CFGAG News and Views vol. 3


"There is a risk of loss when trading futures and options. The thoughts and opinions expressed in this article are those of the author, and while believed to be correct, are not guaranteed as to the accuracy or content. Past performance is not indicative of future results, and each individual should examine his their own  risk capital carefully before trading."

 
Time to Reap
 
As October 1 comes in view, it is now time to reap what we have sown. The planning, planting, spraying, scouting, and every other proceedure we do on the farm leads us to the frantic few weeks of gathering in the crop. We will worry about every storm on the map for potential wind damage, fret about the higher moisure levels of this years late crop, and second guess every decision we made during the year to see if it was the "right move". Many of us planted crops in less than ideal conditions, and until we can get the combines in the field, we will worry. A few have started harvest, and early results are very good, leading us to believe USDA could increase yields and total production. Lets look at a number of factors that could move this market.
 
Early frost? The longer we go without frost, the bigger the crop gets. Enough said.
 
Sept. 30 Quarterly Grain Stocks. This is where we get a good picture of what demand was over the last quarter. There is some concern over beans, that we may actually have more "carry in" to this marketing year, and that could drive prices lower. We have spent the entire summer worrying about tight supplies of beans, this report should give us some answers as to what is really there. The most important number to watch is the carry out numbers in this and every succeeding report. Do the carryouts get bigger or smaller? At this point, the corn and bean carryouts are not "burdensome", but if we move up closer to 2 billion corn, or over 300 million beans, end users will be more comfortable waiting. Take the corn under 1.5 billion or the beans under 200 and we may have more buying excitement.
 
October 9 Crop Production and Monthly Supply/Demand  Reports. At this point, the cards will be "on the table". If there are any acreage adjustments, yield changes or any big surprises, this day should do it. It is from this point that the trade usually is comfortable with supply, and will now focus on demand. Harvest weather will also be important, as the eastern belt will probably be battling higher moisture grain, and any extended cool and wet periods will lead to more prolonged and possibly damaging delays.
 
So what does this all mean? Just a few observations from the growing season may give some clues. Corn spreads are still not out to what we would expect to be full carry. It would seem at no time this year have we had a large number of unwanted or unneeded bushels on the market. Basis has remained strong, and deliveries have been nearly non existant. With a big carry out Sept 1, we would have expected wider basis, and more spread in the futures contracts. This to me is friendly long term. We have evidently built enough storage to hold corn off the market, and with a delayed harvest, could keep this market from going as low as some have been touting. According to USDA, we are using over 1 billion bushels of corn a month, so if we are behind a month in harvesting, thats a billion bushels of storage we dont need.
 
Are we wildly bullish then? No, because there is always another side, and that is the beans. A normal bean/corn price ration is 2.3-1, and we are closer to 3-1 now. In my opinioin, beans have a lot of potential downside. The economic incentive to grow corn in South America is not there. Wheat acres in Argentina were reportedly the lowest in 100 years, leading to more 1st crop beans potentially. And to this author, the soil moisture maps of U.S. crop production areas through the month of August were very significant. In all my years of watching these maps, I cant remember one that had so little moisture stress anywhere in the major growing reigions. If beans are "made" in August, we should have had the moisture to make them. I know there are areas that have had too much rain, and those that have missed some much needed ones, but over all, from the early reports, they made it. We will need some bullish numbers in the reports listed above to convince us that beans are not very vulnerable to some downside pressure.
 
Given those thoughts, what is the plan? As always, and if you are trading with us now you have heard this often.......what do you need and what do you want? We firmly believe that put options are a good idea on rallies. Get them on, and then use them to accomplish what you want. Is it downside risk for unsold or unprotected grain? They can also be good insurance to protect a reownership strategy for grain you dont want to store. Look at the basis in your area, and the carry, and then determine if you want to store and sell later or sell now and reown. We have heard of 25-30 cents costs to store grain until Jan 1, and extra drying charges as well. Call us for some ideas to manage this, you dont have to be held hostage by the elevator.
 
Another item to consider is your crop insurance policy. Spring prices were 4.04 for corn and 8.80 for beans. We start calculating fall price on October 1. Talk with your agent to see what kind of payment you can expect from the coverage and yield expectations you have now. If you need some ideas on these issues, we have an excellent crop insurance agency to consult with and get you some ideas to use your coverage and marketing in tandem to achieve your goals. Again, call us at any of the numbers listed at the end of this article. We will be glad to visit on these and any other marketing issues.
 
From the technical side, we offer these as potential targets, not set in stone numbers, but numbers derived from chart analysis. Based on the close on 9/24, short term targets in December corn are 3.44, 3.48, and 3.54 to the upside, with downside possibilities for 3.24, 3.21, and 3.16. Long term upside targets are 3.62, 3.71, and 3.86, downside are 2.95, 2.86, and 2.71. For November beans short term highs are 9.38, 9.44, and 9.54, lows coming in at 8.91, 8.85, and 8.76. Long term upside potential points to 10.10, 10.31, and 10.64 and downside targets of 8.59, 8.38, and 8.05. Remember these are only technical targets, and we use them as reference points combined with many other factors to plan a strategy.
 
The following are the highs and lows for December corn and November beans during August and September. Keep these in mind also.
 
December corn            High       Low
 
August                     376         311.75
September                347.75     302
 
November beans      
 
August                     10.66       940.5
September                10.18.75   8.92
 
Our question of the month comes from Illinois, and is representative of some other calls we have had lately. "Even with late planting, it looks like I will have 50,000 bushels of corn I wont be able to store. Basis is good, but I would really like a better price. What would you recommend?"
 
Lets look at the numbers. It will cost this producer 25 cents per bushel to store the corn in the elevator until December 31. Add 5 cents to dry the corn an extra point to 14% and we have 30 cents plus interest costs. Corn would have to rally this amount AND basis would have to stay constant, or we lose money. If it were my corn, I would make the sale, and use a protected long position in the futures market. One possibility would be to own a December put option, spending ten cents or less, and then buying a deferred futures contract. My option protection would only last until November 21st, and at that time I would have to decide if I needed to buy another option for protection. Depending on the movement of the spread between December futures and the month I have gone long in, the risk is the option premium plus transaction costs, as I can exercise the december option and have a spread position. This is only one possibility, and there are many. The main advantage I see is I have secured a good basis that may or not be there later, and I have invested about 1/3 of the cost of storage, and I dont have the unlimited downside risk of just hanging on to the grain.
 
In conclusion, if you had to sum up our collective wisdom, we would summarize our thoughts going into harvest like this:
Corn crop is big, but demand looks solid. Economic incentive is not there for South America to grow extra corn. I always look at demand first, because if it is solid and growing, it can eat up a big crop sooner and set the table for the winter worry season. Beans look to be very vulnerable, and I have been surprised by beans many times in the past, both positively and negatively. I close with the following thought........China has huge sales on the books for this marketing year already. Would it totally shock anyone if our crop numbers turn out bigger, South American planting goes well, and China cancels some of our beans? That thought in itself is enough for me to have all of this years beans covered at the least.
 
Have a safe and blessed harvest!
 
Mike Daube  888-391-6330
Allen Gard    800-205-1700
Ron Reed    877-304-2460

If you have a possibe "question of the month" give us a call or send an email! If we use yours in an upcoming issue, you will recieve a gift from CFG Ag.