Clear Focus Hedging News and Views
September 1, 2023

 

"Preparing A Plan For Harvest"

We often mention the importance of a plan, even if it needs tweeks and changes along the marketing year. We talk flexability, risk management, and most important of all, profitability. We like taking advantage of big moves up in market price to lock in profits, but always have a management plan to deal with margin issues or the unexpected developments. Now we are faced with some of the lowest harvest prices in corn in recent years, while soybeans prices have managed to stay near the $14 area for quite some time. This month we will start with the beans, as in our mind, they carry the most downside risk. Yes, we know the latest balance sheet has beans in the tightest situation, and yes, the recent warm and dry forecast to finish the crop year is concerning in regard to yields, but the past week has been troublesome to us in terms of price action beging last Sunday night and Monday morning. With a threatening forecast and concern over potential drop in crop conditions, markets sharply higher in the night session, only to find the day session Monday unable to take out the overnight high by the close. We have often observed that big moves either way on Sunday night have failed to follow through the next day, and this was no exception. "Bulls need to be fed every day" and "when bullish news cannot rally a market, sell it" are two often quoted market adages. Combine that with the following and you will see why we are concerned:

1) Bean prices are significantly better than corn, and implies more farmer selling of beans than corn during harvest

2) Funds are long beans and short corn and wheat......maybe some spread unwinding down the road?

3) With current price ratios where they are, don't expect South American producers to cut bean acres in favor of corn, likely just the opposite

4) Argentina farmers are sitting on a reported 9-10 million metric tons of beans from the last harvest, and the Government is trying to get them to sell with a currency adjustment

5) Given the recent basis pattern, there is no shortage of beans, and harvest has begun in the delta. It looks like harvest will be earlier than normal across the country.

6) The "tight" balance sheet is based on demand assumptions, which may not hold up given China economic numbers, and their efforts to steer countries away from the US $

So what are we doing on our farm? Per previous issues we have advocated selling November beans in the $14 area, and have done so, recently adding cash sales at that level, and holding hedges in place with protective stops. We will consider a long position in the summer months, as if there is a weather problem in South America, the shortage will most likely be felt in July futures. There is no shortage of beans now, and while new crop export sales have picked up recently, they still are not reflective of the kind of demand we are used to, mainly due to the record Brazilian crop. We like the idea of putting the cash in the bank, and lowering our risk level by using a protected futures position, like owning nearby puts and buying July futures, or just some calls or call spreads in you are not inclined to use futures. We would not be buying futures at this level, but would like to see more of a break back to the $13 area or less to enter that, but owning puts may work out if we are in fact in a sell off mode. Check in often to see if we are on the right track, as conditions change quickly, and we do not want to add to our risk level, but selling $14 beans with a plan to re own them if warrented makes sense to us. You could also consider selling November beans, and buying July as a spread. This is not really a hedge, as you will not gain penny for penny on the down move if it happens, but may be a way to participate while lowering risk of a one sided futures position. The spread can also be used as a re ownership position with less risk than outright futures. Make sure you understand the idea, as it is part of the Moore Research information for seasonal September trades, and has a detailed track record

Corn on the other hand is not nearly as good a sale, and we have no intention of selling "down here", as long as the $4.73 low holds in December futures. We are looking at a gap in the chart in the $5.25 area, and feel that is a decent possibility. Here are some reasons we are more friendly:

 

1) Funds are short around 100k contracts of corn according to CFTC and daily bean counters

2) Finishing weather may be reducing test weight and yield more than anticipated

3) Less yield means less storage needed, less forced selling

4) HIstorically, it is not uncommon to see corn futures rally some as we approach crop insurance price discovery in October

5) South American weather will be very important, and a shift to El Nino is typically not kind to Northern Brazil, if first crop beans don't get planted timely, it means more risk to Safrinha corn crop which is about ¾ of their production
6) Wheat prices have been under great pressure, dragging corn with it to some extent. A short covering rally may get us to the level of the chart gap

For those who need to move some corn at harvest, and believe we can rally up to the gap, consider owning $5 or $5.10 November or December calls depending on how much time you want and how much you want ot spend, and be ready to sell the cash if the desired level is reached. With the call option, if the rally does happen, you have the choice of selling the call and adding the value to the sale price, or exercising the option and owning the futures at the strike price you selected. If so, protective sell stops can be put in place to protect the value of what you sold. If the market does nothing or sell off, then the premium paid for the call is lost. We like that risk as with prices under $5, crop insurance prices now are likely to kick in, so being long calls is a way to offset insurance indemnity losses by rising prices.Make sure you call us and your insurance agent to be sure of what your coverage is and how much potential payment is involved, and if it is worth the premium for the option. It is not a sure thing, but if farmers hold grain off the market, eventually basis and possibly futures rally to encourage grain movement. This is regional in nature, and for those folks that depend on barge traffic on the Mississippi, it may be tougher than usual unless we get some decent rain to raise river levels, so keep that in mind when you call or stop in.

Looking ahead, with input costs looking a lot cheaper, we may want to consider looking at 2024 prices, especially beans for some risk reducing sales or option coverage. $13.50 or better may look good if our crop comes in near 51 bpa or better, and South America pushes more acres into production. Again, locking in prices can be done with HTA contracts, futures or option, and a plan to manage each is avaiable. We only offer ideas and some opinions on what we are doing, but these are just that, ideas. We would prefer to go over each in person and make sure the position is a good fit for your opperation. Your idividual profit goals should guide us to the right plan, and how to manage it. We can't go back and get a "do over" but we can learn from experiance and the past year has certainly done a good job of providing it. Those who sold September corn 2023 futures at a big inverse to the December now have the chance to roll out that hedge to March for 33-34 cents CARRY. Add those numbers together and you are talking significant profit! It is time to roll out of September, and if you have storage can gain the 33 or so cents by storing until then. Now the market is paying you to store, when all of last year we had an inverted market, with the front month higher than the following ones. Keep these ideas in mind if opportunity comes again!

There are 2 major reports this month, the Monthly Supply/Demand Report on September 12th, and the Quarterly Grain Stocks Report on September 30th. On the 12th, we get an update on yields from USDA that will use actual field samples. There will likely be a wide range of opinions given the recent weather, so be prepared for some surprises. The bottom line will be carry out for all grains, so while yields will be important, demand will be also. On the 30th, the Stocks reports always seem to find a curveball somewhere, so being set up with your plan is very important. We have seen wide price swings on report days, so having options in place and orders in can make success very possible, while if no plan is in place and no orders are in, well, nothing is going to happen.............

In conclusion, preparing for harvest is a great time of year, with anticipation of good yields and long hours providing a conclusion to the years efforts. Make part of the preparation addressing a plan to sell or store each crop and set some goals to get something done. Hopefully the plan involves lowering risk, and we can provide some good ideas on how to do so. There are still many moving parts to the price discovery puzzel, which we have not addressed above, but we feel it is more important now to focus on the big picture, what we realistically think prices could do, and how we want to handle those possibilities. If we are wrong on price direction overall, we want the "pain" to be offset in other areas, for instance if prices go above our expectation, then maybe we should be looking at next years offers. There is always opportunity to do something, but preparing for the choices in advance is key. Have a safe and enjoyable holiday weekend, and God Bless the labor that takes care of so many!

 

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
September12 : Monthly Supply/Demand and Crop Production Report
September 22 : October Options Expire
September 22 : Cattle on Feed
September 30th: QUARTERLY GRAIN STOCKS REPORT

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