Clear Focus Hedging News and Views
October 1, 2023

 

"Full Speed Ahead"

Harvest has begun, and with today's weather forecast, it does look like full speed ahead this week. We cut some beans yesterday, and were pleasantly surprised. Dry land beans in the 70 bushel range and irrigated in the mid 80's were a little better than we thought given the last half August weather. While still early, Eastern belt yields seem to be better than expected generally speaking, while Western belt yields are a mixed bag. Corn harvest has been very slow so far, but this may also be an indication of better than expected results. Last month we outlined our concern for bean prices given fund position, South American supplies, and the propensity for producers to sell beans rather than store. We have also been watching basis, and beans, while in tighter overall supply than corn, have not seen the strong basis pops that we have seen in corn. That to us implied that nearby supply of beans was adequet to meet demand, but some areas were just flat out of corn, or at least unable to buy it at the board price, so were forced to bid up the basis to get what they needed. The past 2 years we had an inverted corn market, with nearby months trading at a premium to deferreds. Now we have a carry market, with the market willing to "pay you to store" by offering less nearby, but more later. The question we have to address is, "will it pay?" Let's look at some of the issues that go into a good decision when planning for marketing this crop:

1) With interest costs up significantly, the "cost" of storing beans is about 9 cents per month, and corn 3 cents just in interest

2) Depending on your storage capacity, which crop do you have the most "hope" for in terms of a rally?

3) What price hits your profit goal for each crop?

4) What are your cash flow needs, and what are your delivery options?

5) Is tax planning part of the decision to hold or sell?

6) Basis, Basis, Basis

We feel the last one is the most important when making a cash sale, as that is the one thing we cannot get back if we are forced to sell at a bad basis, and it has become a big issue when comparing bids over a large area. We have seen corn bids of $1.50 over the board recently, as ethanol plants ran short, and also corn bids of -45 in areas that have plenty. We urge all to watch bids closely and compare, or even put in some offers at what you consider a good basis, as with good domestic demand, and carry in the market, if producers hold off on sales we could see a decent pop in basis and or futures as well. Watch closely how nearby December trades relative to March, May and July. If the spreads narrow, it could indicate demand up front is exceeding available supplies, and conversely, if it widens, it likely means more supply is coming in than needed. The same logic applies to basis. We think basis could bounce back nicely considering the following:

 

1) Inverted markets the past year has discouraged holding of corn, many commercials are near emptly, waiting for harvest

2) With the carry to July of about 29 cents, every million bushel of storage space not used is a loss of $290,000 in opportunity. We think commercials will want to be full at the end of harvest

3) Domestic demand is solid, ethanol margins are very good crush margins for beans is as well

4) Producers have built more storage, and have more options than before, with bagging and piling being used more in some areas

5) Cash flow needs are probably not as great after the past two years of profitability overall, keeping selling pressure low
6) The longer supplies are held off the market, the more potential for basis to improve

All this being said, we have to recognize the possibility that this year's crop may exceed expectations, and we could easily be dealing with a 2 billion plus carryout in corn. To us, this calls for a solid action plan. While we remain optimistic about some better prices in corn, we fear that waiting too long may be costly. Yes, South America could have a major weather problem, the war in Ukraine could excalate and reduce competitive supplies, but that may not happen. What we do know for sure, is that passing up profitable opportunity really hurts if the market does not go our way later. We want to reduce risk, and insure profitability when we can. Knowing that selling into a rally is always hard, we have found (and learned the hard way) that we need to prepare our minds to sell at a price we are happy with, and construct a plan to get that done while keeping upside options open just in case. For this reason, we like the following for corn, and have done this ourselves:

 

1) Buy December $5 calls for 6-7 cents or better

2) Sell cash if good basis when you can, or sell December futures on a good rally. For now, we are targeting a gap on the chart in the $5.25 area, but will adjust as needed given market action

3) If sell target hits, you can either sell the calls and add the profit to the sale, or exercise the call if above that price, and use sell stops in futures to protect the profit and leave upside open

4) If you are short of storage, selling and reowning with cheap calls may be the least risky way to go, but basis is key. We can re own and participate in futures rally, but cannot do anything about basis

For beans, we suggested selling in the $14 area, and "hope" we can get back there someday. For now,we do not have a shortage of available beans, and with the Mississippi River levels low combined with the Panama Canal running slow due to low water levels, our chance of gaining on bean exports is weak. There is carry in the market, but you have to decide if it is enough to pay storage and interest costs. We like re owning sales in the July contract, and would buy July futures and nearby puts to lower the risk. We mentioned last month the spread of selling January and buying July at about a nickel premium to the July, and now that spread is about 25 cents, but still may have more to go if yields continue to exceed expectations. Added to the negatives was the Quarterly Grain Stocks Report last Friday where the USDA "found" 25 million bushels of beans, and also the funds being spec longs. While they have reduced that length, it is still possible that more selling is possible. Selling cash beans is again, all about basis, so if you can get a good one, call and go over some choices if you want to re-own. At this point we have more confidence in a short term corn rally than beans, but we all know how quickly that can change!

 

In conclusion, we want to emphasize that these are just ideas and suggestions, that specific plans need to be made on individual basis. Everyone has different needs and goals, and prescribing a one size fits all plan is silly. What is important to us is making sure our decisions are made based on profitability and reduced risk. If a trade or plan elevates risk beyond your comfort level, we advise against it. Buying futures or selling options may sound great and actually work well, but they cause sleepless nights or undue stress, walk away from them. If we can help your comfort level with other strategies, or better explain the risk and reward, that is what we do. Have a safe and bountiful harvest, and WATCH BASIS!

 

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
October 12 : Monthly Supply/Demand and Crop Production Report
October 27th: November Options Expire
October 20th : Cattle on Feed