CFGAG News and Views vol. 55 February 3, 2014

"Its Planning Time"

With crop prices considerable lower than a year ago, we know from work on our own farms here that planning for 2014 is much less exciting than a year ago. Instead of reveling in the prospect of another big income year, it now looks more and more like just squeezing out a small profit, or avoiding a loss may be our task. There are a lot of opinions out there as to acre shifts, yield potential both here and in South America, weather impacts, and overall demand. In our planning time, which in our opinion needs to be done before March 31, we will discuss what we know and then consider the "what ifs" that need to be thought through in terms of management of this plan.

On January 10th, USDA released the final 2013 Production numbers, and also the Quarterly Grain Stocks Reports. We can summarize the highlights as follows:

1) Bean numbers were increased slightly, as were exports, as expected

2) Wheat numbers were bearish, both from domestic and world perspectives

3) South American production numbers were large, but as expected 

4) Corn numbers were friendly, compared to trade expectations, prompting a 20 cent rally

As with any Government report, shortly after the numbers were released, the arguing started over the numbers. Feed use was the first topic, as many analysts wondered how we could use 18% more feed in the first quarter than the first quarter of last year? Coming back to what we "know", this number historically looks odd, but there may be other explanations. Perhaps we just undercounted the corn in the country? Is it possible we have more grain in storage on farms than was reported? We simply don't know, but what this leads to is a possible bearish surprise in future Quarter Stocks Reports. We take this risk VERY seriously, and will repeat this farther down this page. What we do know, is that after the 20 cent rally on report day, we had no follow through to the upside on Monday the 13th. Our contacts reported heavy farmer sales of corn on that rally, which is consistent with what we know about how small a percentage of the crop was sold before harvest. Producers took advantage of a nice pop to unload some "extra" bushels, a very normal function after a big production year. We have to wonder how much more is out there, and available for sale on any further "pops" in the market. Keep that in mind as well as our old crop recommendations to use the range in March futures to keep moving cash inventory on good basis, and re-owning the sales with protected longs in the futures market if desired. We do NOT want to be sitting here on July 1 with most of our cash grain still in the bin, but would rather be holding low risk futures and option positions in case weather extremes come into play. A step by step hypothetical plan for incremental sales is laid out in the January Newsletter for reference.

For old crop soybeans, we simply want to be sold out of cash, and if desired, long on paper with manageable risk. We have an inverted market, and prospects in South America look very favorable. The market is waiting to see if China will cancel or roll forward to next crop some of their huge export commitments from the U.S. Argentina farmers are reported to be holding anywhere from 6-11 MMT's of soybeans from last year because of the declining value of the peso. "IF" these beans get sold before their harvest starts, we could see significant pressure on the front months of beans. Early harvest in Brazil is finding excellent yields as they are about 5% done at this writing, and the first ships are being loaded for export. For all these reasons we see the most downside risk in the front months of March and May, and would consider using these months to buy puts for both old and new crop beans at this time.

With these thoughts in mind, we start the planning process for 2014 crops. We list our thoughts and assumptions below:

1) USDA Reports on March 31 will be critical to both old and new crop grain prices

2) Corn acres may be higher than currently advertised, and stocks could be higher

3) South American crops could "get bigger"

4) In 2013 we had 8.31 million acres in "prevented plant" 3.6 million were "corn acres", 1.7 million "bean acres", and 2.0 million "wheat acres". Where will they go in 2014?

5) Export demand has picked up lately, will that be reflected in USDA projections, or are we overstated anyway?

6) Are the projected carry outs higher or lower?

While the bearish possibilities are real, we also like to maintain our "flexibility" in our marketing plan, just in case. We can also list some friendly possibilities that may give us better opportunities. "What If":

1) South American weather takes a turn for the worst

2) Argentina politics cause a "boil over" and negatively impacts production, logistics, or both?

3) "El Nino" conditions develop, which historically impact China and Australia negatively. Will China ramp up corn imports and remove GMO issues blocking US corn?

4) Severe winter weather persists into March? Will we look at $4.50 December futures as a "bargain"?

With these thoughts in mind, we feel like the most potential downside in these markets are in old crop beans, most neutral market is corn, and wheat is the most oversold. A look at the latest CFTC report backs this up as well, with funds long beans, slightly short corn, and very short wheat. Given this as part of "what we know" we feel we have some time to see if the market can rally December corn into the $4.70 and above range, November beans into the $11.25-$11.50 range, and July wheat above $6.00. Any movement into these areas merits some consideration of price protection in our opinion. Use the "Tracker" to see if this fits your profit goals, and call us to see if some option protection may give you the risk avoidance you are looking for. No matter what happens, don't be complacent when it comes to the March 31 Reports, the risk level  is just too high. There are many marketing tools we can use, and maintaining flexibility is better when the unknowns are higher as they are now. That is why we are more inclined to use options for floors and hope they are not needed due to better opportunities later.

 
Mar.  Corn                Support                 Resistance

                                 4.20                       4.49                                                                                                              

                                 4.06                       4.63

                                 3.95                       4.76

                                
Mar. Beans          12.35                      12.96

                              12.18                      13.31                              

                              11.90                      13.58

In conclusion, we recognize there are many firms out there with good intentions and ideas, but we find that attention to individual needs and situations is often overlooked to get as many trades on as possible with minimal effort. While this is efficient from the brokers point of view, it is not always in the individual producers best interest. That is why we promote the winter months as planning opportunities, a time to lay out plans and then management ideas for those plans to account for times of major risk. For example, we know that major report days like March 31, June 30 are well known for big price moves. We know that planting weather  has huge implications for both acres and yield potential. Pollination weather, and the two weeks leading up to that time carry big time risk both ways. Monthly supply/demand reports are always watched carefully for signals of price changing conditions. Keeping these in mind help to plan and use options, either traditional or "short dated" to cover the risk you don't want to bear. We strongly feel that being informed and prepared for these days makes our lives so much easier as there is no good reason not to be free of those risks unless you want to carry them. None of this is rocket science, it is simply a matter of personal choice, and that is why we are here, to help you make informed and workable choices to manage risk. We know what we don't know can be dealt with, and managed. What we can do is plan on a profitable year and maintaining flexibility will give us a chance to make it better. Call us for some time to plan, and make sure you are where you want to be BEFORE March 31.

Important dates to remember:

 February 10th: Monthly Supply/Demand Report.

February 20-21st- USDA Outlook Forum

Weekly Export Sales every Thursday at 7:30 am

Export Inspections every Monday at !0:00 am

January 21st  Cattle on Feed

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

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.