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CFG AG
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CFGAG News and Views vol. 58 May 1, 2014
"Planting Progress and Money Flow" It is Thursday, May 1, and in Monday's Crop Progress Report, it was reported that 19% of the nation's corn crop was in the ground. Expectations were for 20-25%, and given the time lag in collecting data, we probably were at least that far along. When looking at crop progress and conditions, released every Monday at 3 pm, we need to remember that the data is collected from noon on Thursday until 10 am Monday. No one needs to tell you that a lot can get done in 3-4 days, so keep that in mind when listening to the trade analysts screaming "planting delays". Also remember that crop conditions, when reported throughout the season, are subject to the same delays. For instance, if you had gone without rain for 3 weeks, and reported a large increase in "poor" conditions in your report on Friday, but received a nice 2 inch rain on Saturday night, it may skew the information. Our bottom line in analyzing these reports are 1) are we getting better or worse over the course of a few weeks, and 2) how do we compare with 5 year and 10 year averages when looking at similar weather patterns. As of today, soils are cooler than we would like, but overall moisture profiles are decent in much of the midwest, and there is plenty of time to get this crop in. Yes, there are areas of concern, there always are every year, but overall, while we would all like to get the crop in quickly, progress is being made. So if we are getting the crop in ok, then why does it seem like the market is up every day? Money is flowing in, and funds continue to buy more. Whether it is concern over the Russian/Ukraine situation, and a hedge against more hostilities, or just trend following makes no difference. Fundamental traders have been beaten up, arguing that supplies are more than adequate, that we do have a logistics problem with soybeans, but now many cargos of soybeans and meal are either here or on the way from South America. In previous years, just the mention of imports would send the bulls running for the exit door, but not so far this year. We have no idea when the funds will back off, and would not try to predict that time, but all we know for sure is, those who buy but do not use, eventually re-sell. We do not want to be unprotected when that happens. We do want to look at what we know for sure today: 1) Corn exports and ethanol usage are very good at this point 2) South American crops are big, and world supplies in beans are as large as they ever have been 3) Logistics remain a problem, as large supplies of grain in the northern belt and Canada remain unshipped. Basis levels are horrible in those areas 4) There is great incentive via the inverse in beans for Southern Delta producers to plant and harvest early beans 5) The weather pattern called "EL Nino" is usually bearish for US production. Will it develop? We also will be watching for answers to what we don’t know: 1) How many, and how fast will South American beans and meal show up at US ports? 2) Will weather conditions allow timely planting, and good emergence? 3) How many corn and bean acres will we actually plant? 4) Will we have "adjustments" in Grain Stocks reports? 5) When will Brazil start shipping corn again? 6) In subsequent USDA supply/demand reports show grain stocks growing, or getting smaller? With these items in mind, we also want to watch weekly CFTC reports to see what the fund positions are doing. An old adage in trading says that if bullish news cannot rally a market, you better sell it, and conversely, if bearish news cant sink the market, buy it. We will be watching for those signals as well. More importantly, we urge you to look at your marketing plan, and consider the downside as well as the upside potential we have going forward. Because are at profitable levels, it makes sense to us to make sales, either in cash or futures, and defend those sales or hedges with some option protection if you feel the upside is substantial. Our feeling at this moment is make the sales, and defend with some sort of long position if the most recent high in December corn of $5.17 is taken out, or if we have a price break down into the $4.90 level or below. Using the short dated, July expiration calls may offer some cheaper protection in case weather or geo-political tensions rise. See the example below and then call us for some ideas specific to your needs if you are interested. From the technical side, we have the following numbers from our computer to consider:
4.91 5.30 4.76 5.49 4.55 5.75 14.37 15.89 13.99 16.30 In conclusion, we often urge producers (as well as ourselves from time to time) to keep as much emotion as possible OUT of marketing decisions. No one likes to spend money on puts and have them expire worthless, but in terms of the bottom line, net farm income, if prices rise to levels that make those puts worthless, then we actually gain. Why do we buy puts? To make sure we have a price floor that is acceptable to our bottom line. Now, if our puts expire, and we don’t make sales at high prices only to watch them fall for any number of reasons, then we lose twice, and deduct from our net farm income. No one knows when the exact time to pull the trigger on sales is, it’s something that no level of knowledge or experience can do. What we can do with the tools we have is make sure we are profitable, and carry a level of security into the growing season. Selling too much ahead of harvest can be very painful if weather is adverse, but not selling can really hurt if everyone has a big crop or demand falls apart. That’s why we have options, and sometimes they expire worthless, but they have a job to do in keeping our peace of mind in the busy and challenging times of planting. You have to decide if they are worth the cost, and the benefit of having a minimum price established. Happy Planting! Example: Here are some option quotes to consider. We currently like the idea of using short dated put options in both corn and soybeans as they result in less premium paid for a shorter window of risk. Consider these differences: Dec 2014 corn is currently trading at $5.03, a $5.00 put with Dec expiration is 39 cents and a $5.00 short dated put with a July expiration is 18 cents Nov 2014 soybeans are currently trading at $12.30, a $12.20 put with Nov expiration is 65 cents and a $12.20 short dated put with July expiration is 26 cents If you understand the risk, are willing to margin the position, have cash grain left to sell and are willing to cap your price at the following strikes, you might considering selling a call option to help pay for the above purchase of put options to floor the market and protect your income. March 2015 corn is currently trading at $5.09, a $6.00 call is worth about 20 cents March 2015 soybeans are currently trading at $12.39, a $14.00 call is worth about 31 cents.
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 experienced user of the futures markets, capable of making independent 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 accuracy or timing of the content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading.
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