Clear Focus Hedging News and Views

January 2, 2024

 

 

 "A New Begining"

 

   As we start a new year, the outlook is much different than a year ago with prices and overall outlook less optimistic. Yes, input prices for fertilizer and chemicals are lower, but with a corn carry out almost double last year and so so demand prospects, the chance of selling $6 corn this year looks like a long shot. While export sales lately have picked up, a look at world prices would seem to say they should be even better. At last look we were 30 cents per bushel cheaper than our major competitors, and the US $ has been under pressure. We were hoping the commodity funds would take some profits on a faily big short position before year end, but that didn't happen leading to a very disappointing close last Friday. Is there some hope? January 12^th will be a big day in terms of potential price movement, as we will get  a buch of numbers from USDA incuding final yields from the 2023 crop, the Quarterly Grain Stocks Report, and monthly Supply/Demand which will update South American crop outlooks and a look at projected demand. Here is a list of what we are watching closely in terms of numbers:

 

1) Will final corn yields be increased? If so, how much? Bean yields steady or lower? Any acreage changes?

2) Weather in Brazil is less than ideal, some damage has been done, but how much? Will good prospects for Argentina make up the difference?

3)  Will corn export projections be increased? Soybeans decreased?

4)  Final carry out numbers- higher, lower, or about the same?

5)  What does USDA see for average farm prices? Higher or lower?

6)  Market reaction- Have we already priced in a bearish report?

 

As producers, especially in the Eastern Corn Belt, we have a lot of corn to sell as we probably went into harvest with one of the lowest percentages of sales made in many years, as less than ideal weather kept rally potential in mind and the recent memory of $6 plus corn sales the last two years kept the finger off the sales trigger. Combine that with the better than expected yields and we have not only low futures prices, but rather ugly basis levels as well. After dealing with inverted markets the last few years, we now have a carry market with July futures over 20 cents better than March. Beans on the other hand have very small carrys, and with current interest rates, probably not enough carry to cover interest costs. How do we plan to maximize our income given these issues?

1) Where is your risk the greatest? Price, basis, grain quality, or logistics? Will deferred prices hold up or sell off to the levels of the front months?

2) Cash flow needs- when do you need cash and how much? Interest costs are about 2- 3 cents per bushel per month for corn, and 8-9 cents for beans. These are costs just like elevator storage

3) Local basis- when and where can you get the best basis? We cannot re-own to recature basis, only futures, so good cash sales are basis dependent.

4) Winter weather has been very mild so far. Can a big snowstorm snarrel up delivery plans this month or next?

5) With better yields, what price will meet profit goals?

6) 2024 crops- where do we start selling? Do we have a plan?

          For short term downside protection, consider February options, they expire January 26th, but will get you through the reports Call for quotes.

As for reownership, calls or call spreads using March $4.70 and Dec 6.00 calls make sense to us, as well as buying $13 March bean calls and selling $14 November bean calls to pay for them also makes sense if you want to stay long after making cash sales. If the new crop call sales require margin money, then prices are getting much better to make sales! We can also use futures spreads, like buying March and selling New crop, but we need to talk this one over to see if it fits your cash marketing plan. Call for a discussion of the pros and cons of each one, but below is some of our thoughts repeated from last month, but still appy:

 

     1) We like the odds of March corn getting back over $5 and with the $4.70 call would be willing sellers of cash on a good basis at that level. We can exercise that call if we really get a good rally, and we would LOVE to sell next year's corn at $6!

     2) For beans, we would easily be sellers of beans above those strike prices IF we had the call in our pocket or basis was extremely good, and we would LOVE to sell next years beans at $14

     3) Downside risk is limited, and a management plan will be in place in case of dramatic changes to the market landscape. We have ours written and would be happy to share it with you. Bottom line is we feel that any real rally will likely happen before the end of February when the March options expire, but if not, we will use May or July calls to offset. Again, reducing risk of holding cash grain too long to the cost of an option spread targeting a good 2024 price is attractive to us.

     4) Beware of "gimmick" contracts from some commercials that offer a premium now but may require a "double up" later. You can do the same thing by selling options and know what your risk is. Too many have been the victum of not understanding the potential consequences. Call us if any offer seems "too good to be true"

 

If you remember on October 31, I sold a November 2024 $14 bean call for 44 cents, and promised to track the price each month to illustrate what the price action did so you could follow it and see if was something that would be of interest. At the close December 29th, that call closed at 27 5/8 cents. On October 31, November 24 beans were trading around 12.65, and today closed at 12.46. So far the option has lost about 17cents in value in two months time. At any time we can "cash in" and add that to our sales price, but at this time I have no plan to do so. It will take quite a rally to change my mind, and I have lots of beans to sell if we do. Stay tuned!

 

 

In conclusion, we approach this year much differently than a year ago, as conditions have changed. Hopefully we can find some bullish sparks to get us to our sales targets, but we will be more defensive than before, preferring to make sales sooner on rallies and using carry in the market to enhance the final price. Looking to January 12^th and beyond, we intend to lay off some price risk ahead of the big report day, as a bad one will leave us without much to drive a rally until March 31. Push the pencil and call to talk over some ideas to get some comfort ahead of time, it is just too big of a day to be comfortable no matter which side of the suppy/demand table you are on. A lot can change in a short period of time, but for now we are comfortable being more defensive than offensive in terms of price expectation. Best wishes for the New Year, and hopefully a rally to come soon!