|
CFG AG
CFH info
Market Data
Weather
|
"Thinner Profit Margins, More Risk Ahead" As we turn the page on February, it feels more like January here. Cold and snowy conditions continue to dominate our weather here in Indiana, but there is promise of above normal temperatures a week or two out. It will be welcome! Thanks to a truckers strike in Brazil, the markets have been a lot warmer than the thermometer, but that enthusiasm seems to be waning as well. It seems that every year we get some labor issue to challenge the timely movement of beans to the port, getting them loaded, and moved out to sea. Markets rally when there is more "risk" to the smooth movement of harvested grain to the end user, or the possibility of getting fuel to the combines to harvest in timely manner. Our opportunity comes when traders add "risk premium" to a market for any reason, and as we get closer to the midwest planting season, weather becomes a major issue. This is what we call the "too" season, it is either too wet, too dry, to hot or too cold to plant crops somewhere. If the risk is short lived, the market usually takes back all the premium quickly. A frost scare is often a good example of this, as we rally into a forecasted event only to sell off when it actually happens or is not as bad as first thought. In 2012, we had a long rally as hot and dry conditions persisted for weeks. Our challenge is to be aware of the big picture, analyze the risk in terms of depth and severity, and take advantage of higher prices with the appropriate marketing "tool" for the situation. For example, the truckers strike and some rainy weather has produced a solid rally in beans the last few weeks. We ask ourselves, 1) is it a short or long term situation, and 2) will it impact the total supply of beans? Heavy rain at harvest is never good, and as we all know, once beans are ready for harvest the sooner they are cut the better. Any thing that threatens them at that point threatens yield and the market responds. Is this a short term event? Is the total crop size threatened in significant way? Depending on how you feel about those issues will tell you if you should just sell cash grain, sell futures, buy a put, or do nothing. Getting ready for planting season here is much the same decision. Do I like the price? What are the chances of higher prices later? What are the risks of lower prices and when? Lets look at some basic ideas to help us get ready for the March 10 Supply/Demand Report, and the March 31 Planting Intentions Report as well as the Quarterly Grain Stocks Report. Generally speaking, the more unknowns, the more risk premium, and the tighter the supply of grain in reserve, increased premium as well. In 2014, we had relatively tight stocks in corn, and very tight stocks in beans. There was substantial concern over crop size in the spring of last year, so number of acres to each crop, and spring weather became very important. Consider the difference in Crop Insurance price guarantee for corn: this year's price is nearly 50 cents per bushel less than last year, a clear reflection of lower risk premium as stocks are higher. We have more "cushion" for adverse weather developments. We have a lot less risk of smaller crops in soybeans UNLESS the huge crop prospects in South America are threatened in a major way. Fundamentally, if all the beans and corn are harvested and sold in Brazil and Argentina, we have the potential of sharply lower prices. If US weather in 2015 is close to 2014 conditions, we could see lows that we haven't seen for years! But we don't know that now, and the assessment of risk to those crops will determine how we trade. Our job now is to look at those reports that could change that risk assessment and position ourselves accordingly with our focus on net farm income. We use the following steps in preparation: 1) What is our breakeven price, and our profit goals? 2) What Crop Insurance coverage will we choose given our yield and price averages? 3) What is our planned crop acre mix, and our storage available at harvest? Do we need to forward sell in the cash market? 4) Historical basis levels: with more "cushion" will they be worse in your area? 5) What are the chances of higher stocks in the next two USDA Reports? 6) Will South American producers sell or hold more of their production, when are they more likely to sell? 7) Old crop supplies of grain are adequate, there are lots of unsold bushels on the farm, when will they be sold? For old crop grain, we are not comfortable going into these reports unprotected. Beans over $10 and corn near $4 are good sales in our opinion. Selling grain in the bin and replacing that sale with a low risk reownership plan is a good one, as we will not only have futures risk buy also basis risk if we wait too long and crops look good this spring. Remember last year? By June 30, we had a disaster in flat cash price. It could be worse this year, so why be a part of it? Getting rid of physical inventory and replacing with a limited risk option or protected futures position takes that off the table. Call us for some specific ideas on getting that off your plate before the planters roll and good marketing intentions become "woulda coulda shoulda". For new crop, we would still like to sell December corn from $4.30 to $4.50 and November beans at $10.00. Having orders in on cash sales in those price areas are a good idea in our opinion. Any sale can be defended with call options for future rallies based on risk factors listed above, and making sure you have eliminated potential storage payments this fall on grain you cannot store with a sale at a profitable level is removing some risk from your balance sheet. If we cannot get those orders filled, we will look to options to at least put a floor price under us as we go into the weather risk season. Making sure we are profitable, although minimally, may greatly reduce our stress load considering the worst case possibilities. We will consider using May put options, as they will be the cheapest coverage getting through the report. They expire on April 24th, but if the report is bearish, should respond the best in terms of capturing the downside move. We will have to manage that trade, and look to move into December at a later date. We will also consider short dated, July expiration December puts as well, especially if prices rise into our sell range. We will also consider selling some December call options above $5.20 strike price to help fund these and create a sale window in a range of $4.30-$5.30. This may seem like a lower ceiling, but unless we have a major weather event, our "cushion" of supply makes that range more likely to hold. If we rally past $5.10 in December corn futures, we would look to sell cash and exit the short calls, or at least neutralize them by owning some other call options to manage margin requirements if longer term conditions warrant that action. For beans, the $10-$11.50 range looks reasonable to us, and we will use much the same ideas for corn. Old crop options to clear the report looks good to us, making sure we are protected in some way against lower prices, and look to weather or geopolitical events to sell cash grain as you are comfortable. Consider our "short list" in making your plan: 1) Determine total anticipated production 2) Determine level of forward cash sales you are comfortable doing at a given date 3) Determine how much risk you want to take into the USDA reports 4) Divide total production into increments for cash sales, HTA's, options, and futures 5) Use each tool in the amount of increments you are comfortable with the lay off the risk you do not want to carry into the reports 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. In our opinion, we need to be more proactive this year given the levels of supply available in the world. All this can change very quickly, and risk premium can be added almost instantly. What we want for our farm this year is to first make sure we are profitable, and second, have the flexibility to capture higher prices if adverse conditions develop. Depending on the Government or weather to make or break all that we have built up over the past few years is not where we want to be.
In conclusion, we are approaching major risk reports and weather concerns, and keeping our emotions under control with a disciplined plan is our goal. By laying out a reasonable strategy that is flexible to respond to major changes in the marketing game helps eliminate a lot of that stressful emotion. We have said before, our worst marketing decisions have been made when emotions run highest, and by learing to use our marketing tools have helped us manage those time. If you need some ideas or some explanation on how to use these tools, call anytime. Make sure you are comfortable going into the USDA Reports, and that you have laid off any risk you don't want. Lets get ready for planting with a positive approach to the stressful marketing game! Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central March 10th Supply/Demand and Crop Production March 20th Cattle on Feed March 31st Quarterly Grain Stocks and Planting Intentions Report Export Sales and Shipments every Thursday at 7:30 am
|
|
|