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CFGAG News and Views vol. 56 March 3, 2014 "Rallies and Reports" After taking a week off in the middle of February, it was good to step back from the day to day market analysis and grind. That time off allowed me to do some reflection, wonder why beans keep rallying, and put some perspective on what I do for a living. Everyone wants to know about the beans, and if we will run out or not, so lets start there. Honesty is always the best answer in whatever you are approaching, so lets start with the unexpected bean rally. Why were we so anxious to get old crop beans priced? Here is the list: 1) South American crops are big, very big in total 2) Old crop supplies there are plentiful, especially in Argentina where farmers have been holding due to currency weakness and political unrest 3) Logistics, although still a problem, have improved, and loading weather has been favorable leading to a February record in bushels loaded for export in Brazil 4) Chinese demand is quite good, but always suspect as to when they will cancel or roll purchases For these reasons, we felt it was time to make sure we had sold at profitable prices, and if so desired, re-own with limited risk on paper. We still feel this way, as it remains a day to day issue on if and when China will shift demand away from U.S. supplies. The rally and subsequent break last Thursday certainly felt like a "blow off" top, but it remains to be seen if that will prove true. What we can do, with the benefit of taking some time to look back, is remember that just six weeks ago, November beans had a "10" in front of the price, and there was real concern with December corn, maybe we could not get back to $4.50? With the rally in February, we now have insurance price guarantees of $4.62 in corn, and $11.36 in beans for the coming year. Now that's a lot better! No, it is not last year, but it is getting us back to profit levels instead of break even or loss. This gives us a lot more positive energy in preparing for the big day of March 31, and the Planting Intentions Report as well as the Quarterly Grain Stocks Report. We don't feel the need to re-hash the importance of this day to price discovery, we have all seen the potential for up or down limit moves as the result. We do feel it is important to look at our Profitability Tracker, and see what these prices will do for our bottom line. Lets first look at some of the factors that may drive prices near term: 1) Cold and snowy weather do not favor early corn planting as we look out our window today! 2) Russian military involvement into Ukraine may impact markets and volatility 3) South American weather and crop size uncertainty are still price movers 4) Chinese cancelations or rolls into new crop are still possible, there are approximately 4 million metric tons on the books to ship 5) Export demand and feed use are still big question marks leading into the Quarterly Stocks Report 6) Funds are still heavily long beans, long corn, and short wheat With these thoughts in mind, we think it is worth considering getting some new crop beans sold, either in the cash market, futures or options. Selling at a price above the insurance price lowers the deductible, and improves the bottom line guarantee. When we look at the most recent USDA price projection for new crop beans, we note that the average price projected has a "9" in the front, and if that does in fact happen, what will the low be? Obviously, these are only projections and estimates, and we all know weather and acres planted will be determine reality, but it is worth considering what such a move would mean to our profitability. On corn, we noted last month that maybe if we got to the first of March with snow and cold still upon us, maybe we could get that market to rally. Looking outside now confirms that "wish" has come true, and I was able to sell my first increment of new crop corn at $4.70. Now it becomes more important to lay off more risk if we can continue to move up. We like selling into these developments as weather uncertainty and potential planting delays usually offer better prices. We also know that we can plant a massive amount of corn in one week, just like we did last year, and if pollination weather is favorable, we can produce a lot of corn, probably more than we need. We like getting short positions on now, rewarding the rally and making a few cash sales, some futures in increments, and options to put floors under us depending on your situation. Again, look at your bottom line, what this rise in price has done to your profitability, and then look at what might happen to that same number if price goes down to $3.75 or less. We have to consider all sides here, and worst case, need to respect the following: 1) We "could" see 94 million corn acres, and 82+ million beans acres 2) Weather patterns could change quickly, and weather premium removed 3) March 31 Grain Stocks could be much higher than thought 4) Political unrest and military action could drastically alter market perception. Would a trade war with Russia be helpful or harmful to price? All these potential market movers are unknowns, and really only provide daily market chatter to either prompt decisions in marketing or put them off. We really don't know the ultimate impact of Russian military maneuvers, how the world may respond, or if the U.S. or European Union will take any action against Russia in terms of sanctions. There will be posturing and saber rattling, but will the market care? We choose to focus on profitability, and make sure we are protected. If you have been aggressive in selling the market, or are and end user of grain, it may be worthwhile to own some calls or call spreads to balance your risk. In my case, I will look to hedge aggressively at profitable levels in new crop months, and lay off the risk of weather scares or report surprises in July options. I just do not want to go into this growing season unprotected, especially now, with all my new crop cash flows in the black. We can certainly understand the emotion created with unexpected rises in price, but also know the pain of getting through pollination season with a good crop on the way and too much left the bin from last year. Each person needs to look at that scenario, and assess what each dime higher, or lower means. Sometimes it is not pleasant! From the technical side, we have the following numbers from our computer to consider: July Corn Support Resistance 4.64 4.96 4.54 5.08 4.42 5.20 12.90 15.28 12.34 15.90 In conclusion, I reflect back to some time off and how invigorating it can be to relax and re-assess. There are a few points that stand out: I am fortunate to have the opportunity to lock in a profit before the snow is melted, and for all the problems, I still live in the greatest country in the world. I would not trade places or farm in any other place. I have good neighbors, and even though we compete for land and machinery, they would still come help if something serious happened to me, as I would for them. I often take these things for granted, and shouldn't. It is therefore my responsibility to market my production at a profit, and stay in the business I enjoy the most. The tools to do that are available, no matter how big or small your operation is. If you need some ideas or just want to talk over some thoughts, we are available. Take a few minutes while the snow melts to go over your numbers, and see how you feel about the items we outlined above. It won't be long until the tractor lights are lit up way after dark! Important dates to remember:
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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