"The Bull Run Continues, When Do I Sell?"
We finished up the month of April on a strong note, with the short squeeze on the May contracts continuing to lead the charge up. Continued stress on the Brazilian Safrina corn crop and strong demand combined with slow farmer selling has taken us to new contract highs and now the chatter is all about the highs made in 2012. Could we go there? Sure, if we continue to ratchet down production estimates in Brazil, continue to sell and ship more exports, and if domestic demand doesn't falter, and if funds continue to buy and not sell, we could. A lot of ifs. While we really enjoy the rally and price opportunities we have not only for this year but also for next, as a firm that believes in managing risk first and foremost, we must look at the other side of this rally and look for ways to either sell our crop or at least protect the price while still having some upside potential and avoiding "overselling" just in case yields come in less than average. While the bullish stories are still out there, and possibly getting a little stale, we want to go over the list in our minds of what could turn us lower:
1) Weather change in Brazil, or USDA posts production numbers higher than current analysts estimates
2) Famer selling picks up post planting
3) Announcements that previously sold grain for export is cancelled or rolled into new crop months
4) African Swine Fever outbreaks in China are worse than reported
5) Planting weather, while not ideal remains favorable enough to get our crops in timely
6) Funds start selling...........they have a lot of longs
We are no longer the cheapest corn in the world, Argentina is, and US beans are more expensive than both Brazil and Argentina. We have reports of beans coming in from Brazil and possibly some Argentine corn as well. The markets job is to move price and basis to solve the logistics problem and get the supply where the demand needs it to be. How much and how long will be determined by farmer sales pace, shipping costs by rail, truck, or boat, and the ever present weather forecasts that change every 6 hours and can turn the market higher or lower almost instantly. This seems like an obvious statement, but it is important to remember that NO ONE can predict the highs and lows, and trying to do so or believing someone can is folly in the first degree. We remember quite well the analyst that predicted in July of 2012 that "corn would hit $10, beans $20 and wheat $15. Unfortunately, that same source has declined to write a check for the difference to those who bought into that theory. Whenever big bull market runs are going strong based on weather threats to supply, there seems to be a race on to see who can come up with the smallest number for production, and this is the case in Brazil with estimates now well below 100 million metric tons. Some are even at 90 or less. One caution here is we have strong evidence that significantly more acres were planted than last year, even late in the season because of the high prices. This makes sense to us, as we planted corn well into June in 2019, and with favorable fall weather, produced much more corn than would have been expected. We are not predicting that here, only pointing out that emotion in bull markets can come back to bite those that stay bullish too long. Our feelings on the market at this writing (always call before acting, markets change quickly!) are as follows
1) Old crop beans, if unsold, need to be sold or price protected. Too many red flags and the market seems to be working through the logistics of satisfying demand. If bullish, own short dated new crop options to replace
2) Old crop corn is still pretty hot, but caution is advised, we feel like there may be more unsold farmer inventory that will be sold post planting if new crop planting and conditions are favorable.
3) Buying put options on rallies are never a bad idea for producers. We just don't know when the selling will start, but why wait until we drop 50 cents?
4) New crop corn above $5.70 looks like a good target to make more sales, buy puts, or sell futures. We would still sell September near $6 and defend that sale with long December if new highs are made
5) New crop beans above $13.50 looks good as well, and defend with long January futures if we take out recent highs
6) Selling and owning calls if fine as well, options are expensive but so are the ramifications of not doing anything. Manage the options according to time frame needed and amount of risk you are willing to accept
7) Use spreads to cover a portion, such as selling December 21 and buying December 22. Not a perfect hedge, but it offers some downside protection while keeping margin money needed lower
The following paragraph is repeated from last March. We still like to go back to how we got here...........
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 now have all new crop corn covered with a combination of HTA sales, put options, and short September futures that are now spread with long December futures. With only 1 new crop bean sale made for our landlords, we are now targeting the $13.50 area to add to price protection. Making small sales on rallies while adding some option protection as well seems to us to be prudent. We do not want to pass up the profit potential we have now, but also realize that with adverse weather could drive new crop up to levels old crop are seeing. Thats why we would add some call options to our positions "just in case" but we must reward rallies with actual sales. Use breaks to cover upside but don't forget to cash in! Speaking of "cashing in" check out 2022 prices and ask yourself if what is offered now is a good place to start.
In conclusion, it seems more stressful while in a bull market than a bear, but my view it is stress I put on myself by looking back at the $9.50 beans I sold last year and can't seem to get over what could have been. That pain is real, but not letting go is worse. I used to tell by players in high school football that one fumble cannot cause you to blow the whole game by dwelling on it. Move on and look forward. The rest of the game is in front of you and letting one bad play ruin your entire outlook means the other team won. We deal with a futures market, one that looks well into the future, not what happened last week, month or year. The market does not care about any one individual, has no emotional connection to my success or failure, it is only there to find a price and time frame that will bring producers and end users together with a big dose of spec money to keep things moving. Take a rainy day to look at your spreadsheets and double check the bottom line, see if you feel like you need to do anything to protect prices. Call anytime to talk over some ideas, and don't forget to honor our veterans and those who have paid the price to allow us to live and work as we do. Memorial Day is special, hopefully we never forget.................Be safe and prosperous!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- May 12th: Monthly Supply/Demand Report and Crop Production
- May 21st: Cattle on Feed
- May 21st: June options expire