Clear Focus Hedging News and Views
November 1, 2023

 

"West Winding Down, East Still Struggling"

Harvest progress has gone very well from Illinois west, but here in Indiana along with our friends from Ohio, progress is slow. A combination of better than expected corn yields and much above normal moisture levels in the grain have prevented a quick end. Combine that with many days of light rain and you can still find many acres of soybeans still in the field. As this is written Halloween evening, there is a fresh inch or two of snow on the ground here in Northern Indiana. Overall the US is ahead of normal, but there may be Thanksgiving dinners in the field here this year. You don't here too much complaining however, as corn yields have come much better than expected so far with only a few exceptions, so taking longer to get it out of the field will not be a good thing to deal with. Bean yields started coming in with the same idea, but the later planted, fuller season varieties just didn't hold up, most likely the victum of the late August/early September weather. We have received many calls about what to do with the "extra" or "unexpected" bushels. We offer the following thoughts:

1) To us, basis is key. We will sell cash at good basis and re own if we think there is opportunity without adding a lot of risk

2) Basis is very volatile this year, many "hot" bids have surfaced, check them daily! We had a 0 basis for about a week here, then it was back to -40

3) What does it cost to store and what do you expect the market to do the next 60 days?

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

5) With interest costs now significantly higher, does storing make enough to cover those costs as well?

6) Taxes and prepaid inputs can be important considerations as well. How do these items fit into taking income now or deferring?

We like the idea of selling a good basis and re owning but choosing what strategy becomes the question. When will we get a rally that makes calls worth the investment? Great question we do not have the answer to. We know from talking to our commercial contacts that we came into harvest very undersold verses normal, so there is plenty of corn to sell. Beans on the other hand were pretty normal for early sales, with the $14 area well taken advantage of by many producers, which is probably why basis stayed fairly calm even with a tighter balence sheet than corn, enough beans were sold pre harvest so commercials and processors could be patient. With corn, influenced by an inverted market all last year, many end users were just "getting by" and with the slow start to harvest combined with farmers tight holding, it has led to some of these "hot bids" in some locations. Ethanol profits are still very good, so demand in that sector remains solid, and that should continue, but when will the producer start moving grain in earest? This is what we need to consider in reonwership. Will you see a lot of movement after the new year in your area? When will producers need cash? Will South America weather threaten their crops and cause a fund driven sharp rally? If you are considering call options, think about those factors and remember that time value is most if not all the cost of an option unless it is in th money. Compare the cost of December-March options, look at the calendar for when South America is most likely needing rain or past the time, and then how much you want to risk and for how long. We use the following guidelines in out decisions, maybe these thoughts will help:

 

1) We only pay for the time value we think we need. My preference now is December or January, as even if they expire worthless, I can buy more deferreds than and likely not cost any more than I would have spent, and possibly didn't need

2) If going out farther, consider selling higher strike calls to lower costs. It does limit the upside, but maybe the odds of getting "up there" are pretty slim.

3) Owning puts and then buying futures works too, it limits risk, and gives the opportunity to "trade the range" if one materializes. Call us for details on this one!

4) Selling call options at levels you would be happy to sell at

The last one involves risk, and potentially a margin call. If this is totally adverse to your thinking, we understand, but on our farm we have done so, and will highlight both the trade, and the management plan, and what we expect to happen. Each month's newsletter will contain an update on the position, and how we are handling it. Hopefully it will help in understanding the concept even if you don't want to do it, but at least give you some choices in your marketing plan.
On Monday, 10/30 I sold a November 2024 $14 call option for 44 cents.
My thinking is that for all of 2022 we had few days above $14, and that price makes me a nice profit. I hope to be able to sell next years beans above $13, so going to 14 would be great! Remembering how bad Argentina's crop was last year, even if Brazil falters some this year, Argentina may make up for that and more. But, if we do start rallying due to any major change in attitude, I can alway buy front month calls or futures to offset the short call. If we do not find a good rally, I will add the 44 cents to my sale price, and hopefully get a net price that is profitable. Again, this is just an example, designed to watch and learn from, as we look forward to bigger carryouts in grains no the horizon, using tools like this can make a big difference. STAY TUNED!

We will get another USDA Supply/Demand and Crop Production Report next Thursday, November 9th, with an update on yields and carry out projections. While we don't normally see much change from the October report, anything is possible. We would not be surprised to see higher corn yields in Indiana, Illinois and Ohio, but also not surprised to see declines in Iowa, Minnesota, and Wisconsin. If we had to guess, overall yields won't change much, it will be USDA's ideas on demand that may be a bigger influence. With harvest progress overall not a problem, we will need to see some surprises either here or abroad to make a big change, but it is always possible! Make sure you have orders in or at least tell us what you are looking for so we can contact you if it happens!

We also have our targets for old and new crop that we will use to sell if and when we get there, and if we can get back to $5.25 on December 23, (chart gap) or if we get a hot basis bid, we will sell and buy $4.80 or $4.90 December call options, or $4.90 or $5 January calls.

For New crop corn, we like $5.40-$5.50 to do HTA's, or futures sales

Old beans, we like $13.25-13.50 January and for new beans $13-13.50

Again, let basis be your guide, and call us for re ownership strategy if you want one. For our farm, we will be looking at owning July Futures, and selling the $14 November call for the above reasons. If we do rally, July should lead later on, and the call won't move against us in relation to July gain. We would be happy to sell our beans at that level, and as a producer, what is a reasonable price that makes you happy? It is just a plan, but its a start. We can always modify the plan as conditions warrant, but it leads to a profit goal, and we all need one!

In conclusion, we hope you had a great harvest if you are done, and if not, as we are not, we hope for better weather and better conditions. Good yields are a blessing, and keeping safe and sane in trying times is one as well. There are many opportunities in marketing , but we don't have to hit them all. Just the ones that make us profitable and ready for next year. Have a Blessed Thanksgiving, and pray for all the conflicts in the world. We did not mention them this month. we can only talk about them without much idea on how they impact the markets. They do impact us on a personal level, and above all, we pray for leadership,and peace. Amen.

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
November 9th : Monthly Supply/Demand and Crop Production Report
November 17th: Cattle on Feed
November 24th : Last Trading Day Dec options

 

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