"Depressing January, But Maybe?..."

   The month of January was pretty depressing until the last two days of the month for corn and bean growers, as fund selling and a lack of significant export business combined to drive prices lower with very little resistance to the lower trend. USDA added to the negativity with the January Crop Production and Monthly Supply/Demand Reports which showed a big increase in corn yields, somewhat larger than expected bean yields and increased carry out numbers that were not expected. Prices sold off hard with the new numbers, and set the tone for more selling. Brief rallies were met with significant selliing as funds piled on, establishing short positions that approached all time record combined corn, beans and wheat positions. Why the push to sell more? The following are a few possibilities:

1) Weather in South America mixed but not dire: Brazil has losses but Argentina may more than make up the difference

2) Precipitation in the US has reduced drought areas significantly

3) Export sales have been "so-so" nothing to excite the bulls

4) China's economy and prospective demand is questionable

5) While good news on potential bio fuels has been in the news, nothing of real substance has developed.......yet

6) The "funds" may perceive that farmer selling may be "forced" into the market sooner than later, driving prices further

The last item above is a good one to debate. The folks we talk to all agree there is a LOT of unpriced unprotected corn on the farm. The question is when? Our feeling is that after a few years of good prices and exceptional yields combined with agressive bean sales at harvest, cash flow may not be a big problem.....yet. So who is right? You can probably tell us. What is basis doing in your area? Have prices gone low enough to attract demand and end user coverage? We know the risk of waiting too long to sell, as decent weather in SA and a good start to our planting season could spell some real doom and gloom, but what if....? How do we position ourselves to keep upside opportunities alive while reducing our risk of much lower prices? The following is an idea, not specific recomendation that we are using on our farm:

1) Buying short dated December, May expiration calls at strike prices of 4.80- 5.00 depending on your view of price potential and how much to invest

2) Sell old crop corn when basis is good, reducing storage costs/risks, interest costs, and supplying cash flow

3) Place orders for HTA contracts or futures contracts on new crop at prices above the strike price of the calls you bought at reasonable levels

4) Beans are very similar, using short dated May expiration of November beans at $12.50 strikes, for instance, and be ready to sell beans above that level

5) Once sales are established, we will monitor option values, fund positions, and weather developments to guide us in rolling options up, extending time or exercising potential

6) Plan is reducing price risk, staying flexible, and making sales at levels that shoud be profitable with upside potential

         We like ths plan for a number of reasons listed below:

 

     1) Selling cash grain at good basis levels is good, especially in big carry out years. If production goes well, or demand falters, waiting to sell could be costly. RISK

     2) Re-owning with options keeps upside open until April 26^th when short dated May options expire. We think by then a lot of cards will be on the table. While not as reactive as futures, the options give us a chance to do two things, re-own old crop and sell new crop against giving us a chance to establish a floor price that is profitable, but also maintains upside. Reduces margin risk, adds profit potential, and gives us a chance to capture carry later on.

     3) IF we rally above technical resistance levels, calls can be exercised and stops put in and rolled up depending on time left to expiration. Call us on this

     4) IF we sell off hard due to any black swans, cheaper calls can be bought later to cover more time in the growing season IF NEEDED

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 today, January 31 it settled at 18 5/8 cents. We will continue to hold that sale but if it goes below a dime will consider cashing in ahead of the start of the growing season, or new developments in South America

In conclusion, the month of January was not much fun for work days, but we have learned over the years that good time come and go, but looking forward is important. We can kick ourselves for not selling more at better prices but that will not help us take the next step forward. A fumble in football is one thing, but letting one fumble ruin the next play or the whole game is much worse. A proactive plan is needed to be ready this year to take action. A carry market only gives benefit to those who have grain sold either by HTA's or futures. How to use it to your advantage is an individual thing and we want to help if we can, so call or arrange a visit to go over the thought process. Our goal is to reduce risk while remaining profitable and we feel the ideas expressed above adress that, but should be talked out and understood with risk explained. We like the time frame of action by April 26th, as we feel that covers a lot of "risky times". Consider we will see almost 3 months of SA weather, 3 monthly SupplyDemand Reports, and the big ones of Prospective Plantings and Quarterly Grain Stocks on March 28th. Thats a lot of numbers and possibilities with great risk for both producers and end users not to mention the funds and their big short positions. Yes, we could see all bearish numbers and have a "3" in front of the corn price, or we could see 5+ if more goes well. Bottom line is risk and your tolerance of it. Get in touch for more detail and lets hope February is better for the producers, and remember Spring price for crop insurance starts today!