Clear Focus Hedging - CFG Newsletter 167

Clear Focus Hedging News and Views

June 1, 2023

"Tense Times"

It has not been much fun this week after the 3 day weekend after the nice rally last week. We have received many unhappy calls from folks that have gone without much rain the last 3 weeks, and the forecast for the next 10 days is not promising. It reminds us once again that "price discovery" is not based on weather alone. Some of the contributing factors to this weeks sell off have been:

A big selloff in crude oil, as economic concerns around the world have reared up, and OPEC is hinting at production INCREASES
the US $ has rallied
Brazilian crop size is big, safrinha corn is coming along well, and farmers are selling
Funds have been selling, and as of today are estimated to be short 132,000 contracts of wheat, 95,000 contracts of corn, and are now net short 12,000 contracts of beans
Planting progress and emergence are well ahead of average, just a few states behind normal

While all these factors are bearish, and the news has certainly focused on them, we remember that the news does not lead the market, just follows and tries to make sense of price moves. We have been in a technical free fall, and seemingly would never run out of sellers, but as with all rallys and sell offs, we eventually do. In fact, while stepping back and looking at the corn chart for December, it was not that long ago we put in the low of $4.90 1/2, and as of the close May 31, we are at $5.21 3/4, well off the high last week of $5.36, but still in the upper end of the most recent range. Beans and wheat have not been as resiliant, and news of wheat imports into the Southeast US from Europe has not helped, and the extension of the "safe grain corridor" in the Black Sea contributed to the piling on selling of wheat futures. Are we saying that there is no hope of any decent rally to give us some profitable selling oportunities? Not at all. There are some reasons to be optimistic:

Recent soil moisture maps have the corn belt topsoil rated at 42% short, the driest since 2012 for this date, and there is not much relief projected for at least the eastern half of the corn belt for at least 10 days
Funds are short, any extension of the heat and dryness could cause some quick short covering
As of May 25th, the Prevented Plant cutoff date in North Dakota, there was still more acres to plant. Will they keep trying or take PP?
Recent dryness and now heat are exactly what the soft red winter wheat crop does NOT need, consultants estimate we could take off 20 bpa if rain does not come soon
Domestic demand for corn for ethanol, and bean processors has been good, basis is still strong in those locations
While the fast start to planting and emergence led to ideas of maximum acres and record yields, given recent weather trends we may be looking at "normal year" at best, and all time record yields on maximum acres are not made in "normal years"

We still have to deal with old crop in some cases, and with the inverted market still in place, we would encourage those with old crop corn and beans to not wait too long, as we are already hearing of commercials moving their bids to September, and increasing basis enough to get what they need. If we go into a major drought situation, short bought commercials "could" have to scramble for supplies, but as we see it today, the risk of lower bids is getting more likely. Consider moving any remaining old crop if basis is good, there are ways of re owning with less risk. We all remember here what happened in April when commercials flipped their bids to the July option. It was not good for the producer, but the reality is commercials cannot pay more than they can sell for, and if the demand is not there at the higher price, they can't pay us for it. Call us for some lower risk re ownership planning. We offer some general ideas below, and remind those that sold September futures or wrote September HTA contracts, the market has now gone to a carry of 5 ½ cents to December. That move has netted us a nice gain, and while it may get larger, you may want to roll those out to December if grain will be moved at harvest, or maybe March if you have storage, picking up 15 cents carry as of this writing. 15 cents on 200 bushel corn is $30 per acre, added to the inverse gain already and you are talking real money!

Consider buying short dated August expiration 5.30 calls, and selling full December 6.00 calls for either re ownership, or "courage calls" to sell against if we rally. Net cost about 8 cents at this time
For beans, consider buying 12.20 short dated August expiration calls, and selling the full November 13.60 calls for around 5 cents cost
If you don't like having a "ceiling" we still like the short dated August expiration calls for both, it is just more up front cost, more risk but possibly more reward if we do rally
Different strike prices are available to match your expectations of price movement, these are ideas, not recomendations, so make sure we talk these over to consider all choices

The reasoning behind the short dated August options is simple: we will see two major reports this month, June 9^th is the monthly Supply/Demand Report, and also Crop Production, our first inseason look at what USDA thinks we will grow this year. On June 30th, we get the big one, Planted Acres as well as the Quarterly Grain Stocks report. Both of these can be major market movers! Because these options expire July 21st, we will also have a good idea about pollination weather as well as the July Supply/Demand Report and Crop production on July 12th. If we have not rallied by then, odds are we probable won't, so following our ideas on risk management, we only want to buy the time we need to see what we want to do. If the weather is adverse, we should have that factored in, and if weather improves or we go into recession world wide, then we cut our losses and go from there. The most important thing to remember if we invest in these calls or call spreads, is we need to have a plan to sell, and that is an individual decision based on costs and profit goals. What we do know from past experiance, is how hard it is to pull the trigger when we get into a weather rally, they usually don't last long, and the worst outcome is waiting too long and missing a good sale opportunity after investing in the calls. Make sure you tell us what you are looking for so we can give you a heads up if we get close and you are busy with other activities!

In conclusion, we know it has been depressing to see markets fall so hard so fast, but with stiff production competition from Brazil this year and grain able to move out of Ukraine, last year's excitement seems a long way off, and it is easy to forget to take advantage of every opportunity. One of them may be to look over your crop insurance protection, and if the price and yield combination means you have a payment coming, it is not advisable to sell, but rather consider some long exposure so as not to lose what the payment my amount to. If you have a large payment coming, and markets rally, what you gain on the crop will be lost on the payment. We are probably there on beans, and close on corn. Our thought is any way we can squeeze a dime out of the final price, be it basis, carry, insurance, storage or risk reduction of any kind, we want to go there. When you have a few minutes to go over the ideas, stop in or call. When profit margins get tight, any way we can enhance price becomes more important, and planning ahead can really help the peace of mind!