Clear Focus Hedging News and Views
January 2, 2022

 

"Good Prices, High Input Costs"

As we start a new year, the good news is that crop prices are much higher than we started 2021 with, but the bad news is input costs are at least double if not triple than last year. Sticker shock on nitrogen and chemicals, (if they are even available,) has many folks talking about planting more soybeans and less corn. We have been visiting with our client base, and for the most part, so far, folks are staying pretty much with their rotations. Many factors can change minds over the next few months, and our list is as follows:

1) Corn/Bean price ratio: which is favorable today, and what will be the spring insurance price?

2) Adverse weather in parts of South America has sparked a good rally, yield projections will be updated in the January USDA Reports

3) Money flow in or out as we start a new year? Have investors been front running commodities in anticipation? If so, which has the most to lose?

4) Natural gas prices have dropped significantly the last few months, will this lead to cheaper nitrogen in time for planting?

5) Spring weather: favorable for corn planting or not?

6) January 12 reports also include winter wheat acres: will there be more acres available for corn and beans?

The markets job is to move prices to levels that result in supplies of each commodity being "comfortable". When we look at the size of the fund longs, corn is by far the longest, at approximately 350,000 contracts at last report, and beans are around 75,000 with wheat being a small short position. It would seem like the funds are pushing a long that has been in place for quite some time, well over a year, and show no sign as of yet of selling it off. It would appear by looking at the chart that for now, $5 corn is too cheap, and $6 too much to last for long. When we look at new crop, the recent average is around $5.50 for corn, and $12.50 for November beans. When we look at planning for the next year, these are the questions we will be asking ourselves:

1) How much old crop are you holding? Is price protected or sold?

2) When will you need cash flow?

3) Are your input costs set, or still fluid? If set, are these new crop prices profitable?

4) What price will make you happy? Do you have orders in?

5) How much upside potential do you think we have? How much downside risk?

6) How much risk can you stand going into the January 12th Reports?

These reports released at 11:00 am central time on January 12th will likely have a major impact on prices at least for a while. They can set the tone for 2 1/2 months until the planting intentions report at the end of March. Risk is high for both producers and end users, but as mentioned earlier, selling old crop at $6 or better, and end users buying in the low $5 range has worked well. Do we need to go higher to ration demand? We doubt that for now, until more is known about the crops and available supplies from Brazil and Argentina, but weather forecasts change every 6 hours, and we are in the critical time frame for those crops. So far, being a tight holder of grain has worked well, as both futures prices and basis have been strong. We need to remind ourselves that we did produce a big crop in both corn and soybeans, and they will have to be sold at some point, the question is when? How long before cash flow is an issue? We do not want to be the last ones holding if prices drop due to better than expected yields in the southern hemisphere, or some other world event that pops up, and that list is long. Always remember that investors do NOT like uncertainty, and any skirmish amongst other nations may adversely affect holders of long positions. We have no idea if or when that may happen, we just want to remember that possibility exists, and therefore is risk to be managed.

We are repeating a snapshot of the Sales and Profitability Tracker we use to help decide if sales or hedges are warranted at each price level. This is just a sample, and updated information should be put in before using it, we just want you to know this is available. Call us for further information in how it can work for you.