Clear Focus Hedging News and Views

September 1, 2024

 

“Early Lows This Year?”

 

After a very depressing month of August in terms of price for the producer, we finally saw a bounce last week and hopefully we can extend it as we start September. The reasons for optimism include:

 

 

  1. Pre first notice day rolls or sales on September contracts should be over with
  2. Recent warm and dry weather in some areas may have trimmed yields a bit
  3. There are still big differences between USDA and South American production estimates on the crop just harvested in South America
  4. Argentina is projecting 17% less corn area this year due to concern over the leaf hopper spread disease pressure experienced last year
  5. Export sales have picked up, beans still way behind normal but daily sales are encouraging
  6. There are weather issues to be concerned with, Brazil is dry and needing rain in the north to start planting this year's crop

 

 

There are also issues like managed money positions, which are still big shorts, but they have been covering some of them as producers sold. If we can get a weather concern short covering rally, it may be a good time to get some downside protection. The upcoming September 12th USDA Supply/Demand Report will feature actual field sampling and measurement as opposed to the August report that was based on farmer surveys, crop conditions and satellite imagery. The following are what we will be watching for”

 

 

  1. Yields increase or decrease, any change to harvested acres?
  2. South American production totals: any changes?
  3. Carry out numbers for all three grains: any demand changes?
  4. Projections on world numbers given the problems in the Black Sea and Europe
  5. Bottom line carry out changes- what are the weather risks going into South America planting?

 

If the lows are in for the year, we should see some follow-through to the upside this week, but we remain cautious about the report on the 12th. We need to ask ourselves if we are comfortable with our position and coverage going into this report. Beans have rallied 50 cents off the recent lows, and with the reports of 17% less corn acres probably going to beans, we want to be mindful of that risk as we near the 12th. Getting some puts bought and possibly selling some March or May calls at prices you would be happy to sell cash beans at may be worth considering. For corn, owning puts on rallies and buying calls or futures on dips may also work out, and consider selling March or May calls to fund these puts may also work well. Make sure you are comfortable selling them at prices you WOULD be happy to sell cash grain at if and when it becomes available. Why do we like this? We like to sell the carry in the market without having to commit bushels to any one point. If grain needs to be moved at harvest, this can be a reasonable re ownership strategy as well. The caution is to be clear on the plan going in, and stick with it, manage risk, do not increase it. No one knows what will happen with weather wars or politics, but we should know what price makes a decent profit, and not taking it would not be our choice.

 

 

Old Crop Corn:

With September contract in delivery, we no longer will address old crop, if you need to move some, consider the re ownership ideas above or call with specific questions. There is still a wide difference between east and west in terms of basis, and with harvest starting to crank up, there will likely be even wider variations

 

Old Crop Soybeans:

Same as corn, we will now just focus on new crop, but if any old crop remains, moving them on the recent rally makes sense to us and re owning them using calls or a put protected futures position reduces risk and puts some $ in the cash flow

 

 

New Crop Corn:

We like the potential that corn has, but also recognize the risk of a bearish report on the 12th. We like having puts to protect downside, but also to buy futures against. In previous years when we had big crops and comfortable carry outs, we have developed trading ranges that offered chances to make 10-15 cents on rallies and breaks back to buy again. This would be “normal” as producers sell on rallies and end users buy breaks until market equilibrium is found, or new break outs either higher or lower happen. When you think about weather markets, South America now produces more corn and soybeans than we do, so their weather becomes as or more important to price discovery, even more reason for this strategy to work. Our comfort with this is that risk is limited, selling out of the money calls is capturing carry in the market, and we are NOT paying commercial storage, DP fees, dump fees or any other fee the commercials can come up with to take advantage of a tough situation. Compare the cost of this position to the costs listed above at your elevator and then call.

 

New Crop Soybeans:

With the 50-cent rally in beans, we are more interested in making some sales or getting some downside protection ahead of the report on the 12th. Depending on what USDA gives us for yields and production, there now looks like we have downside risk back to the lows if bearish. Again, we like owning puts and selling calls at prices we like for sales out into March and May, with owning futures if desired to “work the range”. Keeping risk managed to your comfort level while taking advantage of any rally opportunity is important, and generating cash flow, utilizing storage, or managing the lack of storage without giving half the price to the elevator is what we are emphasizing.

 

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, we hope the worst is behind us but can never be completely sure. This week’s price action will be important as we approach the next USDA report, and then on to the Big September 30th Quarterly Grain Stocks Report. End users have to ask themselves how long they wait locking in supplies, and producers have to decide if and what to store, how to generate cash, and manage downside risks. We like these challenges, as we DO have choices! We do not have to be at the mercy of any elevator if we don’t want to. The key is to have a plan, be reasonable, but know your costs and profit goals. From there we can find a way to capture carry, prevent storage charges and bring some comfort to the table. For this we plan on a meeting that will be recorded on September 11th. Seating will be limited, but if interested, call us as soon as possible or send a note via text or email. We are excited to be working with some excellent individuals in the lending and end user community to help us form some ideas that hopefully will be of use to you. Let us know if we can improve or add something that would be helpful, have a great harvest and always be safe!

 

 

 

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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

September 12th – Supply/Demand and Crop Production Reports

September 20th- Cattle on Feed at 2:00 CST

September 27th- October options expire.

September 30th- Quarterly Grain Stocks

 

 

Mike Daube (574) 586-3784

Allen Gard (573) 769-4193

Peter Schram (317) 910-1473