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CFG AG
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CFGAG News and Views vol. 46 May 1, 2013 "Drought? Where??" How quickly conditions change. Just a few months ago we were very concerned about moisture shortages in a large portion of the corn belt, and today, instead of corn being planted, many acres are playgrounds for ducks and geese. Here in Northern Indiana, we have just completed the wettest April on record. Compounding that fact are some of the coolest temperatures on average as well. Certainly not a good start to the planting season, as many remember last year when many were finished with planting by this date. So why did the market take so long to rally, with Monday finally seeing some real strength? There are a few reasons to consider, and we need to remember them going forward: 1) We may have had a lot of "weather premium" in the market because of lingering drought conditions 2) Substantial rain may now be offsetting that premium, as long as we can still plant 3) We can put a lot of acres in a small window 4) The safrina crop (second crop) in Brazil looks excellent right now 5) U.S. corn is still priced higher than our competition. How much will we need this year? All these reasons and others may be explanations as to why the market took so long to react to weather delays, but considering the last one, a recent article from the University of Illinois may have given us the most food for thought. If we continue to lose demand to other producing nations, we may only need a crop of 12.5 billion bushels to get through this year. We believe that number assumes a lot, and can be argued from both sides, but at least it is a possible number. Now, do we have weather like 1991 where yields declined due to hot and dry summer conditions, or do we have a 2009 type year when record yields were achieved due to a very cool summer? That is the question every producer must ask themselves when deciding to take some price risk off the table or not going forward. We do not choose to join the emotional bandwagons that seem to dominate the marketplace these days, but rather to look at prices and the effect on net farm income, our true bottom line of profitability. For at least the last few weeks (until monday) the trade was in our view exceedingly bearish, talking down every bullish story or weather forecast, seeming totally ignoring a freeze event in hard wheat country. Remember last year when everyone was bullish? It did not matter that demand was shrinking, we were bringing corn into the U.S. instead of exporting, and the talk of $10 corn and $20 beans was common. The conclusion is that when the trade is one way or the other, most "reasons" given for the price action reflect that attitude. Lets take ourselves back then, away from the chatter, and look at what we have now. September futures are pushing back near $6.00 after trading into the $5.35 area. December has moved back above the $5.65 insurance guarantee. Old crop beans, with the very strong basis, are now worth over $15.00 in many areas. Do you feel these are prices that should be protected, or walked away from for more later? Here are some thoughts and ideas to consider: 1) Demand for old crop corn and beans remains strong, reflected in basis 2) Ethanol margins are good now 3) Producers are very reluctant sellers with planting delays expanding 4) Argentina continues to be a problem with farmers and the government at odds, slowing selling 5) World economics and money flow continue to be a concern, the money is still out there, and cheap, but will it flow back into commodities in a big way? Items that cause us concern for lower prices are: 1) Weather forcasts are very erratic, if we get a good week in, it may take some "premium" out. 2) South American supplies of corn and beans are huge, at some point politics and logistics will be sorted out 3) Demand is questionable, with bird flu in China a problem and world macro economic concerns remain 4) Weather conditions in the former FSU, China, and South America remain generally favorable. 5) Producer selling of this years crop is well below normal for this time of year. So, with all this in mind, what should we do? If we go back a few paragraphs, and look at the 60 cent jump in September corn futures, and multiply that by a 180 bushel APH, it equals $108 per acre, which is all profit. It is a price above our insurance guarantee, and in our minds, worthy of consideration. $15 cash beans are also difficult to walk away from in our opinion, and we would reward rallies by making at least some sales. Cash sales, futures hedges if you are not ready to commit to cash sales due to weather concerns, or some option strategy may be a good idea to capture some of the weather premium. You can sell September futures in the upper end of the range, and defend the hedge with a July call option if conditions warrant. You can simply buy puts on rallies that put a floor under you with the upside unlimited, and have no obligation to deliver. Another tool that can be used now are short dated options. We now can buy a December option that expires in July. At this writing, a December $5.50 put option costs about 20 cents less than the December $5.50 put that expires in November. Less time value, less premium, and designed to cover major risk times without all the time value. Call us for details and examples. There are many combinations of these basic ideas, and the only way to see if they will work for you is talk about them and how they may be useful. From the technical side, we have the following numbers from our computer to consider: 6.20 6.61 5.70 7.12 13.01 15.04 12.87 15.25 In conclusion, we are in a "weather market", and trying to predict the outcome is, well impossible. What we do know is the trade is still basically bearish corn, and still believes we can produce plenty of corn to meet demand. We know that the latest rally has increased our profit level on this years crop. We don't know how much higher we can go, or how low we can go if the weather cooperates. It all comes down to how you feel about prices, profitability, and what you think might happen next. Every year has challenges, weather extremes and other issues to deal with. That's why they call this the "too season", either too wet, too dry, etc until the crop is farther along. We also know that once the "too season" is over, it then becomes the "hopeful" period when we hope that what we did was right. If you need protection on prices, call. We are here to answer questions on different ideas, and are happy to share some with you. No one needs to be reminded that when weather pressure is on, and long hours test our endurance that sometimes we need a little break. Keep it safe and happy out there, and if we can enjoy your "break time" with you and protect some profit, call anytime! Important dates to remember: May 10th Monthly Supply/Demand Report Weekly Export Sales every Thursday Export Inspections every Monday May 17th Cattle on Feed Crop Progress and Conditions 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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