Clear Focus Hedging News and Views
September 1, 2022

 

"Almost Harvest Time"

While harvest has begun in the far south, it will only be a few short weeks and we will be getting actual yields from the midwest. In the meantime, we wil be getting more and more private estimates as we lead up to the next USDA Supply/Demand and Crop Production Reports on September 12th. These numbers will be the first to include actual field sampling of the crop by USDA, and should give us a better idea on what is really out there. The market responded to the Pro Farmer Tour results posted last Friday, with Tour finding lower corn yields than the August 12th reports indicated and bean yields fairly close to USDA by rallying corn to new highs for the move, and after a brief rally, took beans much lower. While we do not try to critique the work done by the folks at Pro Farmer, this year may have a few more issues to look at, not from a consistancy perspective, but rather that this year the route taken (very much the same for years) has taken the scouts through what many of us feel were the worst conditions in 4 of the states, namely Ohio, Indiana, Illinois, and South Dakota. In addition to that, we feel from talking to our clients across the midwest, that crop conditions are likely understated by comparison to other years. States we feel may turn out better than crop conditions indicate include the four named above and also Missouri, Wisconsin and Michigan. The eastern belt has recieved very timely rains since the late June early July drought conditons, and looks to be much better than we would have thought possible. The bottom line is what USDA will say on September 12th, and we don't look for a corn number anywhere near 168, but more likely 173-174. While we usually do not offer guesses, (and that is all this is) using historical data, it would be very unusual for USDA to come down that much unless there is very clear evidence to back it up. Therefore we are very cautious about being too bullish over the next 8 trading days. We will cover some ideas on downside risk protection later, but for now, lets look at the factors that could lead to more selling:

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

2) The US $ is still quite strong, and other currencies weak. The US$ traded at 20 year highs this week. (not good for exports)

3) Inflation continues to be a major concern for US and global growth, and China is struggling with Covid lockdowns, and trying to stimulate their economy by lowering interest rates while the US is raising them trying to curb inflation

4) South American weather has been much more favorable than last year for the start of planting

5) Grain is moving out of Ukraine, better than many thought possible, even though the war continues

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

 

While there is always a chance that USDA will throw out a bullish surprise a week from Monday, we would also note that the market usually does not "ration" a new crop at the start of harvest, especially with a 1.5 billion bushel carry in to start the marketing year. Projections of a sub 1 billion carry out next year are just that, an opinion that includes not just supply guesses, but also demand assumptions. How high do prices need to go before we start cutting demand? The market will tell us through basis and spreads going forward. We have been dealing with an inverted market most of the past year, as the market was concerned about the war and availability of grain this year, and whether we would see exports draining our available supply. That has not happened so far. If we see basis weakening, and spreads going to a more normal carry, then the market is comfortable with supplies available. Keep this in mind as you plan your cash grain program this year. We would expect that if the market sells off for any of the above reasons, producers will have more incentive to put grain away, and the "harvest low" may come earlier than normal. That is why we like selling cash grain on good basis, and re owning using calls or futures depending on your risk tolerance. Lets face it, $6.70 corn and $14.00 beans are not bad, and offer great cash flow. If South America produces crops any where near begining estimates now, it could be a very long ride down, especially in beans.

Are we extremely bearish here? NO, as usual we look at the bullish possibilities as well:

 

1) While improvement in crop conditions in the Eastern Belt, heat and dryness have certainly impacted states like Nebraska, and their yield potential will not come close to the last 2 years

2) The war in Ukraine continues, and threats to the Black Sea Ports as well as nuclear power plants keep the market on edge. Remember Cheyrnobel?

3) China has been buying some new crop beans, and has actually taken much of the grain purchased this year, leaving little to "roll over" to new crop for both corn and beans

4) Basis in some areas remains very strong, keeping the idea alive that supplies are overstated from last year

5) Europe has been extremely hot and dry this year, and crop estimates are falling and import ideas are growing
6) End users are still profitable at these prices, crush marging for beans is extremely good, ethanol still positive in spite of lower gasoline demand

As we said earlier, we want to limit our downside risk before these prices fall, and also look ahead to 2023 given our memory of the late 1970's and early 1980's where inflation, recession and overall "malaise" set in, and commodity prices suffered. Basis is big issue this year, as some areas are very short on available supply, and others have plenty, but the cost of moving that grain has gone up considerably with diesel prices over $5/gallon. This cost will be added to the basis differences, making them more striking than normal. One will think twice about putting trucks on the road for a 100 mile trip to capture a better basis. Make sure you have that information on basis and shipping costs in your notes when looking at cash bids! For now, to limit downside risk we would look at the following

Buy October puts
Buy October puts and sell full December $7.50 calls
Sell cash or futures and buy December calls, or call spreads, buying the December and selling the March at a strike price you would be happy to sell cash grain at
For beans, we would use the same ideas above, and being a little more agressive than corn unless more friendly demand news surfaces
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 hedged our corn crop for 2023 at $7 basis the September 2023 contract, (See May and June 2022 newsletter articles) and this past week added hedges on the 2023 bean crop at $13.95 in the November 2023 contract.After looking at input costs and potential revenue generated with these prices, we like what we see. Yes it will require management, but after working through the fall of 2012 and hedging most of 2013 in the fall of 2012, we are comfortable that by using calls and call spreads we can manage the upside risk at critical times like major USDA reports and weather forecasts. Any good busines will tell you that when you can lock in these types of margins, it deseves a long look. Call us to go over ideas that mar work for you!

Another important thing to remember if you have not already done so is to roll short September futures and HTA contracts. Per last month's advice, we suggested rolling for even money to 5 cents carry and much of this was done, but it is crunch time now and open interest in the September contract is dropping, so we suggest moving on this week. Again, call for specific orders and ideas.

Also, don't forget the September 30 Quarterly Grain Stocks Report, always a potential major market mover, as these numbers will be plugged into the next S/D Report in October. Any unexpected changes in supply will be a potential trend changer!

In conclusion, it may seem like high crop prices will never end, but how many times have we heard the cry of "NEW PLATEAU" only to see some black swan show up and ruin the party. We do not predict a dramatic drop in prices, but also know that it is more than likely one will come, and we do not want to be standing around looking down and wishing we had done something. The tuition on that action plan has been quite costly in past years. We like to sell when we KNOW we are profitable, and right now, with yields more secure, we are. Going out to next years sales requires some faith, but our overall averages give me that confidence to hedge at least 90% of our 5 year average. By hedging in the futures market, I can still change my plans on crop mix if condtions warrent it, just like this past May when we flipped 150 acres of beans to corn and sold the corn immediately. Being flexible is still very important, but with a solid floor price to work with, we feel much better now than earlier this year, as we can now lock in inputs, and grain prices at good profit levels. Have a great Labor Day holiday, and a safe and productive harvest!

 

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
September 12th: Monthly Supply/Demand and Crop Production Reports
September 23rd: October Options Expire
September 23rd: Cattle on Feed
September 30th: QUARTERLY GRAIN STOCKS REPORT

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