Clear Focus Hedging News and Views
August 1, 2022

 

"One Ship Loaded, Market Drops"

As this is written early Monday morning, a ship loaded with corn has left the port in Ukraine, and the market has responded with double digit losses in all grains after opening stronger last night. While last weeks rally was impressive, it was likely based on weather forecasts of hot and dry this week and the continued bombing of Ukranian port facilities. There is considerable debate on how much grain can move and at what cost considering freight and insurance rates for the cargos, but psychologically this is a big deal just getting one vessel out to sea. You can bet on news flashes on any further success or failure to load more to have a swift reaction by the market and specifically the Algo traders. Compounding the sell off this morning is a less threatening forecast as more rain is "in" for the end of the week, and a little less heat. As the maps change every 6 hours, these changes can bring big changes to prices as well. We would suggest if you need to make some sales pre harvest, get some orders in as 10-20 cent moves are more than likely with all the moving parts making up this market today. In the meantime, the concerns we have for prices going lower center on the following:

1) Funds are still holding long positions in corn and beans

2) The US $ is still quite strong, and other currencies weak. The Euro $ and the US $ traded at even for the first time in 20 years.

3) Inflation continues to be a major concern for US and global growth

4) Export sales have been poor for quite some time

5) Weather forecasts have been underestimating rain events, and many areas have seen improvement in moisture supplies

6) China relations have deteriorated, with more concern over Taiwan and the potential for escalated tensions.

 

While these are certainly concerning and could lead to a retest of the July lows, there are also friendly possibilities looking forward to the August 12th Supply/Demand Report:

 

1) While improvement in crop conditions in the Eastern Belt have been felt, the Western Belt has areas that are in need of rain and cooler temperatures.

2) While one ship has left the Black Sea port, a major grain company has decided to keep their employees out of the facility for safety reasons

3) China business has been rumored, but little actual sales have been reported. A big buy could rekindle some buying in the market

4) August 12 will be important as USDA gives us updated production estimates for here and other exporting countries, and a look at what they think demand here will look like.

5) Europe has been extremely hot and dry threatening their crops, and possible exportable supplies
6) End users are still profitable at these prices

As we said, there are a lot of moving parts to the market which tries to discover what price is needed to satisfy the producer and end user. As producers, we need to look at what price satisfies our profit goals, given the range of prices we are trading now that the emotion of the war and adverse weather is becoming less of a factor. We are fairly confident we will have a corn crop that is far better than what we may have thought a few weeks ago with early estimates of national yield in the 175 area. Unless demand picks up, that may be enough to satisfy the market for the near term, and prices could grind lower. If instead the USDA lowers yield further, or if world production comes up short of expectations, we could rally back to recent highs fairly quickly. Trying to predict is impossible, there are those in the analyst world that think we should be over $7, and there are those that think $5 is certainly in play. That's what makes up a market, and we often get caught only looking at those that report "what we want to hear" or "looking only at our back yard". What we would suggest is making sure floor prices are in no matter what strategy you decide as there are many choices, and we will go over a few below"

Buy short dated September puts
Buy short dated September puts and sell full December $7.50 calls
Sell cash or futures and buy short dated September calls
For beans, we would use the same ideas above, but consider selling $16.50 or $17.00 calls to finance the puts
Remember that selling calls will incur some margin exposure and we would manage that by using some buy stops in futures if prices take out resistance. Call us for specific prices and individualized management plan.

On our farm, we have watched our short dated August call options expire worthless protecting previous sales, and share the frustration that once the calls expired, we rallied sharply the following week, but remind ourselves that those calls were in place to make sure we had a crop coming, and 3 weeks ago, we had serious doubts about having one with weeks of no rain and a market that was (and is) considerably volatile. We felt (and still do) that managing that risk was important enough to own those calls through the critical times ahead. Now, we still have good sales on the books, and will only buy "insurance" if last weeks highs are taken out, or we take out technical resistance above the market. The corn crop is getting closer to being "made" but beans have a long way to go. When selecting strategies for sales and deliveries, consider basis, spreads, storage capacity, and cash flow. We have different choices for both corn and beans depending on what the picture is in your area. Call to discuss each as prices can change very quickly!

Another important thing to remember is the inverted corn market has now gone to a carry as expected, with September trading 4 3/4 cent carry to December last week. We have this month to roll those positions, but need to make sure it gets done. We have orders in to roll at 5 cents and up, but the bottom line is even money to a carry is good, as we have picked up 20-30 cents depending on when you entered the position. On 200 bushel corn, that is $40-$60 per acre! Looking ahead, we will watch the Dec/March and on out for opportunities to roll out further and capture more carry in the market if it comes to us. Depending on your storage and cash flow needs, there could be more profit available if the crop gets bigger or demand weakens further. Carry in the market and basis improvement further out is basically what the market will pay to store the grain for later delivery, and we need to make our plan based on these numbers to mazimize what we have available. Again, call us to go over your possibilities.

In conclusion, it may sound redundant but there are many "moving parts" in the market today with the war in Ukraine and China making threats concerning Taiwan, and price volatility for grain is large because of it. Throw in changing forecasts, and moves like we are watching today are common. Try not to get emotionally attached to any one idea, as that usually leads to disappointment when the switch gets flipped. We would suggest watching last weeks highs as clues, if we rally and cannot take those out, it may be time to pull the trigger and get covered. Any thing is possible, but we have the ability to put floor prices in at any time. We can also use sell stops both at the elevator or here in the futures market, so you at least have a floor price in if some seriously negative happens. Preparing for the worst and hoping for the best may well be the best idea today with all the uncertainty, and managing risk both upside and down is certainly advised here. If the possible range for corn prices is $4.50-$7.50 where do you want to be? Have a blessed summer, and we pray for rain when needed and reasonble temperatures to finish out the crop, as producers we all want more to sell!

 

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
August 12th: Monthly Supply/Demand and Crop Production Reports
August 26th: September Options Expire
August 19th: Cattle on Feed

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