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CFG AG
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"Happy New Year"
Yes, it is 2016 already. A new year with new challenges and possibilities. The challenge of being profitable in farming looks to many like a very big one, as prices continue to be stagnate or make new lows this past week. We have to remember that there will be changes, just like October of 2014. Not that long ago, we were looking at a December 2014 corn price of $3.20. What happened next? Funds went from a big short position to a big long, giving us a great opportunity to sell at profitable prices. Just last winter, we saw the funds sell and sell more to acquire a very large short position by May of this year, and yes, when the rains fell excessively in the Eastern Corn Belt, they went from a large short to a large long position in two weeks, with corn gaining about 80 cents per bushel. Another opportunity to sell at profitable prices. The message here is simple, now is not the time to panic.
While we fully accept the bearish possibilities if we do not have a major weather problem, we also can only remember 1 year in recent history when we did not get some sort of weather rally, that being 1994, which was followed by a big rally in 1995. In short, the odds of 3 years in a row of well above trend yields are low. While we are not wildly bullish, with the extreme weather conditions we have been witnessing lately, we cannot get overly bearish at this point in the calendar year. South American weather has been relatively good, some issues of too dry in Northern Brazil, and too wet in the South, while Argentina has been generally favorable. This indicates "trend" yields are likely, but not records, and the market has probably factored those yields into current prices. It is now "July" in South America, so the next 2 months will be critical to final yields, and funds, who are holding sizable short positions now, will be watching those developments as well.
So what should we do? As risk managers, we should focus on January 12th, when we get the final production numbers from the 2015 crop, and the Quarterly Grain Stocks Report from USDA. This is a big day, as limit moves in price are more common than not. If the reports are bearish, there is nothing except South American weather that is likely to move price in a positive direction until the end of March. We could be stuck in a choppy bear market for a long time. If the numbers are bullish, we could get the rally we want to reach a price that makes us profitable this year. Either way, these reports and days leading up to them need our attention! We have a lot of ideas that are very specific depending on your situation, so the general ideas we will list below should be taken as guidelines only, make sure you call and go over each one as it relates to YOU!
In general, we want to be "neutral" going into these reports, meaning all unsold 2015 grain be protected with puts at least, and if prices are decent, (each producer decides what is decent) we cover some of 2016 production with March puts as well. Why March? At this time, the spreads in corn and beans are narrow, about half of full carry. If the reports are bearish, we would expect the front months to get hammered the most, widening the spreads closer to full carry. Conversely, if the reports are bullish, March call options are the cheapest, and are good until late February. By then, we should have a good handle on South American crops, and a better look at our spring planting weather outlook. Obviously we would like to see a rally in the next week to get better strikes on any option purchases, so staying in touch over the next 10 days is important. Our "short list" of ideas is listed below:
1) We would be a seller of March corn above $3.80 and March beans around $9.00 2) Any move into this area, we would be buyers of 3.80 corn puts and 8.80 or 9.00 march bean puts 3) We would exit any long positions in futures, and replace with March calls if still bullish 4) Remaining patient on new crop sales, we are still targeting $4.30 corn, and $9.50 November beans 5) If #4 targets are reached, we would do a combination of HTA's, short dated puts, and if desired, selling out of the money new crop calls to create a price window 6) Call option premiums are relatively inexpensive, for those with an optimistic outlook, owning some to sell futures or cash against later may be a very good long term strategy. If we do rally 30 cents or more, they will make pulling the cash trigger much easier!
The following paragraph is repeated from last month, as it still applies. While basis has backed off lately, there are signs that it is ready to strengthen again. We may have moved enough grain due to good weather conditions in November and December, but that may be changing now.
We feel strongly that moving grain on good basis and replacing with low risk (long put/long futures, calls or call spreads) is a much better alternative than simply waiting for a weather scare. We have ample stocks, and an export program that is lagging. This is not a recipe for a big rally. Setting a goal of moving an increment of bushels every month that you have stored may be a good idea. We cannot be sure that good basis will still exist after January 1, as grain sold for that time frame moves, nor can we be sure that it won't. Recognizing that we have two components of risk to our flat price, basis and futures calls for us to limit half that risk by doing a basis contract, or selling and re-owning. Right now, basis here has backed off the highs a few weeks ago, but still remains relatively good. Check your bids and call us for updates. Be aware that a basis contract should be made in the time frame you want to sell, as rolling it will reduce the price by the amount of carry in the market. In other words, if you do a March basis contract, and roll it to May, you will lose the amount of the spread, or difference between the two months price, currently about 6 cents. Continuing to roll forward will do the same, so make sure you understand the contract and what it will and won't allow you to do. We have had many calls on this, and see a lot of confusion on the terms of delivery, so we want to make sure you do not get into a contract that limits your options
Looking forward, there are factors we are watching:
1) Weather threat in South America. (or not?) 2) Long US $ positions/short commodity spreads 3) Strength or weakness of the US $. Has it topped out? 4) Selling pace of US farmers (TIMING!) 5) Removing export taxes in Argentina. (or not?) 6) Weather- shift from El Nino to La Nina? Strength of event and projections?
Statistically, a strong El Nino like we have now is followed by a warm and dry summer more often than not. While we will not base our marketing plan on that alone, we do like the odds of a rally some time in the next few months to get profitable prices protected. Depending on your risk tolerance, cash flow, storage space and crop mix, there is a way to protect any or all of your crop with the focus on limiting risk. We are always glad for the opportunity to walk through some ideas that may work for you, call for a time we can do this! In conclusion, we want to emphasize the importance of being prepared for the next major risk day of January 12th, and also not letting emotions or the latest talking head on a farm show to dominate our thinking. Being prepared to pull the sales trigger may mean the difference between making money and losing it this year. Make sure you have a thought out plan to make these sales or protect a price that is profitable. We only have to look back to last June when we had two weeks to do exactly that, and doing it when emotions of looking at flooded fields were quite high. Make sure you have a handle on what crop insurance will or will not cover, and then we can make sure you have enough crop protected if the price target is reached. We do not know if or when the opportunity will come, but we CAN have a plan in place to grab it if appears. Have a great New Year, and be ready if the sky clears and a profit appears on the horizon!
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 22nd Cattle on Feed Export Sales and Shipments every Thursday at 7:30 am
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