on the front burner:

 

1) Are crop sizes in South America getting bigger or smaller?

2) Will China buy more, or are they done?

3) Will China actually take shipment of what has been bought?

4) US planting weather; early start, moisture conditions, and prospect of acre shifting?

5) US $: continue rallying or not?

6) Funds are still big longs in the market: do they sell, roll out to new crop, or just buy more?

 

April 9th is the next Supply/Demand Report and we will get new balance sheets incorporating these new numbers into projected carry outs. New world numbers based on South American production will also be closely watched. This can be a great opportunity, or just another leg up in an up trending market. While there is no question that the low acre numbers are bullish relative to expectations pre report, we have to ask ourselves what do we really expect to happen in the next two months? As always we want to look at both sides, and discuss the possibilities of what could change the present set up. Here are some items to bring some caution to the debate:

 

 

1) Funds could sell for any reason: profit taking, geo political issues (Russia/Ukraine Chian/Taiwan) outside market collapse, and so on

2) China trade issues, military threats, and human rights issues

3) Good weather in Brazil, and US

4) July KC wheat is now within 20 cents of July corn. How much wheat will displace corn in the feed bunk?

5) Wheat damaged by winter kill may be grazed off and more acres planted to milo (50 cent premium to corn) or soybeans

6) Norther Plains farmers may switch from spring wheat to more canola, sunflowers, and soybeans given the rally in oil

 

As always, number 1 above is our main concern, as we say earlier this week, we can take 30-40 cents off the corn price and 50 cents to a dollar off beans if a short time. We did not get to these price levels without massive fund buying, and unless we get more adverse weather, inflation pressure, weaker dollar, or other friendly issues, we will need a real reason to ration supplies either by increased demand or a shrinking supply. That is what the market will be doing, looking forward, not backward to determine what to do. We have weather forecasters trying to draw similarities to 2012 weather patterns, and that is certainly in many minds, but with the recent unusual rains received in the western corn belt, that concern has been put on hold at least temporarily. All these factors tell us volatility will be with us for most of the year, and sharp moves both up and down should be expected. Flexibility is a big part of our planning, and here is our idea on how to achieve maximum profitability paired with managing risk:

 

1) Get sales made, or floors put in at very profitable levels. 

2) If sales made on rallies, buy short dated calls on breaks (similar to last Monday and Tuesday)

3) If puts are purchased, and the market rallies, consider rolling up to a higher strike.

4) If calls are purchased, consider rolling up or simply taking profits on good rallies like yesterday, adding more to the sale price

5) Make sure you have priced old crop corn and beans while we still have the inverse of May over July, unless basis improvement will pay you to store it

 

We feel strongly that given the Stocks Report was neutral, and only Acres were bullish, these numbers are likely to change. How and when will be up to each producer, but it would appear to us that old crop (especially beans) are likely to lose ground to new crop, and we are actively moving any old crop bushels and replacing that physical inventory with new crop calls on breaks. This allows us to limit risk of downside from unlimited on stored bushels to the price paid for the call, and gives us something to sell against whenever you feel comfortable. It increases flexibility and choices you have to be selective on when or where to sell. Buying put options on rallies puts floors in but leaves upside open to those who remain friendly. If you are one that feels a repeat of 2012 is in the cards, using puts is a very good way to spend a little "just in case" the weather folks are wrong. It may seem like wasted money to roll those puts up, but often times we have been able to roll up 30-40 cents in strike price for a dime. If we do get a rally based on weather and emotion like 2012, this could well be the case. Remember: what may seem like wasted money actually was a price guarantee, and with prices near $5, to us it is worth it.

 

Given all the above, and because we remain the most friendly to new crop beans, we will continue to add to sales in September futures in increments on rallies and buy short dated December calls on breaks. This has worked quite well so far and we are building a respectable average price that looks really good on the balence sheet. We will do this as long as the inverse exists, now about 16 cents verses the 28 cents we had a few weeks ago. We are moving all old crop corn on this rally, and replacing with new crop calls on breaks to open the upside on existing and future sales. On old crop beans, we are of the opinion that old crop should be sold and new crop calls bought on breaks. We are transitioning focus from rationing old crop to concern over new crop and what the price should be in the future. Any weather issues should bring excitement to the new crop contracts, and we feel it is very possible fund longs could be rolled into these months as well. New crop beans are a good price, but we like to be long calls when making sales, just in case.

 

In conclusion, as we were greeted on April Fools Day with an inch of snow this morning here in Northern Indiana, the forecast is for warming temps and normal rain. We could easily see planters rolling in a week or so, and with the economic incentive, we can only assume you and all of us producers will be anxious to get the seeds in the ground. We remember the wise words from former Secretary of Agriculture Earl Butz who told our class at Purdue the following: 'Don't ever bet against the American Farmer when he has the economic incentive to produce. He will bury you with grain if given any opportunity." I never forgot those words, and in the heat of a bullish move, try to remember to make sure I manage the risk to the downside when the bullish fever is highest. Good luck and be safe and call for some ideas on how to protect these profit levels, and above all, a Blessed Easter to everyone.

 

 Dates to Remember:

• Every Monday: Export Inspections, Crop Progress
• Every Thursday: Export Sales and shipments

• April 9th: Monthly Supply/Demand Report
• April 23rd: Cattle on Feed
• April 23rd: May options expire