Clear Focus Hedging News and Views
November 1, 2021

 

"Time For Risk Management!"

After the October 12th crop report which raised yields and carry outs especially in beans, markets sold off sharply only to find support led by wheat and now corn to levels not seen since last spring or early summer. We try to always focus on risk management and with the recent rallies now have some significant risk to manage! There are several reasons for the rally, some of which are listed below:

1) Domestic demand is strong- ethanol margins are great, production is challenging all time highs, and bean crush margins are good as well.

2) Adverse weather especially in the eastern corn belt has delayed harvest, with significant acres still in the field

3) Basis levels are very strong indicating lack of farmer selling

4) Cash flow is not a major issue, so tight farmer holding can be expected, at least until the new year begins

5) Folks remember vividly how harvest time sales last year were "too soon" as prices rallied sharply when South American weather deteriorated

6) End users are profitable at these price levels, and inflation fears may add to the buying

While we certainly enjoy the rallies, each day up reminds us that with our good yields, profits per acre look great, but all this could disappear quickly if something happens to change the landscape. We have another monthly Supply/Demand and Crop Production Report coming on November 9th, and while we would not expect many big changes from the October reports, there is always that possibility of a "curve ball" as these updates also include new numbers from all major producing nations. Here is a list of possible negatives:

 

1) Big crops get bigger?

2) Funds are still holding big long positions in corn, well over 200,000 contracts

3) We have a big crop to sell- it will be sold at some point, will producers wait "too long"?

4) Harvest progress should pick up this week

5) South American weather is much improved over a year ago, some concern in Argentina but Brazil is on pace with planting and to this point, is amply watered

6)Export sales have been lagging, especially in beans, and China has been notably absent in corn buying

It is easy to become complacent when prices rally, it seems like it will just go on forever, and selling "too soon" keeps us from looking at what we could have in the bank if we protected these prices. There is much talk about input costs for next year, and how that may change crop plans but is all the chatter becoming a reason not to price or protect some grain? We would not suggest that a major sell off is imminent, only to point out that $5.75 March futures times 200 bushel corn is simply $1150/acre gross. This is where risk management come into play, as we could easily see prices go either way from here, worst case scenario is South America produces record crops, the US goes into major recession, and all major producing nations respond to higher prices with more production, we could easily see $4.50 corn and $10.00 beans again when faced with high input costs for next year. That is the risk. On the other hand, if we do see weather threats in the southern hemisphere, if the dollar weakens, and world production slips for any reason, we could easily see $6.50 corn and $14 beans. That is a risk. How do we make a plan to manage it?

Here in Northern Indiana, we feel that producers will continue to be tight holders, at least until we can get the crops out of the field, and probably next year. This should give us a good basis opportunity and with futures at levels we like in corn, we would like to move the cash grain on these rallies, and use calls, call spreads, or futures backed by put options to keep risk at minimal levels, around 15-20 cents. We presently own December 5.40 calls and will look to sell them or roll them to March in the next 2 weeks. We like owning March calls instead of grain in the bin simply because of the above list of possible negatives, led by possible selling by funds and/or producers as the year ends. We have a big crop, it will be sold sometime, and we would rather be 2 days early than one day late, therfore, transfering the physical risk (grain condition, futures price and basis) to others and owning 15-20 cent calls is attractive to us. On beans, we still think it may take a cash price of $13 or more to shake bushels loose, and with positive basis at our processer here in Indiana, we don't need much of a rally to get there. Again, transfering the risk of price and condition, including shrink, we like owning January or March calls instead, or possibly buying January futures and selling next November 22 to begin a hedge program for next years beans in case we do see a record crop in Brazil and planting intentions reflect a big increase in bean acres.

On new crop, the chatter has been high input costs will drastically change planting intentions, and in some areas, this may be the case, but in the heart of the corn belt, we doubt it. Below is a screenshot of our Sales and Profitability Tracker with some base numbers to consider. Your numbers may be different, and these can change, but for a reference point today, consider that it looks like $5.50 December 22 corn is more profitable than $12.50 November 22 beans at least in Central Indiana. Call us if you want to run your numbers in the spread sheet to get a more accurate picture for your area, but the message here is simple. Don't assume farmers will not plant corn just because fertilizer is high, we like our rotations, and will need lots of incentive to change them. For all the above lists and reasons, we have sold another increment of old crop (2021) in March HTA contract, and an increment of new crop (2022) at 5.51 in December HTA contract.We will continue to hold our January/November bean spread and hopefully see $13 or more where we will sell cash beans, own March calls, and take the long leg off the spread leaving us hedged for 2022 beans above $12.50. We feel this is managing our risk and protecting a very profitable year while making sure 2022 is at least somewhat in the black. Call if you have questions or other ideas specific to your area.

In conclusion, having a plan with the ability to tweek or flex it to fit changes in market conditions is very important to us. It is a futures market, what happened last week or month is old news, as is the adverse weather in the eastern belt. It has been traded, and for us to assume that producers will not get the crop out goes against all history. There may be some losses, but in the big picture, enough to change the balence sheet dramatically? Future reports will tell us that but for now, we have some pretty good ideas on how big the crop is, the question is when will it be sold, and will funds continue to hold big longs in corn. We don't know the answers to those questions, nor do we know what the weather will be in Brazil next month, but we do know what current prices do for our balence sheet, and we like how it looks. Maybe you are bullish and just want some put protection, or maybe you have a great basis and want to sell corn or beans and re own them. There are many choices to fit any individual need, but every body needs to look at what is on the table in terms of risk, make a clear decision on how much you want to take on, and plan accordingly. Have a safe finish to harvest and call anytime, and above all, a Blessed Thanksgiving to All!

Dates to Remember:

Every Monday: Export Inspections, Crop Progress
Every Thursday: Export Sales and shipments
November 9th: Monthly Supply/Demand Report and Crop Production
November 19th: Cattle on Feed,
November 26th: December options expire