Clear Focus Hedging News and Views
March 1, 2023

 

"Big Sell Off-Any Hope Now?"

The last half of February has not been kind to market bulls, with prices falling sharply the past 4 trading sessions. Call it fund liquidation, South American producer selling, falling fertilizer prices or whatever you want to choose, it always seems like prices fall much faster than they go up. Some level of concern to bordering on panic is setting in some producers minds as the free fall continues. We have been concerned for quite a while that the inverted markets combined with scant export sales in corn could lead to a big sell off, and after looking for it for many weeks, it finally came to be. First notice day deliveries on March contracts were given the blame for Tuesday's weakness, but we also feel that South American selling is coming in bigger as well, with May beans the biggest loser on the board. Our contacts in Brazil have indicated for a while they felt that producers were undersold, and could "catch up" at any time. For the first time in years they are reporting a negative basis, as commercials, processors and exporters know there is a big crop out there, and will need to be moved at some time. We were very concerned when last weekends forecast was warmer and drier in Argentina, with crop production estimates falling, and the market brushed it off and moved lower anyway. The old trading addage is "if bullish news cannot rally the market, beware", could not have been more appropriate. The question is, when will the selling be over, and when will the end users start buying? Here are some possibilities:

1) When funds liquidate enough positions, and margin calls are made. Weak longs are out of the market

2) When spread trades are washed out, ie long beans and corn, short wheat spreads

3) When end users step up and increase ownership- bean processors are very profitable with some estimates are near $3/bushel

4) When export sales pick up- corn prices are probably competitive now in the export market

5) If the war in Ukraine escalates, and the "safe grain corridor" agreement is not renewed

6) If weather patterns threaten harvest in South America, or planting in North America

 

While corn exports continue to lag well behind USDA projections, and carryout levels may grow in the next S/D Report on March 8th, we are still dealing with a relatively tight ending stocks number, and any late winter storms that threaten timely planting could easily spark a rally. As producers, we ask ourselves "what price will make us happy?" and end users must do the same in reverse. How low is low enough before you lock in some type of return on your process, feeding, grinding for ethanol, or industrial use? That is how price discovery works, but throw in the spec money, and that is what the biggest driver continues to be, money flow. We won't belabor the point made many times, but when money flows in, it is pricing opportunities for producers, and when it flows out, opportunity for the end user. We will be watching closely for any sign that might indicate a change in attitude, and especially when a new month comes around, as sometimes a new month corresponds with new money flow in, or possibly wait for a new quarter on April 1. With the CFTC reports delayed because of a security issue, it has been difficult to track fund positions, and may have added to the volatility as well. Hopefully we will get caught up on these soon. Going forward, we will be looking at the March 8 S/D Report which will give us updates on South American production as well as world numbers, and certainly the "Big One" on March 31 where we get Quarterly Grain Stocks and Prospective Plantings numbers. Being positioned properly in regard to risk management has been very important in years past, and this year should be no exception. There will be many "guesses" going in, with likely wide ranges so someone will likely be surprised. Some items we will be watching closely:

 

1) Quarterly Stocks: higher or lower, feed use and export potential weighing in from S/D numbers

2) Weather impacts on SA harvest, and planting prospects here

3) Planted acre prospects- What is the acre mix projected? Will some wheat acres be abandoned and if so, what if anything will be seeded?

4) World prices: will Russia/Ukraine war impact this years production estimates?

5) Will we be in a recession by then? What will be the impact on commodities?
6) Will tensions with China affect trade with them?

The bottom line is as always, going into any risk area like a report or major weather season like planting, asking yourself "at this price, do I want to be long. short. or neutral." We would all like to see $7 corn and $15 beans again for new crop but right now, that looks unlikely, but we could. Anything is possible, and the past few years have proven that. Unfortunately, history suggests that we usually have a few years of lower prices after big price gains, and we certainly could be heading that direction until something changes. What to do? We suggest going back to the spread sheet and determine costs, reasonable yield goals, and come up with a price you can live with. With that in mind, lets look at some things we can do to prepare.If you have sold significant bushels already, buying some short dated calls in the near future may be something to look at. We like the short dated May expiration at this time, as they are relatively cheap, and we feel realistically, if we are going to get a significant rally, it will likely come by the end of April. If any of the above mentioned reports are bullish, or if weather is threatening either here or in SA, or if exports pick up sharply, it will likely be well known by then. In other words, we are only paying for the time value we think we need. For those who have more to sell, we call these "courage calls" or comfort calls, as by having them in your pocket, it is much easier to make sales or hedges when you already have the upside potential covered. If you are willing to "cap" the upside, selling full December calls can be a tool to reduce costs of them, but margin issues after expiration can be a factor, so make sure we visit on this to explain the risk completely.

Here are some examples of short dated call prices after the close on 2/28/23:

 

Short dated December calls:
May ex. $5.80- 11 cents $6.00- 5 3/8 cents
July ex. $5.80- 22 ¼ cents $6.00- 16 ½ cents Full December $7 calls are 9 ½ cents

So, if you want to "re own" some sold bushels, or want to be able to sell with some comfort, or without the fear of "missing a rally" if and when we do rally back to a price that makes you happy with your balance sheet, it will make it easier to pull the trigger. We know from personal experience how hard it is to sell a rally, so to discipline ourselves, have come to use these tools often. Is it time now? We obviously don't know, but when the liquidation and selling slows down, it may well be. The same ideas can be used for beans, the courage calls are just another tool in the tool box of marketing. We strongly advise to make sure you understand all the aspects of using these, as time value decay and margin risk when selling options should not come as a surprise down the road. We want to be prepared for anything that may threaten our bottom line, so will be happy to talk it over, but these days go by quickly!

In conclusion, it has been a rough week or so, but actually we have been looking for a sell off for quite a while as outlined above. All big moves in the market offer opportunity for someone, and if this move lower is temporary, getting positioned for the next move may be a good idea. We know the Brazil crop is huge, Argentina is still struggling and it may get worse. No one can put all the puzzle pieces together to know or predict the next days price moves let alone the weather a month from now. What we can do is lock in profitable prices when offered, and use the "tools" to keep upside potential open if we so choose. Get in touch soon if you would like to talk some ideas over, or call us with some ideas for a zoom meeting which we can set up quickly and easily so you never have to leave your office. Look at the website for recorded zoom meetings after every newsletter issue and following every USDA report, as Peter has set these up in case you can't attend when it is live, and again, if one on any topic would be useful to you, let us know. Bring on the Spring!

 

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
March 8th: Monthly Supply/Demand and Crop Production Reports
March 24th: April Options Expire
March 17th: Cattle on Feed
March 31st: QUARTERLY GRAIN STOCKS REPORT PROSPECTIVE PLANTINGS

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