Clear Focus Hedging News and Views
February 1st 2023

 

"Old vs. New"

Last month we listed some questions going into the January 9th reports, which set the tone for price discovery:

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?

 

USDA DID raise corn yields, and DID cut export demand, but quite surprisingly CUT harvested acres 1.6 million, (unprecedented from the November report to January final) so the net effect was to cut production, and leave the market with a price friendly surprise as most were looking for a neutral to bearish number. Beans were also a friendly surprise, as yield was LOWERED as well as harvested acres cut when many were looking for a slight increase in yields. We could comment for many pages on our thoughts, but as always, these are the numbers we will trade until the next set we get on February 8th. Reaction by the market was typical of a market caught leaning bearish, as we were, and prices shot higher led by beans. Now the question is, have we gone far enough to encourage enough selling, or is there more upside to go? South American weather is now the main driver, and so far, the Brazilian bean crop is huge, looking somewhere in the 152-155 mmt range, and harvest has begun, running slightly behind average pace due to frequent rains. Argentina has been experiancing a major drought this year, but recent generous rains have at least stabilized production estimates, with some saying damage was too severe to recover from and others saying that due to the late planting, these rains should really help, and even raise estimates providing followup rains come through in the coming weeks. Here are the items we will be watching going into February 8th:

 

1) Will the weather allow for timely harvest of Brazil beans? Will the Safinha corn be planted in the optimum time frame?

2) Does Argentina get followup rains, or do they slide back to hot and dry?

3) How aggressive will selling be as their crops are harvested?

4) Will the inverted markets in the US prompt more farmer selling?

5) Crop insurance spring price calculations begin today. Are these levels conducive to more or less corn acres?
6) Fertilizer prices have come down, is it enough to inspire more corn acres?

We have received some calls concerning new crop corn and beans, folks looking for some downside protection as the "bullish" report on January 9th has not produced the strength in new crop as we would have hoped for. We off the following as some choices, not specific recommendations, to think about in terms of setting a floor price but also leaving upside open for a period of time that we feel will be very important in terms of rally potential. We are looking at $6.00 or $6.10 short dated May expiration call options that will keep upside open until April 21. We like that time frame, as it covers two monthly supply/demand reports, and the big one on March 31 for planting intentions, and we should know a lot about SA production and progress as well as the start of our planting season. Because we do not like to pay for option time value beyond what we need, we feel that any major rally potential is likely to be realized by the end of April. For those that have sold old crop, or will be doing so shortly, this is a way of "staying long" the market while offering hedge protection as well if we want to set a floor price. As always, we want to emphasize the importance of talking over this or any hedge idea to make sure you understand every aspect including margin risk, and the timing in terms of having a plan as we approch the end of April. Consider the following:

Sell September futures or via HTA contract
Buy a short dated May expiration $6.00 call
IF you would be content to sell your crop at $7.00, sell a full December $7.00 call
At this writing, September futures are $6.05, short dated calls are 15 cents, and 7.00 calls are 18 cents, so net after trade costs is approximately 6.05 floor
Initial margin for this trade is about $1,500, and if the market rallies, there will be margin required to offset the level of September futures. There will be gain on the short dated calls, but time value does decay so if and when the rally comes, gain will be dependent on how much time is left and what level December futures are. Therefor, we need to first have a price in mind we would be happy to sell cash grain for, and use the "paper strategy" accordingly. As we see it, a floor price in this environment with the upside open for the time frame that is likely most volatile is good business, and worth the funds to protect a profitable price. We are concerned that new crop prices have not kept pace with old crop, but as the old saying goes, "the market is always right" comes to mind. It does not matter what we think the market should do, but what it actually does matters most, and with the potential of massive Brazilian crops coming to market quickly, (they will have to sell a lot as there will be no place to store it all) the downside potential is there expecially if the funds liquidate a big chunk of their sizable long positions.
If you think we can rally further, simply own the short dated calls, and wait for a higher number to sell, but we like the September futures, as there is a 16 cent inverse to December, and historically this has disappeared by late summer. You can also use short dated May expiration put options, but that does not take advantage of the 16 cent inverse the September contract offers

We like selling new crop beans in the 13.80-14.00 range, as the market has not been able to close above that level in the recent past, and with Brazil poised to extend export sales well into the next year, we will face stiff competition longer than usual. This is what makes the next few weeks so important. IF Brazil is able to harvest timely, and sell agressively, there could be some real pressure on price. The flip side is if they are severly delayed by rain, and Argentina goes back to hot and dry, then maybe we hold onto gains longer. With funds long corn and beans, the potential is there to drop prices considerably, but if the money keeps flowing in to the buy side...

There are no easy answers, except for you and I to decide how much risk we are willing to take into the next few weeks, and what price makes our bottom line acceptable. If you want a floor in beans, consider a short dated put and sell a full November call at a price you would love to sell cash beans for to pay for some or all of the premium cost of the put. If we break back to support around 13.30, maybe then own a short dated call option to keep upside open. There are plenty of choices we can talk over, if you want to set floors and how you feel about rally potential from here forward.

 

In conclusion, the next few weeks will go a long way in determining our profitability in 2023. We have enjoyed great prices for the last few years, and would hope it continues, but the high prices encourage production, easily observed in Brazi this year, and we have to respect the possibility this trend will continue. With China now buying corn from Brazil, our export potential is likely lower unless the US $ weakens or they cannot keep the Chinese demand satisfied. Can ethanol demand increase enough? Will other importing nations come to us? Mexico has become out major trading partner in corn, but is balking at GMO corn now, threatening to ban it. Can they really do that and keep the demand satisfied? All questions to be answered down the road, but another concern for bulls. We need to keep all the noise in the background, and focus on prices that make us profitable, and hopefully we have some ideas that make sense. If you want to meet in person, call, as the next two months will fill up and we welcome the opportunity to share some thoughts.

 

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
February 8th: Monthly Supply/Demand
February 24th: Cattle on Feed
February 24th: March Options Expire

 

Mike Daube: 574-586-3784
Allen Gard: 573-221-9234
Peter Schram 317-910-1473
--
Allen Gard
Branch Office 419
Clear Focus Hedging
P.O. Box 347
5864 Hwy. 24 South
Palmyra, Mo. 63461
1-573-769-4193
www.cfgag.net
This message and its content is intended only for the person or entity to which it is addressed and
should not be shared with additional parties.
Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment.
Past performance is not indicative of future results. No one knows which way the market will move.