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"Where Do You Want To Be.....?"
... on January 12th, long, short, or neutral in the grain market? On that day USDA will release the Quarterly Grain Stocks Report along with the final production numbers from the 2014 crop and monthly Supply/Demand numbers. A lot of numbers, and history tells us that limit moves following the release at 11 am central are more common than not. Needless to say, there is a lot of price risk involved with that day on the calendar, and given the price rally since the October 1st, we have to respect the downside risk and what it could mean to net farm income not only for 2014 crop, but new crop as well. Each of us as producers has to ask ourselves the question of just how much risk we have going into that Monday, and if we want to lay off some of it, all of it, or none of it. Lets look at some of the things we know going into the new year. 1) Commodity funds have a sizeable long position, especially corn, almost as long there as last May 2) South American weather looks very good overall, still some time left, but prospects look excellent 3) Farmers have been reluctant sellers here for tax and price issues, while South America holds off due to politics and currency 4) Corn and Soybean demand has been very good, Ethanol production has set new records 5) Crude oil prices continue to fall, raising concerns over ethanol margins later on 6) Russian ruble/economy is in trouble 7) The US dollar continues to strengthen and rally higher What we don't know is usually a longer list, and why different opinions on that list is what makes the market continue to try to discover that price that equals it all out. We list some of the main ones here: 1) Final acreage and yield- will USDA raise or lower any of them? 2) World Supply/Demand numbers and carry outs- up or down? 3) Demand: what will USDA do to feed/residual, ethanol use, and exports given the rise in the US dollar? 4) Will carryout of US grains go up or down from last month? There are others, but the main focus will be on world supplies, and if they are "in the right place" logistically. We have to assume that there will be no need to ration anything at this time, but winter weather is crucial to wheat production, and there have been some real weather concerns with the recent cold and lower than normal snowfall both here and in Russia. The question will be if supplies are more than adequate to offset any production losses. Final acreage has been debated for months as FSA data has been slow and incomplete, even at this date. Bulls argue that we did not plant as many acres, and yields may actually go down. Bears say yields may increase further, and acres will not go down as some farmers simply did not report their plantings as there was no incentive to do so. A lot of "what ifs", and with the range of guesses, we do know that somebody will be surprised! Our job here is not to try to outguess the Government, that has never proved to be a useful exercise. We feel it is important to first know what a profitable price is for our production, then find a mix of marketing tools that puts us in control of our destiny. Many years ago we decided it was useless for us to go into a major report completely at the mercy of whatever came out of it. With margins a lot thinner than the past few years, it is even more important to make sure that does not happen. Back on October 1st, we were looking at negative margins, and new crop prices below the cost of production. Now, on January 1st, (even with the sell off yesterday) we have prices that are profitable. Given what we do know today verses what we don't know and the potential impact, should we do anything? Every individual has to make that call, or decide to take a chance on what comes out on the 12th. Here are some ideas to consider in general, and we will be posting some "choices" on our website on January 8th. Make sure you call and go over some ideas to see if they may be of use to you in your plan. 1) If you are "long", for example, lots of grain stored but unsold or unhedged, consider making some cash or HTA sales if basis is weak. If cash sales at this time are not a good choice, consider some February or March puts. February options will expire on January 23, so there is not much time value to pay for, but not much protection beyond the report. You can also sell futures and defend that sale with short term call options to make sure we don't get a bullish surprise. For new crop, you can make sales, either cash or HTA if you don't like the basis, use the March puts with the intention of rolling out to new crop later. If the report is bearish, the front months should lose more value than the new crop months, so watching the spread between March and December and rolling when historically wide would be a plan. You can also use short dated, July expiration December puts to put a floor in, and possibly sell a December call to help finance it. This strategy would create a price "window" of what ever put strike you buy for a floor, and whatever call strike you sell for a ceiling. We are looking at $4.40 puts and at least a $5.50 call at this time, but actual strikes depend on your budget and risk tolerance. Call us for specific prices and "window" ideas.
In conclusion, we feel that given the recent rally, and the combination of what we know and what we dont, there is a lot of price risk on January 12th. One of the most powerful feelings in life is one of being in control of a situation. As a farmer for over 40 years now, I have learned what was "in control" and what was out of my hands many times over. Weather is just not predictable, but to some extent manageable with some farming practices and insurance. Timeliness of planting, side-dressing and harvesting is manageable with our new technology machines that can adapt to more adverse conditions. It is marketing that seems to be the most un-manageable to many, with too much or too little emotion involved in decision making. Marketing tools, and risk management in general is not rocket science, but does require us to make some decisions, and live with them. It does require us to look inside ourselves, put ego and coffee shop bragging rights aside, and decide what we want. Once that is done, we can explore options to put ourselves in control of that much of it. We look at this process as one where we are there to listen to your situation, analyze some numbers, and then give you some choices to consider when charting your course. As we have said before, we worked hard to be an independent producer, and not be told what to do by anyone, so we do not like telling anyone else what to do. We would much prefer giving you choices and working them into a marketing plan that accomplishes your goals. If that idea appeals to you, give us a call, and have a Happy, Safe, and Productive New Year! Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central January 12th Supply/Demand and Crop Production January 23rd Cattle on Feed Export Sales and Shipments every Thursday at 7:30 am
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