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CFGAG News and Views vol. 47 June 1, 2013
"More Weather Extremes= More Uncertainty" Another month has passed, more rain has fallen in areas that don't need it, and many acres are left unplanted with June 1st now upon us. It is amazing to take calls every day from producers from Ohio to Wyoming and note the extreme differences in weather and soil conditions. Western belt producers were struggling to get planters in the field, and far eastern belt producers were hoping for some rain as they were finished planting and had gone without significant rain for over 2 weeks. Where corn was planted, reports from the field indicate excellent stands and overall good conditions that simply need some warm temperatures and sunshine. The markets have responded with a nice rally in new crop corn and beans, and we now have prices above our spring insurance guarantee. Can we go higher? Sure. If weather continues to hamper planting progress, if crop conditions deteriorate with more adverse weather, if demand surfaces or if funds decide to pour money in on the long side, we can easily go higher. Will we? There are some good reasons why we may not, as listed below: 1) Corn planting may well be over 90% done in Monday's report 2) Emergence has been good, and stands excellent. Will crop conditions be good enough to offset less acres? 3) Demand is a problem, and world supplies are ample 4) There are now big weather threats (yet) in the FSU, Australia, or any other major producer 5) Shipping problems in Brazil and Argentina are gradually being worked out. With the recent rally, (it was not long ago that December corn was testing $5.11 per bushel and November beans were under $12.00) we are looking at prices that certainly add more profit to the bottom line than before. Fall basis is reported as fairly good historically, and we wonder if that is in fact so because we have not sold much new crop corn or beans? Elevator contacts that we talk to indicate very little grain has been forward sold, and after the last few years, we are not surprised. Anyone that sold cash grain early and took no further action missed a lot of price potential, and a lot of profit when yields fell short. It is so hard to sell for less than $6.00 when we could have had over $8.00 last fall. Can't we go back there? Anything is possible, but remember, last year South America had a short beans crop, and end users were forced to bid up for supplies. We feel it is time to take some action to protect what we have, and depending on where you are and your comfort level in the crop you are producing, will offer some ideas to consider. Our first example is one where a producer does not have enough storage, and needs to move some grain at harvest. He has a -20 cent basis for fall delivery on corn, and is a little nervous about selling cash bushels before pollination, but likes the fact that we are above the spring insurance price. His solution? He will lock in a basis contract at the elevator for -20 cents basis the December futures, but sell September futures on the Board for $5.95 or better. If and when the inverse of September over December comes in to even money, he will lift the hedge on futures, and make it a straight cash contract. Net price, if the inverse comes together to zero, is $5.75 cash less the transaction cost of the trade. If you are in an area of good looking crops, this may be a way of getting ahead of "the herd" that will be more and more willing to sell grain if the weather improves. Options are another way to cover downside risk, and ideas range from simply buying a put, buying a put at the money and selling one at a price below that level, (a bear put spread) or buying a put and financing it by selling a call option at price that you would be very happy to sell your cash grain. These ideas can be as simple or as complicated as you like to manage, but should always be put on with a management plan and action strategy if the market shifts unexpectedly. We can all understand weather premium being added with this spring's adverse weather, but we also have to respect resistance levels, old highs and lows on the chart to see if perhaps the market may be on another mission. Right now, when looking at a July corn chart, we have solid resistance at $6.70. If that is taken out, we need to respect that, and have a plan in place. Hedging seems very scary to some, and perhaps it is because there is a fear of missing something. For those, developing a plan of defending the hedge before putting it on may put the mind at ease. It can be as simple as selling futures or cash grain on good basis, and owning a call option to take advantage of rallies or reducing margin exposure. You can sell futures or cash, and then have an order in to buy futures or options if the market takes out a certain resistance area, and participate in the upside that way. You can also put sell stops below the market, at a price you do not want to go below, and stay on the sidelines until support is taken out. Any of these ideas are workable, there are no all right or all wrong answers, just ideas that give you choices depending on your comfort level and trading experience. With any and all of them, be sure to call and go over these with us so we can give you the pros and cons with each in detail. As always, have a plan and use it. Play "what if" before it gets emotional, and have some confidence in what you are trying to accomplish. We have no idea how long this rally will go, it may be over with the next forecast, it may just be starting, but unless we have some idea of what we want, it does very little good to just "watch it". We watch it every day, every minute practically, and can no more tell you what will happen easier than we can explain why one location got 3 inches of rain, and why another a few miles away got 3/10ths. it comes down to profit and management of profitable opportunities, and each of us is solely responsible for those decisions. In preparing for the end of the month, don't forget the major reports out on June 28, when we get the Quarterly Grain Stocks, as well as the Planted Acreage Reports. The Quarterly Stocks reports have always been volatile, and we don't expect any different this time. Wide ranges of guesses only make the sparks fly higher. We also have the unusual impact of planting over half the crop in a week this year, which makes pollination weather critical in this time frame. We would encourage those with cash sales or hedges on to consider some August or September calls to defend those hedges and sales, and those with no price protection in place to at least consider some puts as well. This will probably not be a time to do nothing, as risk both ways will be large. Again, if you have a good crop coming on, take the steps to let someone else carry some risk, and hopefully sleep better at night. From the technical side, we have the following numbers from our computer to consider: 6.31 6.90 5.90 7.39 13.93 16.21 13.51 16.64 In conclusion, we want to emphasize again to look closely at fall basis, especially if you do not have or want to use some storage. We feel that strong basis is probably a reflection of lower than normal sales, and may be a major risk going forward. The absolute worst position to be in is to have a bigger than needed crop, a weak board price and a bad basis. There is no way to recover a bad basis. If you pay them to store it for you, then storage charges usually eat up any basis gain, and the commercial elevators and end users know this. They know where their demand is coming from, and if they are "long" enough, or "short" bought. They are not benevolent organizations, they make money storing grain or they wouldn't be there. If you sell a good basis, you can take the money you saved from paying storage charges, and invest in some call options, or other re-ownership ideas instead. The comfort level is increased because you do have grain price above the insurance price, and have a lower deductible as a result. Make sure you understand your options for prevented planting as that date is fast approaching as well. If you need some answers on marketing or crop insurance, call us, as we have good contacts available if we don't know the answer. Important dates to remember: June 12th Monthly Supply/Demand Report and Crop Production Weekly Export Sales every Thursday at 7:30 am Export Inspections every Monday at !0:00 am June 21st Cattle on Feed Crop Progress and Conditions every Monday, 3:00 pm Central Time June 28th Planted Acreage and Quarterly Grain Stocks
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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