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CFGAG News and Views vol. 51 November 1, 2013
"A Bigger Crop, How Big? See November 8" As harvest has progressed, it has become more apparent each day with more reports from the field that this years crop of both corn and beans has exceeded expectations. The question is, by how much and how much of this is already factored into the price. Our biggest issue is the lack of a report in October from USDA due to the Government shut down. We simply do not have the consistancy of monthly reports to compare, and do not have the ability to go back and sample fields that have already been harvested. We have not had the anticipated adjustment to prevented planted acreage that was supposed to be out in the October report. This combination of issues makes November 8th a big day in the marketing world. We will use this month to lay out the issues coming on the 8th, and follow with some hedging ideas we have posted on the website. For the USDA reports of Crop Production and Supply/Demand, there are a list of questions that hopefully have some answers when USDA weighs in: 1) Just how big is the U.S. crop? 2) What is the projected demand, how does it compare to previous estimates, and what is the carry out? 3) How many acres were planted, and how many will be harvested? 4) South American production estimates, crop acres, and yield 5) Wheat export projections from India, how much and when? 6) Estimates of farm prices, up or down? We do not try to out guess Government Reports, we only try to examine the risks we have going in, look at ways to lay off the risk we dont want to carry in, and take some action. In this case, there is significant risk both higher and lower, as acres and yields are anybodys guess. With yields exceeding expectations, a still a relatively low level of sales made, we are more concerned with the downside risk at this point, but certainly understand why markets could rally. A glance at the October 31 list of export sales with very big numbers over the last 3 weeks tells us that demand at these prices is pretty good. It will have to be if production of corn comes in over 14 billion bushels. Owning puts going into this report makes sense to us, and we will go over these ideas further down the page. For those that have sold corn on early premiums, and still want to re own those bushels, there are a few good ways to do that if you expect a friendly surprise. Again, we will look at ways to do that as well. The questions have been coming in on what to do with the "extra bushels" that many producers are finding this year. First of all, we like to deal with problems like these. Last year for many was not very good, and it is always more enjoyable to work with more than less. Last month we had a list of questons that are repeated below: 1) Do you have enough storage? 2) What are your cash flow needs for the rest of 2013 3) If you do not have enough storage, what are the options? 4) What is your local basis for corn and beans now, and in the next few months? 5) How long are you comfortable storing grain? First, here is what we would NOT do. We would not pay for commercial storage, or Deferred Price option. Paying someone 30 cents per bushel to hold the corn and use it and still have all the downside risk in price is simply not good business. Add a monthly charge after January 1, and to us, any potential gain is quickly eaten up besides that elevator or ethanol plant not having to bid up for the grain compounds the issue. These folks know the grain is out there, South America is planting now, and in 4 or 5 months we will be planting again here. We would advise instead, buying March puts, either 4.40 or 4.50, and if you can store the grain, hold for a good basis bid perhaps in the late November or December time frame. If you are still friendly to the market, you can buy March futures with risk limited to the price of the option and the difference between the strike price and where futures are trading. If you dont have storage, then as long as basis is acceptable, sell the cash grain, and re own it using the same idea. Compared to the cost of storage, using a put and futures looks better to us right now, and you have the flexability to manage the position with stop orders and profit goals that may work multiple times. For soybeans, because the market is inverted, and basis is strong in most areas, we would simply sell the cash beans, and re own them with a July/November 14 spread, July call options, or July futures with stops to manage risk. More details below. Our trade recommendations are posted on the home page of the website, but we want to try to explain why we like them in more detail here. Being flexible to changes in market conditions and psychology is something we like. Right now, the corn market is filled with bearish notions with yields coming is so much better, and even beans surprising many despite the lack of August rains in many areas. Traders are nervous that yields "could" come in north of 160 and carry out could exceed 2.2 billion bushels. The last time that happened, corn prices were much lower than today. If nothing changes, you can easily project that prices for this year and next could be much lower in both crops. South American weather has been generally favorable so far, but what if that changes? For these and many other reasons related to profitability and flexability, we like owning put options in March corn for old crop as we discussed earlier, and a three way option spread for new crop corn. We like buying a $5.00 December 14 put, selling a December 14 $4.00 put, and selling a December 14 $5.50 or higher call option. What this trade does, is put a floor price in of $5.00 less the cost of the spread and trasaction costs, and creates a window of opportunity up to the strike price of the call you sell. For us, it will be a price we would be happy to sell cash corn at. This strategy allows us to have some comfort in a floor price, but not limited from taking advantage of changes in market conditions. If something dramatic happens, we can own July calls, or simply buy out of the short call. We sell the $4.00 put as we believe at this time, our insurance price should be above that level, and therefor is not a risk at this time. If that changes, we may have to adjust that position as well. We ask that you call and go over this and any other idea that may work for you, understand the margin risk and make sure these price levels are comfortable for you. Lets run them through the Sales and Profitability Tracker to see what it means to the bottom line. On the soybeans, we like owning the Sn/Sx spread, as any rally based on demand, South American weather, or more logistical problems getting beans out of there seem to happen every year. The idea here is to capture some gain on the spread, pick a point to exit the long side (July) add that to the sale price of Nov 14, and have decent hedge price. Defend that hedge with July calls if needed, and it should work out. This requires management and decision making on your part, and we would recommend choosing price goals early and exit strategy to avoid making emotional decisions later. We can also do option spreads, straight hedges with option protection, or provide reownership ideas for cash sales made, depending on what you need or are comfortable with. Be sure to spend some time with us to make sure you understand each one and the advantages and disadvantages of them.
4.22 4.57 4.02 4.80 3.83 5.05 11.61 13.55 11.44 14.08 In conclusion, this years production has surprised many in a good way. We do not want to spend a lot of time wishing we had sold more, if you were in the north west belt in May and saw a foot of snow on your newly planted corn and beans, then you realize it was pretty hard to sell grain then. If you oversold last year because of the drought, it was very hard to commit many bushels early this year. What we have now is a blessing, and a chance to market more bushels and capture other opportunities. There are many ways to do just that, and its why we come to work every day, looking forward to putting ideas to work that fit your opperation. Lets make sure we are profitable, and then look at ways to improve on that number. Thanks for the opportunity to work with you, and have a Happy and Blessed Thanksgiving! Important dates to remember: November 8th Monthly Supply/Demand Report and Crop Production Weekly Export Sales every Thursday at 7:30 am Export Inspections every Monday at !0:00 am November 22nd 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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