Clear Focus Hedging News and Views
May 1, 2022

 

"Is It Time?"

Time to buy, sell, or ride the fence a little longer? Everyone wants to know where the high is, if there is much more "left in it". We have had an amazing run with the bulls and new contract highs were made in again in corn last week. Funds are long, but according to the CFTC Commitment of Traders Report last Friday, they actually reduced their long position last week a little. How high is high enough? The futures are one thing, but the basis differences across the corn belt are quite large. Ethanol remains profitable, so bids are higher than in rail ownly areas, as some producers remain tight holders, and with no real end in sight in the war in the Ukraine, cool wet planting conditions in the east and serious dryness in the west, the market has had plenty of bullish amunition to attract buying. China has been on the scene buying beans and corn, keeping a "bid" under any weakness, and it would seem like there is no end to the rally. But as we have seen many times over the years, there comes a time when all good things end, or when the profitability levels are just too good to pass up. We don't pretend to know the day that will come, but for our farms, we have made some decisions for both 2022, AND 2023. We will present our ideas and some reasonings for how and why, NOT to tell folks what to do, but offer some ideas and ratioinal for why we want to take some serious actions now.

Old Crop Corn:

We have sold out while basis and futures are at excellent levels, we see no reason to hold out due to the inverted market price structure. We feel that risk is more effectively managed with cash sales and if still bullish, owning calls, especially new crop short dated ones make the most sense, especially if we get another "correction" back down near the $7 level in December corn.

Old Crop Beans:

Same here as corn, we like moving remaining bushels here on good basis and futures in the $17 area, and on a good break, own some new crop calls. With the price ration between corn and beans, we feel that from the March 31 intentions, we may see more corn acres and less bean acres in future reports. Certainly weather will have a say in that, but at this time, data from some seed companies indicate that more corn acres are possible.

 

New Crop Corn:

We have been making sales in the September 2022 futures market, some HTA'S also for bushels we cannot store, and have defended the hedge with long December futures which have added to our price. Depending on how trade opens tonight, we will be willing to take profit on some of our long December contracts, and use buy stops to re enter the longs on a new contract high. With this much profit on the table, and the length of time we have been bullish, it feels like the market could be due for a break, and with planters rolling hard in Northern Indiana last week, planting progress may well exceed expectations. Again, we don't know when the market breaks, and certainly would not try to make assumptions on your thoughts, but it feels like its time to take a shot at banking profits and letting the market tell us this week if we are right or wrong. Cetainly the market has a lot of bullish news factored in, but there are always possible new issues with the war, weather, or China demand that can change the picture, but again, it would seem to us that alot has been adequetly factored in. We like making more sales at these levels, in the September futures, with the ability to cover them with long December if needed to manage margin. The inverse is still there, although off the highs, but still enough to utilize to add value to our sales. Another possibility is using sell stops to make sure you have a "minimum bid" in place to put a floor under your price, which if hit becomes a market order and you are sold, but if the rally continues to go higher, you simply raise your stop to gain more value. If you like option spreads, consider buying a short dated, July expiration $7.20 put, and selling a full December call for about even money, Friday's close had them at 21.25 cents. This gives you a 7.20 floor and 10.00 ceiling until the end of June. We can then look at crop prospects, both here and world wide, and make a much better call on prices going forward, and well as some more comfort in our production potential on our farms. Management of this position is simple, if we break hard enough, we can exercise the put into a futures contract or make a cash sale and add the gain in the futures market, and buy back cheaper the 10 call. If we continue to rally, we look for a place to make a sale and then unwind the position. We feel $10 corn is a stretch at best, we will likely see end users back away long before that happens, or government intervention in the ethanol industy is more likely. Demand will be reduced if food security is threatened, not just here, but world wide. There is no bigger threat to a government than a bunch of hungy people!

2023 Corn

Here is where we are making a big decision for our farm this year. We started selling 2023 corn in the September 2023 contract this past week in the $7 area, and will probably get to 100% covered if we get back there this week. Because we have had good yields and prices the past 2 years, there is cash in the bank drawing a miniscule 0.25% interest. When looking at input costs (a big concern going into next year) we still believe that we should be able to get prices covered somewhat close to this year at some point. A lot of fear mongering has gone into our emotional outlook lately, but basis economics tells us that at some price, material will be available, and profits are high enough that competition and basic greed will prevail over "sanctions", in other words, Russin fertilizer will find its way out, as well as energy and grain. We can't think of a better investment in our business than locking in what is likely to be a 50% return on investment. (200 bushel corn at $7.00-$700 per acre costs) = $700/acre return.

Obviously this is a hypothetical, but reasonable on our farm the last few years, and weather, war, or any other possibliity can change our outlook, but the opportunity is now to get something done with good profit potential. As in any other strategy, there needs to be a management plan, and we would use 2022 call options or December 2023 futures to manage this position so as to not exceed our margin comfort zone, but without making any cash sales that far out, it simply becomes a price guarantee for the length of time you need to make a more definite decision as to what you will grow next year. Our feeling when looking at the price of December 23 corn verses November 23 beans, the market is telling us "MORE CORN" which corn belt farmers love to accomodate as long as costs are reasonable. We think that is very likely, and we may have more corn this year, another reason to get some coverage on. If in fact we do see a major crop problem this year, we think there will be tremendous pressure on governments all over the world to reduce set aside acres, fallow land, CRP, etc. Hunger will trump energy if it comes to that.

 

2023 Beans

We cannot rationally tell folks not to sell $14 2023 beans knowing that South America will probably go all out with plantings this fall for next year, the price incentive is just too high, and our contacts there suggest no problem getting inputs from Russia, but we are less concerned about 2023 beans than corn for all the above reasons. One potential problem is the oil seed market in general, as prices are high enough to inspire more palm oil, canola and sunseed production eveywhere possible. If your balance sheet looks really good with $7 corn and $14 beans for 2023 you can sell those futures and own 2022 calls, as if there is a big bull market yet to come, the prices nearby will rally more to ration supplies this year than next. Bull markets are lead by the "horns" not the "tails", in other words, the front end verses the back.

In conclusion, We again emphasize that we do not pretend to know what day or what hour this bull run will end, we just know that it will. In the height of the 2012 drought emotions were quite high and some "analysts" were screaming $10 corn, $20 beans, and $15 wheat. Unfortunately they did not write a check for the difference when we did not get there and sold off. It is up to each individual to look rationally at the market, weigh the risks, and decide the best course of action looking at your own personal profitability and potential. What we do on our farm is only a sharing of information and ideas, and there are plenty of them. Take a minute to call and challenge our thinking! We love to exchange ideas and thoughts, we benefit greatly from our people, and really enjoy fitting these ideas into concrete strategies to make you as profitable as possible. Let us know if any of these thoughts are helpful, and don't forget to remember those who sacrificed it all for our freedom on May 30. Because of them, we still get to choose how we live our lives and make our own choices!

 

Dates to Remember:
Every Monday: Export Inspections at 10:00 am
Every Thursday: Export Sales at 7:30 am
Every Friday: Commitment of Traders Report at 3:00 pm
May 12th: Monthly Supply/Demand and Crop Production Reports
May 20th: June Options Expire
May 20th: Cattle on Feed

Mike Daube: 574-586-3784
Allen Gard: 573-221-9234