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CFG AG
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"Ugly Report, Now What?" The USDA gave us quite a shock yesterday, with prospective corn plantings coming in at 93.6 million acres, more than 2 million acres more than the HIGHEST trade guess. The number crunchers took that number, multiplied it by trend line yields, and spewed out carry out numbers for next year at 2.5 billion bushels or more. Bean acres came in a bit below the average guess, at 82.2 verses 82.95 average guess. The Quarterly Grain Stocks Report came in almost dead on the average guesses, with corn and beans just slightly below, and wheat slightly above. Wheat acres were very low, down 2 million from the average estimate. It is very easy now in hindsight to say we "should of bought more puts", and going into major USDA reports without price protection can be costly. We do not dwell on the past, that is over, but going forward, we want to make sure we ask ourselves if we want to be "long, short, or neutral" going into the high risk time frame.
So now what? First of all, when looking at the numbers, our first reaction is obviously bearish, if we do plant all those corn acres, and we do achieve trend yields, our price prospects look quite dim indeed. The key word in the last sentence is "if". Remember the survey that gave us those numbers was taken in early March. What has happened since then?
1) Beans have rallied over 50 cents 2) Funds have a record or near record short position in corn 3) Excess rainfall has caused flooding and delayed corn planting in the Delta 4) Yesterdays price action favors more beans and less corn on acres going forward
While we cannot look at a bearish report and be friendly the market, we just point out that all those big carryout numbers are predicated on those big acre numbers getting planted, and weather favorable enough to achieve trend yields. We know producers are capable of growing crops, we never doubt the American Farmer's ability to produce. That's what we do! What we do know about the big numbers is this:
1) The higher the acres number, the odds of lower yields goes up 2) Producers are more flexible in shifting acres between crops with the increase in no-til acres 3) The lower the corn price, the more likely the shift becomes
We do not list these expecting a quick and dramatic turn around in corn prices, as these numbers are going to have a negative impact until we have something that changes the psychology from bear to bull, and unless the weather forecast suddenly threatens planting progress, it should be more of a gradual change. Carry out projections are quite large in corn, and with China changing their price support program to rid itself of excess corn supplies, the market will have to see some real changes to those numbers to get off the bear band wagon.
What we want to do now is look for opportunity. Yes, opportunity, as there always is something to do in a positive way even when it looks the darkest. First of all, we want to see how basis responds in corn to the big sell off of yesterday. We would expect farmer selling to shut down. Most folks have enough sold now to wait the market out, and see if weather threatens supply. We would also expect to see some increase in export business, as end users also look at the risk of weather, and may decide to lock some up, just in case. We also will be watching the CFTC report this afternoon to see what the fund positions are, and how this may impact price going forward. For my farm here in Indiana, the market "bought" 200 acres of beans at the expense of corn, as my calculation of the benefits of rotation and the price differential are making that call easy today. I WILL sell the beans today to make sure I have that "bird in hand". For the next 30 days, our positions are as follows:
1) We would be a seller of old crop corn on good basis, and re-owning with limited risk long positions 2) We are a seller of beans, both old and new crop, and re-owning on breaks back down to the lows,or calls if we take out contract highs 3) If you are "switching" acres from corn to beans, we would sell the beans, and own corn calls 4) We have lowered our price targets for new crop corn to $4.00- $4.30, still reasonable in our minds given fund position, etc. 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!
In conclusion, while it is easy to beat ourselves up when USDA shocks us with bearish numbers, it is more important to focus on the opportunities that we have. I mentioned growing more beans and getting them sold today, because I want the cash flow of selling beans to insure I have the ability to store all my corn and capitalize on basis and carry in the market if we do grow those big numbers. It allows me to avoid selling bad futures and bad basis in the fall. If I do have the chance to sell corn at profitable levels, it will be icing on the marketing cake. We do believe there will be chances to do just that, but patience will have to be exercised. By being proactive in cash flow planning, I can avoid a very bad situation down the road, and be ready to grab some cookies off the plate it the market passes some out. We could see some real changes in the numbers over the next 6 months, and the weather man may give us a spark to fuel a rally. Until that happens, we will play the hand dealt, and look for ways to add some dollars where we can. Call us to see if we can use some of these tools to make your decisions better!
Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central April 12th Supply/Demand and Crop Production April 22nd May options expire April 22nd Cattle on Feed Export Sales and Shipments every Thursday at 7:30 am
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