Clear Focus Hedging News and Views
August 1, 2024
“When The Going Gets Tough…”
There is no way to sugar coat the market price action, very depressing to say the least as new contract lows were recorded on the last day of July in corn, with December closing below $4 and beans holding just above $10. It has been a long grind lower, with fund selling, farmer selling of old crop, and no real weather threats to spark a short covering rally of any substance. There seems to be no end to the selling, with market talk of corn yields over trend, (181), and beans above as well. We were hoping that the 4.03 low in December corn would hold, as it did for 2 ½ weeks, but it gave way yesterday. When all hope seems lost, is there at least a glimmer of light on the horizon? What do we do with old crop left in the bin with a big harvest coming? How can we show a profit this year even with good to excellent yield prospects? While we cannot give specific answers in a general way we can say this:
- A lot of bearish news is already priced in the market in our opinion
- Many areas in the western corn belt have good basis levels compared to average
- The US $ is weakening, there is talk of a rate cut in interest rates in September
- Domestic demand for corn and beans is very good, ethanol production hit an all time record this past week
- Our grain is now as cheap or cheaper than anyone else
- There are weather issues in Europe, the Black Sea, and China. Exports could increase (and they need to)
These may sound bullish, we do not intend to diminish the reality of what price action is doing, we only want to point out that there is another side of the story. The trend is down, and until that changes, we expect more negative news. However, when the market rallies, and it will someday, then watch the news then. It will focus on the positive side, and probably point to some of the above list. That doesn’t solve today’s problems, so we won’t dwell on this, but we do have to wonder if end users and importing nations are looking at managing THEIR risk of prices going up by locking in supplies soon? Compared to a year ago, these prices look like a bargain. Everyone wonders when it will turn, I guess unless weather becomes a factor, then August 12th is the next Supply/Demand Report and we will be watching the following:
- Yields increase? Harvested acres decrease?
- South American production totals
- Carry out numbers for all three grains
- Any changes to Chinese, Russian, and Ukraine numbers?
The funds are holding a very large short position, possibly another record when the CFTC report comes out Friday. We have no idea when they will come out of those, it could be a long time unless supply is threatened, but profit taking can come at any time. So to try to address the many questions, we want to try to construct a plan to be ready if and when it does. We cannot undo what has happened, but we can look to the future and better price opportunities when they come. Given that interest rates are what they are today versus 2 or 3 years ago, our thinking must change concerning sales versus storage when it comes to cash sales. Does the cost of interest justify storing grain long term? Would I be better off selling sooner and maintaining ownership with calls, call spreads or futures protected with put options? We hope to provide some zoom meetings as well as in person visits to go over every choice available as it is an individual decision based on local basis, cash flow, and other items like tax planning. Look for those announcements in the next few weeks. For the near term, here are some general ideas, call for specifics.
Old Crop Corn:
Chart wise, we broke support this past week, and there are no magic numbers to look at for support. The grain that must be moved in your area depends on how much and how soon basis gets better or worse. If you sell, set up a plan to re- own and determine how much risk is acceptable so we can choose between the choices available. Demand is good, so when the selling dries up, again, in your area, we would hope the basis would improve. The downside is the probability that harvest will come early, and more grain may become available sooner in high yielding areas. Don’t underestimate the basis risk in places that have plenty of corn available, and a big early harvest coming. Commercial elevators are not benevolent businesses. They want to make money too and have the cards on their side of the table until supplies tighten. In these areas, we could get a rally in futures, and gain nothing if basis widens.
Old Crop Soybeans:
Basis in this area is quite strong, we are wondering where all the beans are here. We would be moving them in advance of harvest especially if yield prospects in your area look good. At some point end users will be able to wait for new crop to come in. Re-ownership is also a possibility especially if August weather is threatening, a lot can happen this month to change yield prospects, but basis opportunities now are real.
New Crop Corn:
With the break in price, we are reluctant to sell any more at these prices as we are very close to crop insurance guarantees if yields are average or below. If your area is subject to basis risk as noted above, it may be wise to sell bushels you can’t or don’t want to store and own futures or options. Having cash flow and a low-risk plan of owning the grain on paper may make good sense. Figure the cost of storage, interest, and logistics compared to the cost of options or protected futures. Again, these are general thoughts, we need to talk specifics individually.
New Crop Soybeans:
Like corn, we are reluctant to sell more at these levels, but if you need to move beans at harvest, start figuring the costs as noted, look at basis levels, and your cost of production to determine a price you can live with. If sales are made, we can look at the cost of options or protected futures to see if it makes sense to be long “on paper” for a specific period. Let’s look at all the choices you have available to see if anything works for your operation.
The following is repeated from last month’s article as the message remains the same:
Following up on our sale of the $14 bean calls that were sold for 44 cents on October 31, our order to buy them back at 4 cents was filled on June 21, netting us 42 ½ cents to add to our sales price. We want to illustrate this trade as an example of using tools to help generate a profit in tough price years. Why sell those calls? Why take the chance on a margin call? My answer is simple. If I get a margin call on those trades, I will be selling this year’s grain at a great price, period. I will also likely have decent prices for next year as well. In short, a small loss in this year’s hedge account means a much better overall profit margin! We feel that fear of margin calls and fear of missing out on higher prices are the two most important threats to a good marketing plan. We need to confront these fears head on if we are going to improve our overall marketing success. As we have noted many times, a good lender is vital to understanding this relationship and the risks, or reduction in risks associated with these trades. In simple terms, we need to look at the total effect of what these trades mean in the big picture, not one aspect of it. We plan on having a zoom meeting soon to explain this idea in detail. Stay tuned!
In conclusion, it is a tough time for ag producers, but for those of us in our 60’s we have seen many times like this, and worse. We will get through this, and learn from the experience. One of my good clients calls it the “cost of tuition”, and some of us have paid it multiple times. Producers are the most optimistic folks I know, as we seem to find a way to make things work, be it machinery, agronomy, or markets. We may have to lower our targets until supplies tighten, but there are highs and lows every year. Our goal is to be profitable and hope we can find a way to increase your bottom line as well. Have a great August!
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Dates to remember:
Every Monday – Export Inspections at 10:00 am CST
Every Thursday – Export Sales at 7:30 am CST
Every Friday – Commitment of Traders Report at 3:00 pm CST
August 12th – Supply/Demand and Crop Production Reports
August 23rdt- Cattle on Feed at 2:00 CST
August 23rd- September options expire.
Mike Daube (574) 586-3784
Allen Gard (573) 769-4193
Peter Schram (317) 910-1473