Clear Focus Hedging News and Views
November 1, 2022
"Home Stretch"
With soybean harvest nearly done, and corn not far behind, we are now in the home stretch of bringing in the crops, and for the vast majority in the eastern corn belt, feeling very good about yields, especially corn. Exceptional quality and test weight seem to be the most often heard comments about this year’s corn crop. We are hearing this enough over a large area to make us wonder if we won't see USDA actually raise corn yield projections in the November 9th Supply/Demand Report, but this week that report seems a long way off. We have developments in the Black Sea Region with Russia suspending the safe grain corridor agreement and uncertainty with the election of Lula in Brazil (Bolsanoro is a conservative and has support from farmers and truckers)
As this is written, feed grains have settled back from the spike up in prices made Sunday night, but oilseeds are appearing to trend higher. We read that negotiations are still ongoing, but grain is still moving out of Ukraine at least by rail to the west. As we mentioned last month, sudden changes in conditions there will cause markets to react violently, both up and down depending. If you wanted $7 corn, you had about 3 seconds to get the order filled, as the high in December was $7. Unless something new develops, it looks like this level of price has serious resistance, and that number gives us some confidence in planning going forward. In the meantime, we are dealing with the following issues in price discovery:
- South American weather- Brazil in good shape, Argentina improving at least temporarily
- The US $ is still quite strong- after a big correction lower, is rallying back to the top end of the recent range
- Corn yields have been coming in much better than expected- will USDA find the same on November 8th?
- Low water levels on the Mississippi continue to hamper barge traffic, and a rail strike looks more likely later this month
- Export demand has been poor for wheat and corn, decent for beans but that may be short lived depending on South America
- Will grain continue to flow out of the Black Sea? Are we reaching a tipping point on this war?
While these items are good to talk about, the question is "do they give us any insight on when to sell?" When looking at a December corn chart, it is obvious that $7 is pretty strong resistance, and selling near that level makes sense to us. If you want to delay sales to March, 7.04-7.05 looks like the same resistance. Looking at deferred months, the market is telling us not to wait, as there is no carry to capture from storage. The only possible gain is basis, and that is even more suspect with the above mentioned river level and possible rail strike. Simple math: 200 bpa corn x $7= $1,400/acre gross. At this writing, you can own July futures for 3 cents less than you can sell December for and you can own December 23 for 65 cents less. With all the risk associated with Russia/Ukraine, we like selling December or March, either cash, HTA or futures, and either buying calls or deferred futures on a solid selloff, or if we take out overhead resistance at the aforementioned levels. This is what we referred to last month on having a plan and also a management strategy to get the most out of any opportunity. Options limit risk, but you can also reduce risk when using futures by using stop orders as well. Check in to compare the choices to see what might fit your comfort zone.
On soybeans, we broke through resistance at this writing, led by a rally in bean oil. We like using trailing sell stops starting at old resistance on the chart which now should be support, and ratcheting up those stops if we keep rallying, or putting a target price on them as well. If you have a "happy price" in mind, put the order in! Nothing gets filled unless the order is in, and if I had a nickel for every call I got that started with "I was going to call last night, but................." I could retire tomorrow. Keeping emotion out and good profits and business first almost always wins.
The term "happy price" simply means is there a price that makes you happy. For us it is a price that gives us a profit per acre that is too good to pass up. With harvest winding down we have a good idea of total production and what we are looking for in terms of that price. When there is no carry in the corn market to justify paying storage, deferring sales to March may be a good idea if basis is bad in your area. If basis is good and you are hesitant, keep in mind that basis is good only as long as someone wants it. Once demand is curtailed, then basis weakens. We don't know when or at what price that is, but there is a limit as to what end users will pay. We also need to remember funds are still long about 240k corn and 95k soybeans. Any negative news that is strong enough could spark heavy selling, and change the whole picture. The market will be watching South America weather closely, and if weather continues favorable, and the US $ stays strong, we could see export projects dropping and price go with it. Bottom line: complacency could be costly.
We are still holding our position on Dec/Dec spreads as outlined in previous issues, but if we do not get significant movement in the next 2-3 weeks, will rethink in terms of abandoning it or rolling short leg to March on unsold or unprotected bushels in storage. Overall, we think the market has plenty of $7 corn, but may not have enough $6 corn, so maybe being long December 23 is attractive to you? We continue to hear about dry soils and high input costs possibly cutting into corn acres next year, but in areas that had much better than expected corn yields verses beans, that may not be the case. We don't want to try to outguess the market or what may or not be planted, there is a lot of weather and price action between now and next year’s planting season to change a lot of ideas! We still like the following ideas if you want to sell or protect more bushels:
- Buy December puts
- Buy December corn puts and sell March $7.50 corn calls, Buy January bean puts and sell March $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. The following paragraph is repeated from last month, we still want to emphasize this idea, overcoming fear of high prices with sound management plans:
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 always 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, we have been very blessed this year with good crops and beautiful harvest weather so far, and should be able to wrap it up in a week or so. We approach Thanksgiving this year with much gratitude for good crops and good prices that will really help in this inflationary environment. History has taught us to capitalize on opportunities like this, and make plans for what inevitably will follow at some point. Can you imagine trying to balance these costs with $4 corn and $9 beans? It could happen. We do not want to sound the doom and gloom alarm, but remembering the '80s and all the pain of high costs and interest rates, we do not want to be complacent with management of our risk, and pretend that prices can never fall back to these levels. Remember February of 2020? Covid shut down the county and most of the world. Again, not to sound any alarms, but remembering what could happen is important. History is real, and if we don't remember, and learn from it, we will probably repeat it. Don't forget to vote, and speak out loudly with your ballot, it is your best opportunity to do so. Also, when doing so, thank a veteran for their service that makes it possible! It is always a good time to remember them and give thanks for all we have received, and thank you for working with us!
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
November 8th: Monthly Supply/Demand and Crop Production Reports
November 18th: Cattle on Feed
November 25th: December options expire
Mike Daube: 574-586-3784
Allen Gard: 573-221-9234
Peter Schram 317-910-1473