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CFGAG News and Views vol. 64 November 1, 2014
"Hedger or Speculator?" The month of October has been nothing short of amazing, even more so with additional record yield reports coming in. Think about it, we are harvesting the largest crop of corn and beans in this nations history, by a large margin, and we have rallied almost $1.50 in beans and $.60 in corn! How can this be happening in the biggest month of harvest when elevators are filling, turning some producers away, or forcing cash sales and offering no storage options? The simple answer is money flow, as funds have certainly bought a large amount of corn and beans, now a sizable long in corn and modestly so in beans. They still hold short positions in wheat. So why are they so optimistic? There are a number of factors, we list a partial list below: 1) Transportation problems, primarily railroads, have not been able to move grain, and especially meal, to the end user 2) The "pipeline" of beans and meal was near empty, and harvest delays extended the problem of timely refilling 3) Farmers have been reluctant sellers with the lower prices, trying to store as much as possible 4) Export sales of beans and meal have been stellar, a large draw on available supplies 5) Currency issues in South America have farmers holding back sales in both Brazil and Argentina 6) Weather concerns are popping up in Brazil, with some delayed planting due to drier than normal conditions The problem with all these items is they are temporary. There is simply no long term reason that we will have to "ration" supplies. We will be reminded of those numbers on November 10 with the monthly supply/demand report from USDA. Big crops tend to get bigger, and unless we find some more demand, carryout levels will likely rise as well if yields are increased. We also have yet to see what happens with the last third of bean harvest, and the last half of corn. Will be be able to get it all in and locked away, or will we have to move a great deal to the elevator yet? Will they be able to hold it? With the transportation system be able to catch up? When will US and South American producers sell enough to offset fund buying? Basis levels for beans have been very strong in the eastern corn belt, but on friday, the first sign of weakness came through our local processor, as basis widened by a nickel. This next week, with the report coming on the 10th, will be important to see if any of the above questions find answers. At the very least, we certainly have downside risk now, when looking at the lows made last month, and if those "temporary" problems get solved, we may find a reason to revisit them. We certainly recognize the markets ability to rally, and if money keeps flowing in, we can certainly go higher. Our job is not to try to out guess them, but take advantage of opportunity. Which brings us to the title of this article. Are we hedgers or speculators? Are we risk takers or risk managers? Everyone wants to think they can predict market moves, and as far as we can tell, will at some point be wrong. This October rally has certainly had many if not most market analysts scratching their collective heads. Maybe we all got "too bearish"? Those with huge profits in their hedge accounts have watch a big chunk of that go away. The balance has gone down, but have we lost any money or reduced net farm income? NO, not if we were hedged. The cash market has gained what the futures have lost. Only speculators that were short have really lost money. It is hard to realize, because we look back and say, "boy, if I had just lifted my hedges a month ago, look what I would have made". That would have been speculating, and yes, we speculate every day on weather, machinery, landlords and many other things. We look at our job as managing risk, which means not taking chances on market whims. This is a very important time to make sound decisions on marketing. If you are hedged, and do not want to make a margin call, either sell some cash grain or buy some puts to replace the futures. Call us for some ideas or options on these issues, we cannot afford to take a loss on hedge positions and then watch the market collapse without selling the cash grain. If we had more confidence this rally could be sustained, we might feel differently, but with the fundamental side of the market so bearish, we are more concerned with downside risk. Other reasons include: 1) The US $ is rallying, making our crops more expensive on the export front. 2) Crude oil is falling, and corn tends to follow crude 3) South American soybean meal is priced much lower than US supplies, making switching of origin very possible 4) Big crops usually get bigger, and we have seen no yield data that makes us believe otherwise, making November 10 a potentially big day Actually, on my own farm, these price levels are what I was hoping for to start incremental sales of the 2014 crop, so I did so last week on both corn and beans, using HTA contracts for March delivery. By doing this, I am capturing carry in the market, and have a chance at a better basis later on. We feel that each individual should look at their total production, and consider rewarding this rally, especially if basis is good. Their are many ways to re-own grain with limited risk, but you only sell cash once. Take a minute and consider the downside risk we have now and weigh it against the potential to extend this rally. We still have a long way to go to finish this harvest, and logistics will likely remain a challenge for some time. Be sure to call us with some ideas to capture this rally and remove some risk from your plate In conclusion, a phrase comes to mind, "you ain't seen nothing yet". When I look back a couple years, remember the drought of 2012, and the price extremes we had, and the long sell off this year that has seen record yields by a wide margin in many areas, I wonder what could be next? The October rally was certainly one for the record books in terms of December soybean meal rallies, and to see grain prices go north with such velocity in the middle of harvest was nothing short of amazing. Such is our market environment today, and for those that try to forecast such moves, well, good luck. We have often said that removing emotion from decision making is important, keep net farm income as our focus, and avoid undue speculation unless you are well funded and prepared for loss. Instead of being at levels for 2015 crop that are losses, we now have black ink on our spread sheets. Did anyone feel like that a month ago? So what should we do? Try to take a minute and consider what a move back to the October lows would do to not only this year but next years bottom line. Are you a hedger or speculator? Dates to Remember this month
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