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CFG AG
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CFGAG News and Views vol. 69 April 1, 2015 "USDA Reports Out, Now Weather Leads" At first glance, the numbers from both the Planting Intentions and Quarterly Grain Stocks looked fairly reasonable, more negative to corn, but within ranges of analyst guesses. What then became apparent very quickly was the trade was expecting something very different. Corn started a downhill spiral, ending over 18 cents lower on the day. How could it be that bearish? We had been hearing lots of market chatter since last fall that farmers would simply cut back on corn acres because of low prices and returns. Market psychology seemed locked on lots more beans and less corn, and it didn't turn out that way. Past history suggests that when we have a major surprise, it takes more than a couple days to wash out the story line. We will now look to the April 9th Supply/Demand Report for clarification on the impact on US and World carry outs. In the interim, weather for planting here and harvesting in South America will take over the headlines. Our focus will be on the following factors, both bullish and bearish: Bullish 1) Spring planting is delayed in the Delta, probably less corn will be planted 2) With the current balance sheet, a trend line yield on corn will actually lead to a smaller carry out for 2015-16 3) Funds are flat in corn , short in beans, and very short in wheat. Lots of money on the sideline waiting for weather issues? 4) Soft red winter wheat conditions are questionable coming out of dormancy 5) Geo Political issues remain an issue: Russia/Ukraine and South America all have situations to watch Bearish 1) Old crop stocks are more that adequate, rationing will not be necessary this year 2) South American crops are big, and will probably get bigger in the next S/D Report 3) Other than the Delta, the Midwest is primed for a rapid start to planting. 4) Unless weather prevents planting, more acres can be expected. Who is not going to plant anything? 5) Producers are producers- unless weather comes in, expect maximum effort to grow all we can The following paragraphs are repeated from last month, they still apply: 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. While we feel that the report was bearish, there should still be opportunities to sell new crop corn at higher prices. We are really not that far away. One good week of threatening weather and we should be close. For now, those with May puts will have to either cash them in and wait for higher new crop prices, exercise and roll to capture carry, or wait for a week or so to see if funds press the short side. We are more negative the beans than corn at these price levels, as conditions in South America seem to get better daily, and more beans should be moved in the next month. We would watch closely the numbers in the April 9 report, and the trade reaction. At some point, all the production news will be factored in, and demand and weather will be the focus. We should be close with this report to being there. Longer term, any planting delays should focus on more beans and less corn in the US, and we should trade accordingly. Keep in touch, as for now our price targets are unchanged for new crop, and old crop sales now become a function of basis, but the next report could change our thinking. The most important thing now is to be ready with sell orders at prices you are content with. Opportunities could come and go very quickly!
In conclusion, we are fully aware of what was "lost" yesterday in the terms of the corn market. 100,000 bushels became over $18,000 less valuable in one day. These are the days we feel good with option protection in our pocket, and a game plan to deal with what is next to come. Planters will be rolling soon, but there will be rainy days to go over the plans and make sure you have orders in, just in case the market decides to shift north. We got to this carry out level because we know how to produce, and sometimes in very challenging conditions. We want to help you maximize your efforts with good sales strategies to make your business as successful as it can be. Its all about the team, and may the best one win. Dates to Remember this month
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