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CFGAG News and Views vol. 44 March 1, 2013
"Planning for March 28" A month ago, we projected that since we started the month at $5.91 December futures, we should have a spring insurance price above last year, remember? Well, so much for that, as corn has sold off in a more typical "February Break", and now we are looking at close but slightly lower price guarantees for corn, but higher ones for beans. Will this change the acre mixes on your farm? Possible, but we still feel other factors such as rotation advantage, market availability, and future price expectations will also enter in to the process. In preparing for the March 28 reports, its the Planting Intentions that seem to get all the press, but following the January 11th Reports, its the Quarterly Grain Stocks that should have most eyes on first. Everyone knows that acre numbers come and go, but the usage numbers and subsequent carryout figures have the potential to either begin another climb in price to ration tight supplies, or head south on a more comfortable supply number and a potential of a more normal growing season. Important questions to consider leading up to the 28th are: 1) Will 1st quarter feed use be higher as indicated in the January 11th Report? 2) Will corn export sales pick up, or will USDA lower them further? 3) Will South American crop yields be raised, lowered, or stay the same? 4) Will bean exports and big domestic crush numbers show up by lowering the bean carryout? 5) Will USDA lower the wheat carryout due to price being cheaper relative to corn? We also have to look to South America numbers, as recent rains have helped Argentina, and less rain has aided Northern Brazil in getting harvest going, actually running ahead of last years pace as of this writing. The numbers coming out of multiple sources, vary from 48-52 mmt of beans and 22-24 mmt of corn in Argentina, and Brazil producing 80-84 mmt of beans and 70-72 mmt of corn. The bottom line is anything over 130 mmt of beans combined is a big increase over last year, with the only question being "can the get them shipped"? So far, weather and rail problems have resulted in long waits for ships to load and go, resulting in more business in the nearby for our beans, going to China. That is great for the front end of the bean market, but if the beans are still there, and cheaper than ours, then eventually they get shipped. Barring a severe weather problem in the US, we could find ourselves trying to underbid Brazil to sell beans this fall and winter. Not a good prospect, but one we have to respect if the trend continues. The problem continues in corn in much the same way, if not more so. If you are in Brazil, and have many ships to load with both corn and beans to load, which commodity goes first? Most likely the highest value, which would be beans. Any delay in shipping corn may have shoppers returning to the US to fill the cart. Once agan, very good for the front end of a market that is already looking at a very tight supply situation, but not so good for the back end, our new crop, and currently the spreads between old and new crop are widening. When looking for a worse case scenario, consider backing up a lot of South American grain and beans into a good growing season here and the trading funds could have a field day trying to out sell each other. Does that mean we are hopelessly bearish here? Not at all, as we fully remember last year, in fact the last 3 years when NOT hedging was the way to go, markets rallied and rallied and produced the highest prices we have ever seen. If you want or need a list of those factors nobody talks about when the doom and gloom sets in, consider these: 1) China has produced two record corn crops in a row. Can they do it again? 2) A few ethanol plants have now reopened, ethanol production is increasing the last few weeks 3) Poultry numbers are increasing, and indications are they are ready to expand more 4) Given increasing demand, we need average or better production in many producing countries, in all commodities, to satisfy the desires for a better and more diverse diet. (The following paragraph is repeated from last month for reference as it still applies) Given the above, we would recommend those with old crop corn to sell to shoot for a cash price in excess of $7.50 to move it and,if still bullish, consider either owning July futures, some call spreads, or possibly owning a put and then buying futures against it. There are many ideas to re own grain, and please call so these different ideas can be fully explained in terms of risk and reward as it pertains to your operation. For new crop, we still like selling the September futures and defending the hedge with old crop calls if needed, or buying September puts to capture the inverse as it exists today. Looking at my cash flow, $6.00 corn still stands out as a bright light in my banker's eyes, and deserves consideration. Beans have managed to rally back into the "sale zone" we mentioned earlier, and perhaps should be looked at to get started. As always, call to make a plan that covers not only the sale, but the plan to defend it if production does not come in. For right now, and we will add this recommendation to the home page of our website, we really like the idea of buying May $7.00 calls at a cost of 18-20 cents. We like them for the following reasons: 1) Lower risk trade for investors, as we have tested the lower end of the range and bounced. The next four weeks leading to March 28 should add volatility and value verses time decay 2) For hedgers, by buying these calls now, will give add some courage to sell September futures around $6.00 if we can rally up there. This would give us a defended hedge going into the reports 3) Shipping delays in South America could add value to old crop while taking away from the new crop. 4) Timing is right historically to come off the February Break, and rally into the "too" season of "too wet" or "too dry" or "too hot" or "too cold". With tight old crop stocks, this looks to be very possible. 5) Technically, recent lows have held, and some export business has been done with China buying at least 800 tmt of new crop corn. As always, we encourage you to call and see if any of these ideas appeal to you, or if some variation would make you more comfortable.
6.54 7.46 6.12 7.88 13.30 15.70 12.75 16.30 In conclusion, while the sell off in corn has caught many off guard, and increased anxiety, we still have some reasonable expectations and profitable prices to work with. The key will be getting a plan together and executed before March 28, when MAJOR risk is at hand. Many have projected, and we agree, that corn could range from $4.00 to $9.00 this year depending on acres and weather. We will have a lot of cards on the table on report day, as well as a two week forecast for planting. The advantage of the May calls is not only do they include the report time frame, but also the first 3 1/2 weeks of the planting season. The question all of us as producers must ask ourselves is how much, at what price, and what percentage do we want covered before hand, and what marketing tool do we want to use? Hopefully we can help explain those tools to see if they will work best for you. We will be working extended hours through the insurance deadline to compare strategies and run numbers. If you need help with either marketing or insurance questions, we have good insurance agents to recommend, and will be happy to sort it out with you. Lets get ready for the 28th! Important dates to remember: March 8th Monthly Supply/Demand Report Weekly Export Sales every Thursday Export Inspections every Monday March 22nd Cattle on Feed Crop Progress every Monday, 3:00 pm Central Time
Disclaimer: This material has been prepared by a sales or trading employee or agent of Clear Focus Hedging, and is, or is in the nature of, a solicitation. By accepting this communication you agree that you are an experianced user of the futures markets, capable of making independant trading decisions, and you agree that you are not, and will not. rely solely on this communication in making trading decisions. There is a substantial risk of loss when trading futures and options. The thoughts and opinions in this article are those of the author, and while believed to be correct, are not guaranteed as the the accuracy or timing of the content. Past performance is not indicativeof future results, and each individual should examine their own risk capital carefully before trading. |
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