Clear Focus Hedging News and Views
July 1, 2022

 

"One Surprise in Reports, What Happened?"

When the USDA Planted Acres, and Quarterly Grain Stocks Reports were issued, The surprise was there was only one, lower bean acres by over 2 million. Every other catagory was so close to the average trade guess, it was almost unbelievable given what we have been used to. Both stocks and acres were almost spot on except for beans, which rallied sharply over 40 cents in a few minutes. Taking roughly 100 million bushels from the balence sheet will be a challenge for the next Supply/Demand Report on July 12th.With that said, why did beans close 20 cents lower on the day. We offer this list of possibilities:

1) Funds have been liquidating, and with today being end of month, and end of the 2nd quarter, it looks like more serious liqudation of positions, led by bean oil

2) The US $ has been very strong and the Brazilian real very weak, prompting South American sales

3) Inflation and global growth concerns have been a drag on all commodities, look at lumber and copper for instance

4) Export sales showed a net cancellation of old crop beans this week, and China has been very quiet in terms of new buying

5) Weather forecasts have more generous rains due in next week, along with less heat

6) Technical signals have been quite negative, although beans had a nice rally off $14 support this week

 

 

We have voiced our concern many times when funds get big long positions, as big sell offs are always possible when folks who own futures contracts, but do not use the commodity, no matter what it is, will eventually sell and often with little warning or "reason". While we watch many acres in the midwest under severe stress from lack of moisture and above normal temperatures, today is hard to grasp, but is reality. There were simply more sellers than buyers, and in a big way. The good (or bad) news is as of the last CFTC report, funds were still long about 230,000 contracts of corn, but very likely less now. That means they still have more longs, but have a lot less than they did, so will have plenty of ammo in the magazine to buy if conditions warrent. What can turn the tide back up? Here are some ideas:

 

1) The big drop in price of grains may stimulate some buying especially with end users looking at soil moisture maps

2) Weather forecasts have a generous rain event coming next week. Will it still be there when we open at 8:30 am Tuesday after the holidy weekend?

3) China has been slow to buy as they reduce hog inventory, and deal with a large outbreak of Covid. Will they come back for some "bargains"?

4) While not in the news as much, the war in Ukrain goes on, and many questions remain on how much can they produce and more importantly, how much can they export?

5) Argentina wheat crop is off to a very poor start due to drought, and new estimates will be out on July 12th

6) It is reported that we now have the cheapest corn in terms of world price, and are now very competitive in wheat depending on freight costs, and export sales for wheat were good this week

While one day does not have to be the end all, we are certainly looking at a very negative technical picture. Depending on where we close on Friday, and the weekend weather forecasts going into Tuesday's open, there could be a lot more down to go, or we could flip the forecast and rally back IF the funds decide to jump in on the long side. We suspect that a lot of negative news has been priced in, including the rain event, but cannot ignore the technicals that at this writing look bad, and funds are still long. Along with the weather, we will start looking at potential changes in yield and production in the US along with all other producers in the northern hemisphere. How the USDA factors in the lower bean acres, the ongoing stress in areas of the corn belt, and the potential changes in demand will be key. It will be interesting to see the average guesses when looking back at the original 181 projected corn yield and later 177, and a bean yield of 51.5. How do you feel about those numbers now? If you are in Eastern Iowa where 3 inches of rain fell last weekend, you probably think it is very reaonable. If you are in Northen Indiana, you think there is no way possible when looking at pineapples that used to look like corn. Then next week will probably tell us a lot more..........

