CFGAG News and Views vol. 54 January 2, 2014 

"A New Year, New Challenges"

One of the  most over-used statements is "what a difference a year makes", but it is certainly true looking back to January 1, 2013. We had just finished a production year with one of the worst droughts in history, corn supplies were very tight, and we wondered how we would make it to the new crop of 2013 with enough corn to meet demand. Once again, the market worked as it always has, to ration out the bushels, substitute when possible, eliminate usage by the economically challenged user. Now we are faced with a very different story. Our challenges include a big crop that may get bigger, regaining lost or reduced demand, and adjusting production acres in 2014 to find the most profitable mix. With the January 10th USDA Reports covering final 2013 production and Quarterly Grain Stocks looming, we feel it is very important to make sure we are managing the risks associated with these reports, and take appropriate action. Some possibilities to consider going into 1/10/14: 

1) Do big crops get bigger? Will USDA raise production of corn and beans

2) Has export demand picked up enough to make a difference in carryout numbers?

3) South American production numbers: big, bigger, or price busters? 

4) Feed use numbers: are they overstated in previous reports?

The bottom line will be projected carryout. Does it go up or down, or stay the same. Psychologically, a carryout over 2 billion bushels in corn is negative. If South American production exceeds expectations, even with tight domestic stocks, we could see a lot of downside in beans, with logistics of delivery from Brazil and Argentina the only question mark. It is not out of the realm of possibility to see a dollar downside in beans, maybe two. While beans have been very resilient, and demand very strong, there is only so much that the world can use. With funds still holding a decent long position, a washout could take us a lot lower than we may want to believe. Any movement by China to cancel or roll into next year some of their purchases may trigger just such a move. We strongly advise protection in the bean market for both old and new crop going into these reports. Make sure you check in to examine some strategy to prepare for that possibility.

Corn has been In roughly a 20 cent trading range since November 8th. On one hand we have the funds carrying a large short position, and farmers are holding a big long position in the bin. It may take some surprises in the upcoming reports to break out, but certainly the trade is bearish with the possibility of bigger numbers for our 2013 crop as well as increases for South American production. Covering risk of a downside breakout may be warranted here as well. Options seem relatively inexpensive right now, and owning some puts may make it easier to sleep the night before the report. Option premiums and volatility increase as these reports get closer, so acting early may be a good decision.

We have had many calls on what to do with old crop corn and beans, as well as some ideas for new crop. Looking back and wishing we had sold more will not get us any closer to a good decision now, so lets look forward and decide first, "where I don't want to be"! I do not want to be sitting here on July 1st with 3/4 of my corn still in the bin. Right now, we have downside risk in both futures and basis. With a relatively small amount of 2013 corn crop sold by US producers, the danger lies in a combination of a bigger number from USDA, big South American crops, and stagnant demand. We could see the "carry" in the market slowly erode away, and leave us with a rather ugly flat price. The only way to capture the carry is to sell something, be it cash or futures. If we do not sell anything, our worst case scenario is stagnant or declining futures combined with stagnant demand and eroding basis levels, leaving us with no good alternatives as time goes on. This set of thoughts tells me NOT to be holding a large cash inventory to July unless the market will pay me to do so. Take a look at your cash bids from now until then. Are you being paid to store grain?

Given where I don't want to be, my plan to market corn (beans are already gone) is as follows:

1) Divide unsold bushels into increments (100,000 bushels into 5 increments of 20,000)

2) Use the trading range of $4.20-$4.40 March futures for reference

3) On a rally to the top of the range, buy puts, sell futures, or sell cash if the basis is good.

4) Own March puts on remaining bushels

5) Sell an increment of cash corn on a strong basis bid

6) Use a selloff to the bottom end of the range to re-own futures if desired, and take profits at the upper end of the range

By doing this, I am transferring my physical inventory to someone else, reducing my downside risk to the value of the put options purchased plus transaction costs and strike price differential. I get started doing something instead of "hoping" for something that may not happen and leaving me with a mess in July. It is important to note that individual basis levels play a big part here, as you have to look at reasonable expectations in your area. We have some information on local basis, but your experience is far more valuable as far as grain unsold and local demand. Cash sales should be made when basis is strongest, and by having a protected long position using either puts and futures or calls, you can still take advantage of bullish developments if they occur. Call us with for details and timing ideas, as we know from experience that USDA reports such as January 10 and March 31 will have the potential to move the market significantly and being prepared for them instead of cussing them makes a lot more sense to us.

For new crop corn, depending on your sense of urgency, we look to our "Sales and Profitability  Tracker" to guide us. Getting something done using cash sales, futures or options at profitable levels is always advised. Being flexible to weather developments, both here and abroad is also important, as it would only take one good weather scare to get us back near $5.00 new crop corn. End users don't have to have long memories as to what $7.00 corn does to their bottom line, so locking up inventory may be a quick decision with any significant threats to production. They may even want a "little extra" booked, just in case. Our feeling is that right now, every thing is bearish, but the closer we get to March 31 and the start of planting, uncertainty over this new year may give us a bounce to sell into. Make sure you have your targets set and a plan of action ready if we get there. It may be one of few if not the only one of the year. For beans, selling or protecting new crop at 11.70-12.00 has been our goal, and many have some covered there. We would use a rally back to this level to add to sales or start if none is done. Some combination of cash, futures, or options depending on your comfort level and desire for flexibility going into planting is advised. We need to use the next couple of months to get these plans on paper and be prepared for the emotional time of year!

 
Mar.  Corn                Support                 Resistance

                                 4.18                       4.40                                                                                                              

                                 4.10                       4.57

                                 3.97                       4.69

                                 3.80                       4.81
Mar. Beans          12.76                      13.22

                              12.51                      13.46                              

                              12.17                      13.78

                              11.74                      14.33

In conclusion, while prices have fallen, a good crop makes us feel better, because we are producers. Conquering production challenges has never been a problem for American Farmers, and we will continue to produce, even with low prices because we know it can always get better. We have enjoyed some very good prices the last few years, and even now, with the bears growling at every corner, we know that the world will continue to eat every day, and weather extremes will bring new opportunity to make a profit and continue doing what we do best. Our job is to help market that production, keep an eye on profit levels, and give you some ideas on how to use these marketing tools to fit your wants and needs. Thank you for allowing us this opportunity, and get in touch soon to go over some plans that make you comfortable. We cannot emphasize enough the importance of being prepared for USDA reports and managing the risks they bring. If we are properly positioned, it doesn't matter what the report says. That positioning is our responsibility together, and from a personal note, since I have accepted that responsibility of making sure that whatever numbers come out, my farm is ok, a level of comfort has evolved. We want to share that feeling with you. Happy New Year, and we pray for good crops, prices, and friends!

Important dates to remember:

January 10th: Monthly Supply/Demand Report, Crop Production, Quarterly Grain Stocks 

Weekly Export Sales every Thursday at 7:30 am

Export Inspections every Monday at !0:00 am

January 24th  Cattle on Feed

Mike   Daube      888-391-6330
Allen   Gard       800-205-1700

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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.