Clear Focus Hedging News and Views
October 1, 2022

 

"ANOTHER Curve Ball"

Once again USDA threw a few more curve balls at the market with bullish corn and wheat numbers and bearish bean numbers. The market reacted with sharply higher corn and wheat and sharply lower bean prices, with corn up 27 and wheat up almost 50 for highs, but sold off at the close to only be up 8 and 25 respectively while beans closed near the daily low at 46 cents lower. Using the lower stocks numbers for corn (135 million bushels less than the average trade guess) the implication is that the October 12 Supply/Demand Report will reflect that decrease in 22/23 carry out. While this sounds very bullish, there are some reasons that USDA may not ratchet carry out down:

1) Demand numbers may be lowered on exports and ethanol use, both have been struggling as of late to meet projections

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) Early yield reports are overall better than expected. Too soon to tell now, but the crop may be bigger than crop condition reports have suggested

4) Brazillian weather has been much more favorable than last year for the start of planting,while early, their crop size will be reflected in world carry out

5) Gasoline demand has been lower, ethanol production lower, but stocks of ethanol have not been dropping as fast

6) Barge freight rates are soaring due to low water levels on the Mississippi River, and rail issues remain a problem, there is still a possibility of a labor strike

 

There are also corncerns with the Russia/Ukraine situation, with the annexation of occupied territories in Ukraine, pushing toward more conflict. The current agreement for the "safe corridor" that allows grain to flow out of Ukraine expires in November. If hostilities escalate, the "headline risk" is real. Prices could spike higher or lower depending on the markets perception of what happens next. With the damage to the major pipeline supplying natural gas to Europe from Russia now a major issue, the next few weeks hold the potential for volatility. While we are in the very busy time of harvest, keep in touch for the latest developments and what opportunities may exist. There are lots of moving parts in price discovery, that has been the case all year long, and making sure you have orders in to catch a knee jerk reaction to some news bulletin can make some nice returns! Going forward, here are the key things we are watching:

 

1) Price action this week: do beans recover or continue selling off, do corn and wheat challenge the highs made on Friday?

2) Spreads! The inverted markets are moving toward more carry, watch closely to see if that continues with front months (Dec corn and Nov beans) lose to the back months

3) Export demand (or not)

4) Basis: stronger or weaker?

5) Russia/Ukraine developments
6) Ongoing yield reports

We are really focused on the top two this coming week, as spreads usually tell us how strong, or weak, a market is. Bull markets are lead by the "horns, not the tail", in other words the front months of a market. With the funds long 238,000 corn contracts and 95,000 beans as of yesterdays CFTC report, the question is will they add, subtract, or roll out to later months? Their activity plus actual demand should be reflected in the spreads and overall price action. Given the above reasoning, we have taken the position of selling December 22, and buying December 23 corn on our farm. With the spread around 62 cents premium the December 22, we like the downside protection in case actual yields come in better than expected, and demand does not improve due to the strength of the US Dollar and global economic concerns. Given the high input costs and overall tight supply situation possibly getting tighter if Argentina switches corn acres to beans as feared, we may have a real problem getting more corn acres next year without higher prices, therefore we like the possibilities of using this spread for both downside coverage for this years crop, and then legging out of the short as cash bushels are sold to re own with the long December 23. This is NOT a recommendation, just an idea we are using for ourselves, and everyone needs to understand the margin risk and overall risk of loss if something changes in any of the above ideas. If basis is good, we intend to move grain sooner rather than later, have the cash in hand, and use the market instead of the bin as there is very little if any carry to justify long term storage, and in our opinion, remembering back to the late '70s and early 80's, we don't like the downside risk of holding this years crops unprotected. We fully understand those that were frustrated by selling "too soon" the last two years, but we can look at what is available now, take than price times our yields and feel VERY good about the level of profit that is here right now. The old saying of "bulls and bears run every day, but the hogs always get slaughtered" seems quite appropriate to remember today. Again, watch closely the price action this week in terms of the highs and lows made Friday as well as the spreads, and make a plan. We are happy to take some time to go over the risk/reward scenario of each idea, so call whenever you have a minute or thought to talk over. For some downside protection, we still like the following ideas:

Buy November puts
Buy November corn puts and sell December $7.50 corn calls, Buy November bean puts and sell January $15 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. Same idea for beans using January
Sell December 22 corn, buy December 23 corn as explained above
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. We offer these ideas as ideas only, not specific recommendations. Call us for specific prices and individualized management plan, and also to understand the risks involved with each one. There is simply too much volatility to offer specifics with the rapidly changing market news flow.

One more thing we want to cover this month, and will focus on with our winter meetings is something we have struggled with in the past on our own farming career is overcoming the fear of "high prices". There alwasy seems to be a strong fear of high prices going much higher and a fear of "missing out". To be honest, this fear has cost us a lot of money over the years, and hopefully we have paid enough tuition to overcome this fear with a more business like approach, focused on profit instead of what if. That is why we have nearly all of 2023 production hedged as outlined in previous issues, locking in $7 corn and $13.95 beans for next year. With input costs now locked in, we are very happy with the profit margin we have, but we are not done. One of the ways to overcome the fear of missing out is to have a flexible plan to take advantage of opportunities to enhance the price. Number one, we are not locked into growing either crop, able to take advantage of price action because we have it sold "on paper" and can switch crops if the incentive is there, switching our hedge is easily done. Number two, spreads, carry, (or lack of it) basis and costs can be managed throughout the year, taking advantage of whatever the market offers. For instance, to protect our hedges, we may choose to own some calls ahead of major risk times like USDA reports, or weather developments, always going back to the basic question of "at this price today, do I want to be long, short. or neutral?? Right now, we are neutral at $7 corn for next year, but that may change, so the flexibility is there to change course if the incentive is there. Switching bean acres to corn last May 14 was a great example as the switch netted over $300 per acre, but only because the corn was sold at the same time! We will talk about this often and in future meetings but the message is simply to overcome the fear of higher prices. Hopefully we will be able to discuss this with you often this winter!

 

In conclusion, there are many items we can spend a lot of time talking about, but the bottom line is we are all busy, so will keep it very simple. IF you feel the need to get some coverage on protecting the downside risk, don't hesitate to call. We can get lots of days like Friday, both ways, and hindsight will not do much good. Being profitable is our number one priority, and prices right now make us profitable both this year and next. We feel being comfortable with a sound yet flexible plan is the best option in terms of both being happy with the price and sleeping well at night. Have a great and safe harvest and stay in with yields! It helps us help you with a broad base to get a feel on whether this years crops are likely better or worse than last month's reports.

 

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
October 12th: Monthly Supply/Demand and Crop Production Reports
October 21st: October Options Expire
October 21st: Cattle on Feed

 

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