On our farm, we have all old crop gone, and most or probably all new crop covered in cash and futures sales, and have bought calls to cover all sales this past week before the report. We were concerned if it doesn't rain soon, we may have too much sold, so covered all sales, and will hold those calls, (short dated August expiration) until at least late next week, and possibly through the July 12th report, as if by then we have recieved good rains, will feel much better about getting rid of them. They were bought to REDUCE risk, which they have and continue to do as long as we are uncertain about our crop prospects. Having grain sold but unable to deliver is not something we want to deal with, and most commercials will exchange futures or option contracts for the physical, with basis the issue to negotiate. We probably use the words "risk management" a lot, but it seems like many times it is either accepted as normal, or disregared until there is a crisis. At no time do we "pass judgement" on any of our clients, as each opperation is different, and each one of you is respected for what you do. We know, because we go through the same challenges trying to maximize profits and put in the hours of hard work. This past week has seen most of us in Northern Indiana running 24/7 irrigating, spraying, and trying to catch a nap now and then. Marketing can get lost in the dust of too many hours in the hot and dry and throw in a few break downs and parts runs, and you have a full plate. If this describes your days, we can relate. Our point is, when it is not so crazy, we need to talk planning, both when and what level to start selling, and then construct a management plan and exit strategy. We know this works, even though it is hard to commit to, it works and takes the stress level down for us. Not that we sell the highs and buy the lows. but when based on a profit goal that is reasonable, it works.Stop in or give us a call to explain in detail. What we do here is no secret to our clients, there are no magic mirrors or crystal balls, just a profit objective and a plan to execute it. We repeat the following paragraph from the April newsletter, as it certainly applies today

"We will also be monitoring other potential items that have been discussed but have not seen any further action, like a decision in the European Union to allow crop production on previously mandated "fallow land" which could be a few million acres or more. There has also been a lobby effort to release CRP acres here in the US on a temporary basis to offset lost production elsewhere in the world. While no action is immenent, there will be intense pressure from consumers to get inflation under control, and even if a bushel of wheat only amounts to a fraction of the cost of a loaf of bread, you can bet that's where the arguement will start. Never mind the cost of energy, the wheat price has doubled so that;s got to be a big reason! (You and I know better, but most of the world does not) When people get hungry or don't have enough money to fill the car with gas or buy the groceries they want, there will be protests. How the government here and elsewhere deals with this will be impact us as producers. There is conflicting pressure on the government to reduce food AND energy costs, so on one hand some want to cut renewable fuels standards (negative for ethanol and bean oil) while others want more renewable fuels to cut those costs. Good luck on that policy tightrope, but you get the idea, government policy changes can have a quick and devastating price impact on our commodities. Don't go to sleep on sound risk managment. We would rather be more protected than less when prices are this high and profit margins are where they are. Look at your own bottom line, what you have sold and what is still unprotected, and ask the question we ask ourselves every morning: "From this price level, do I want to be long, short. or neutral?" Don't forget the grain still in the bin as well as what you expect to produce this year and next for that matter. We have prices that are profitable for this year and next, and staying "long" too long always brings out the worst as we look back and wonder what "could have been"."

In conclusion, it is now up to the weather and the interpretation of it that drives the market until July 12th. With most of the numbers today, the only questions will be on foreign production (and deliverable supplies) and how USDA handles the lower bean acre numbers. We will also watch the CFTC report Friday to see how many contracts managed money has liquidated from the previous Tuesday to Tuesday. Also look at Thursdays closing prices, while sharply off the highs, the prices are still profitable. Taking a defended short position is still advisable, and on any decent rally back, call options can be sold as well at strike prices you would be happy to sell cash grain at. There are still many tools in the toolbox to use, even with hard down days, we just have to fing the combination that works for you. Hopefully we get some rain, and don't forget to celebrate the Independance and Freedom we enjoy this weekend, we gratefully acknowledge the wisdom of our forefathers who fought for it and defended it, then wrote the most significant documents in history, the Declaration of Independence and the US Constitution. God Bless All.

 

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
July 12th: Monthly Supply/Demand and Crop Production Reports
July 22nd: August Options Expire
July 22nd: Cattle on Feed

Mike Daube: 574-586-3784
Allen Gard: 573-221-9234
Peter Schram 317-910-1473