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CFGAG News and Views vol. 75 October 1, 2015 "Long, Short, or Neutral" It is very early here on the first day of October, but there is plenty of noise as the grain dryer runs on trying to catch up with yesterdays harvest activity. We have a good start so far, as corn yields have been decent, but certainly not the "bin buster" we had last year! It is easy to think that if yields are down on my farm then prices must be too cheap, but the western belt is enjoying what we did last year in the east, record yields in many places. This is not going to be a poor crop nationwide, but certainly in central Indiana there will be areas that are simply a disaster. Having a marketing plan to cover all the extremes in production might seem difficult, but using the title of this newsletter is a a start. Do you, given the present situation with production and price, want to be long, short, or neutral? Going into the October 9 Crop Production and Supply/Demand Report, we need to need to do just that: look at our production estimates, our Crop Insurance guarantees, our sales so far as well as our futures and option positions. Are we long? In other words, do we have more grain in the bin, in the field, or in the elevator than we have sold or protected? If yes, do we want to be in that position at 11:00 am on the 9th? Our most important job here, as we see it, is to help you (and ourselves as producers) manage risk. We hear a lot about risk management, lots of lofty verbiage about lots of stuff but unfortunately, it is mostly hot air and noise. Why? Because unless we both know where YOUR risk is, we cannot help you manage it. Your personal risk tolerance may be quite different than your neighbor, and your cash flow needs as well as other unique items dictate different plans for each individual. Consider the following list of factors we use to determine some good choices: 1) Crop Insurance coverage, and projected yields 2) Storage availability and cost of handling and storage 3) Basis levels now and in the future 4) Cash flow needs, as well as tax implications. When do we want/need the income? 5) Expectations for the coming year, what are the potential opportunities for rallies, and how far? 6) What is our profit goals and objectives? Are they reasonable? Ideally, if we are risk averse, we should be "neutral" as much as possible. Our insurance program is downside protection, but is limited to insured bushels at a set price. Anything over that we are "long" the market. We smile when we hear folks say we are just speculating by being in the market, when the truth is anyone without insurance, sales, or option protection are in fact the biggest speculators! If you are going to put $500 per acre into growing a crop and have no price protection, is that not speculation, and a lot of it? For some, that is just fine, they may have no debt, no cash flow needs for rent, etc. For others, it is now bare bones time with no room for error, and everyone in between. That's why we work on individual basis to fit the right tools to the need. Making sure you are in the right position for your situation going into October 9 is important. It does not matter what some farmer in another state says his crop is making, it matters what your crop is doing and how you are positioned in terms of risks. We all have risks to deal with every day, but evaluating what is tolerable risk and what is not is where the meat is. Going into the reports on the 9th, are you long, neutral, or short? Where do you want to be? Last month we examined a possible "trading range" developing, and we are now at the upper end of that range. Can we break out? Should we sell now and re-own later? For our part, anytime we can sell at the upper end of a range, and re-own towards the bottom, that is ideal. Timing and emotion can sometimes get in the way of making a good decision, but if you sell, and have a re-ownership plan laid out, the emotional pitfalls are managed. How many times have we not "pulled the trigger" when we knew we should because of the fear of going higher. Let us help you manage that situation, we have been through it many, many times ourselves. One idea if you simply like options and not futures is to look at a retest of the recent lows to buy them. If we then rally, you can sell your cash grain at the upper end of the recent range, and either sell the call, add the profit to the sale, or hold it in case the rally breaks out to the upside. I call these "courage calls" that give me the courage to sell grain when I should, but keep me "in the game" for a limited risk, simply the cost my call option. This is just one way to use the tools to manage your situation, and for us, it is no different. We have to manage our fears and emotions like everyone else, its just a matter of finding the right tools!
Our positions at this time are as follows: 1) Sales or downside protection should be added at the upper end of the range 2) Yields on soybeans are coming in better than expected so far, maybe add a few puts up here? 3) We have exited our long positions ahead of the Quarterly Stocks Report, and are re-hedging both corn and beans at the upper end 4) We will look to lift hedges and buy calls at the lower end 5) Plan the cash flow! Do not get caught having to sell at a bad time. Sell good basis and re-own futures instead of storage! 6) Make sure you are prepared for the October 9th Reports! 7) We feel that producers will be tight holders of grain as long as possible, there is no need to sell at the low end of the range, but each producer needs to look at what protection he needs, depending on insurance, storage, and cash flow 8.00 9.96
In conclusion, harvest has begun with a rapid start and great weather overall. Moisture levels of corn and beans are on average, quite low for this early date. We may see a lot of harvest hedge pressure in the next week, but then what? We believe that producers will sell as little as possible under $9 beans and $4 corn. It will be up to someone else to provide the sell pressure, do you think the funds will? Unless the managed money comes into the short side of the market in a large way, it may be difficult to push down below contract lows. We cannot predict what funds will do, but we can look at the recent ranges on the chart and make some good marketing decisions. Using the recent ranges offers a lot of opportunity, about 20 cents in corn, and 40 cents in beans. We know prices are not what we would like, but by using our chart points, we can hopefully find some profit this year. Just remember, do you want to be "long, short, neutral?" Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central October 9th Supply/Demand and Crop Production October 23rd Cattle on Feed Export Sales and Shipments every Thursday at 7:30 am
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