Clear Focus Hedging News and Views

October 1, 2024

 

“Rally to be Sold?”

 

While August was a depressing market for grains, September has been much better. We have now rallied over 40 cents off the low in corn and over $1 in beans. Do we reward it? Do we protect it and hope for more? What about basis? These are the questions we need to address. The Quarterly Stocks Report gave us a nice bounce in corn, with a number 80 million bushels less than the average guess, and prices responded with a new high for the move right at $4.25. Beans were neutral, at least not bearish, and rallied a little before selling off into the close. The next report will be on October 11 with Crop Production, and monthly Supply/Demand numbers released. It will be interesting to see where the 80 million bushels of corn went, as we look forward to demand and South American weather for major price discovery drivers. Some observations going into that report:

 

 

  1. Funds have covered a lot of their short positions, giving us a rally. What is next for them?
  2. Early yield reports have been variable, extremely good in the west, with Indiana and Ohio less consistent.
  3. South American weather for the start of planting has been far from ideal. A very warm and dry start in Mato Grosso. Will that pattern change soon?
  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 are catching up while corn has been decent.
  6. Basis in the west is still relatively strong for corn while the east struggles. Can it hold up to harvest pressure or will farmers find a way to keep it off the market?

 

 

While no one knows what the funds will do, we know that one thing that worked last year was rolling sales and capturing carry in the market. Without some major weather event in South America, we would expect more of the same, call it “if it’s working, don’t fix it”. September 30 is the end of the month and end of the quarter, so it will be interesting to see how we trade on October 1st to see if we get some follow-through buying or if producer selling takes over. It will also be the first day of establishment of the fall insurance price, so a pretty important day to follow.

 

The fact that this year’s crop is big is no secret, and early yields are supportive of that notion. Question is will USDA confirm that on October 11th? We will be monitoring yield reports daily to see if there is any reason to doubt it but as of now, we do not have any evidence that they are not reasonable. The big story now will be weather in South America, especially Brazil, as getting the bean crop planted timely is important in getting the Safrinha crop of corn in the ground early enough to get it pollinated before the dry season begins. There is nothing to say the dry season could not be delayed, but with $4 corn instead of $6 the incentive may not be there to plant beyond the ideal time frame. Again, not a major issue now, but it’s on the radar.

 

Given the above, we like rewarding rallies, and did so today as we will discuss below. Selling in increments takes advantage of rallies and improves our average sale price. Owning puts now is also a good idea to put a floor in, and if grain needs to be moved at harvest, can cover margin risk if you sell cash and re-own with futures. Check basis carefully, as it may be far more profitable to move cash, put the money to work on interest, and own the paper with less risk than simply putting it on DP. The cost of storage is often far more than some options, but make sure we visit a few minutes to make sure the idea fits what you want to do. To illustrate what we are talking about we have included 2 charts, November beans and December corn. Notice where the lows were, and where we are now and see if you think we need to reward the rally with some sales or put options.

 

 

 

If you don’t feel comfortable pricing but see the value of a floor. Here are some put option prices:

 

Dec 2024 = $4.24 Nov 2024 = $10.55

$4.10 put =5 cents $10.30 put = 11 cents

$4.20 put = 9 cents $10.50 put = 18 ½ cents

$4.30 put = 14 cents $10.60 put = 23 cents

 

Looking ahead to October 11th, we will be watching the following which are the same as last month:

 

 

  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?

 

 

Here is what we are doing on our farm with the price action today:

 

2024 Corn

We like to reward rallies and did so today by doing a March HTA contract at $4.44, electing to wait on a better basis here as it is quite wide. Our feeling on this is harvest should wrap up a lot earlier than last year, and hopefully we will have enough demand to get a post-harvest bump to price it. We chose that price as it corresponds to chart resistance and will add to these sales on further rallies in increments. We have re-owned some previous HTA sales via the futures with our puts in place, and will consider rolling puts up if the rally continues.

 

2024 Soybeans

We rewarded the rally today by selling some January beans at $10.80, and like corn, will add more sales on further rallies. These are beans that were hedged last spring but given basis and the yields coming in we feel like it is time to get started, and lift hedges accordingly. We do this by using buy stops above the market in case the market sells off and will “trail the stops down” if the selling continues, hopefully adding a few cents to our price. This is not guaranteed, as stops become market orders when hit, and could fill above the stop price if volatility is big. Make sure you understand the risks involved before doing this by talking it over with us first.

 

2025 soybeans

Given all the factors facing beans, we felt like we needed to “start” by doing an HTA for next November at $11.00. We need to move some beans at harvest in a normal year, so having some on the books at this price seems like a good starting point. We will also look to sell far out of the money calls similar to last year on weather scares to add to our price if warranted. Again, these are only ideas, things we are doing on our farm, which may not be suitable for you, but it at least gives you an idea of what we are looking at, and we can talk about ways to manage these positions as market conditions change

 

 

In conclusion, things look a lot better now than a month ago, but now the ball is in our court. Like the dog chasing a car, when he catches it, he’s not sure how to drive it. We like rewarding rallies, if not with sales, at least with put options to make sure these prices hold. All year we have been more “defensive” in our marketing strategy, and as of now, have no reason to change that thinking. We have trade issues, world economic issues, and wars on two fronts not to mention an election on November 5th. Price discovery is driven by many things, but supply and demand are still the top dog, at least the PERCEPTION of supply and demand and the accompanying money flow. If it starts raining in Brazil, and weather there improves, we could see more selling as their producers become more comfortable with making sales. Conversely, if it doesn’t improve, maybe we can work higher yet, but after a rally like the most recent one, we don’t want to pass it up. Call us with questions or concerns and make sure we go over the plan with option strategies in place of ones to consider. Safe Harvest to ALL!

 

 

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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

October 11th – Supply/Demand and Crop Production Reports

October 25th- Cattle on Feed at 2:00 CST

October 25th- November options expire.

September 30th- Quarterly Grain Stocks

 

 

Mike Daube (574) 586-3784

Allen Gard (573) 769-4193

Peter Schram (317) 910-1473