Clear Focus Hedging News and Views
January 3rd 2023
 

 

 "Price Discovery +Volatility"

 

Another year in the books, and after trade today, the first trading day of the new year, more volatility and sharp price moves are the story. Above expected rain events in Argentina, a sharply higher US dollar, and maybe some new sales in the new tax year are getting the blame for big price moves down in the grain and livestock markets. We have no reason to believe this will not be case in the days to come leading to one of the most important report days of the year, when on January 12th we get final crop production numbers for the 2022 crop, Quarterly Grain Stocks, Monthly Supply/Demand numbers, and final winter wheat seedings. A lot of important numbers that traders, producers, and end users will be preparing for in the next 6 trading days. Here are some of the ideas and questions floating around the market chatter as we hear it:

 

1)  Corn exports have been dismal, will USDA lower demand and raise carry out?

2)  Will final corn and bean production numbers go up, down, or stay the same?

3)  Did we plant more wheat than expected? If so, what condition is it in? 

4)  Quarterly Stocks report is always a big issue, as final production, feed and residual use, and feed use numbers all come into play

5)  Brazil crops look very good now, Argentina has dryness issues. How will USDA project each one and what will world numbers look like?

6)  Given above, how does USDA project our exports of all three going forward?

 

A lot of questions, but the bottom line is what does our projected carry out look like after all the math is done. We know that so far, corn and wheat export sales have been struggling, beans holding their own, but the clock is ticking as harvest has begun in Brazil, and barring too much rain, beans will be heading for the export market sooner than last year, and with the strength of the US $, we will not be competitive at this price within a month or two. One thing we have learned from our contacts in Brazil is while infrastructure has improved dramatically over the past 5 years, a crop of the size they are estimating now is going to have to move, they only have so much storage. If crop conditions are maintained throughout the Safrina (second crop corn) they will have to "sell something". That is probably the most bearish possibility, and there is still time for weather conditions to deteriorate, but we have to recognize potential selling as a possibility that limits our rally potential here. Argentina is well behind normal planting pace as excessive heat and dryness has lowered crop estimates dramatically from original thoughts, but IF the weather pattern changes, there is still time for some recovery, and with the weekend rains, planting should resume in some areas. These are the "sparks" that can cause sell offs, (and rallies) in the next few weeks, but our focus will be on getting ourselves positioned for the January 12th reports. Looking to that day, here are some questions we would be asking:

 

 

1) How much old crop grain do you have on hand? Are you comfortable with the risks going into the reports?

2)  What is local basis doing in your area? What are your cash bids now compared to deferred months? 

3)  Will the market pay you to keep grain in the bin? For how long?

4)  Fertilizer prices are coming down is some areas, does this change your planting intention ideas? 

5) Are new crop prices acceptable for your profit goals? What do you think the risks are of higher or lower prices? Do you have a "happy price"?
 
6) What do you think the upside potential or downside risk is in old and new crop grain?

 

On our farm, we have priced or hedged all old crop corn and beans, and have new crop covered as well as you have read in previous issues. We have outlined some "management plans" to defend those hedges in case something changes our outlook but for now, we are content and pleased with our profit goals. If you need some ideas, please call for specifics as everyone has a different level of risk tolerance and margin aversion, and we would like to explain the differences one on one. NO one has all the answers, but maybe some discussion and thought exchange will be helpful. Right now in corn, we have an inverted market with March trading at a premium to July, and in beans, a 7 cent carry from March to May. Is that enough to pay your storage and interest costs? When do you want some cash flow? We are repeating some of the ideas from last month as they are still valid for downside protection and re-ownership is desired. We like the idea of reducing risk now, especially ahead of the 12th. Maybe you are happy with the net income from these prices, then do nothing else, but if you want to sell cash but maintain some ownership with less risk, consider the following ideas:

 

  1. Buy March puts/ Sell March, May, or July calls at much higher strikes ( call for specific price quotes, these change rapidly)
  2. Sell cash or futures in January or March, buy a call spread, buying at the money March call and selling May or July $16 or $17 call. (selling time value to buy time value)
    For corn:
  3. Sell cash or futures and buy March calls, or call spreads, buying the March and selling the March or May at a strike price you would be happy to sell cash grain at. 
  4. Buy March puts, sell March or May calls at a strike that would be a sell target.

 

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. 
 
 
 

We want to emphasize again, many of these ideas involve management, and having a well thought out and clear objective for a profitable year is vital to a successful outcome. We like the flexibility that these ideas give, as we can change our minds as conditions warrant. For example, we switched 150 acres from beans to corn last May when prices simply gave us too much profit opportunity. Selling corn for $7.77 per bushel was easy, just lift a bean hedge and sell the cash hta contract and go to the field, but it took a few minutes to run numbers, call the seed dealer, and go to the field. Easy to do, but setting aside margin money and planning for the new risks involved had to be thought out. We like to help with these types of decisions, as it's what we do, and making others successful is a real joy of the work, but we do understand the fear of the unknown and hopefully we can use some experience to ease some of that concern. Sometimes a price is just too good not to take and run with, and other times we want some more flexibility and are willing to invest in some option protection instead. What you are comfortable with is the right answer, and hopefully we can make you more comfortable with these tools. No Till farming has come a long way since we started in 1980, and marketing tools have as well. Combine crop insurance with a good marketing plan and we have much more to work with than 40 years ago!

 

 

 

In conclusion, as we turn the calendar to a new year, we are looking at profitable prices. Not the high levels of last May, but certainly better than many years. Looking back can be a good thing if we can keep these prices in perspective, as looking at a multiyear chart shows just how many years we attain these price levels, and how many years we stay in depressed markets. Needless to say, $6.50 and higher corn is usually not around that long. Profits spur production, and Brazil is certainly responding to that incentive. While we do not want to be overly bearish, when looking at the funds being long in corn and beans, we always have to recognize that selling potential is there if they decide to liquidate, or worse, short the market. Ask around to see how much old crop grain is still on the farm, and how much new crop has been sold or hedged. Add up the South American production potential and come up with a downside risk potential to decide whether sales or hedges are warranted at these prices. Everyone has a different comfort level risk management, and we can certainly agree that maybe this early new crop corn should have some upside potential at least until planting intentions come out at the end of March, but there is no guarantee if the world goes into a major recession, fertilizer prices drop off, or anything else that would inspire more corn acres. (What if beans drop a dollar a bushel?) Again, not trying to be overly bearish, but rather trying to look at all the possibilities that can eat into our profits. May the new year be happy and prosperous for all, and above all safe and profitable!

 

 

 

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
January 12th: Monthly Supply/Demand, Final Crop Production Reports, Quarterly Grain Stocks, Winter Wheat Seedings
January 20th: Cattle on Feed
January 27th: February Options Expire
 
 
 
Mike Daube: 574-586-3784
Allen Gard: 573-221-9234
Peter Schram 317-910-1473