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CFG AG
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CFGAG News and Views vol. 82 May 1, 2016 "One Month, Over 10 Billion More $$ !"
Yes, its hard to believe but in fact, just looking at the value of the 2016 crop of corn and beans, it worth over 10 BILLION more than just one month ago. We also added value to our old crop still stored, and it indeed is a massive improvement in net farm income projections! So how did we get from the gloom and doom of the March 31st USDA Reports to this in just a short time? Simply said, massive fund buying. An enormous amount of money flow into commodities has push prices, especially beans, into areas we only thought possible with a major weather event to lead it. There are some fundamental changes that have contributed some enthusiasm, and we list them here:
1) Excessive rain in parts of Argentina has damaged crops, and reduced production 2) Hot and dry conditions in Brazil are reducing the size of the Safrina corn crop 3) Export sales in corn have improved dramatically, now running at or slightly ahead of USDA projections for the marketing year. 4) Export sales of beans are now slightly ahead of USDA projections, reflecting the harvest delays in Argentina 5) Weather pattern shift from El Nino to La Nina looks more likely now
We have often mentioned how money flow drives a market, but to get the kind of price move of the last month, we usually expect a major weather event to spark it. Quanifying yield losses in Argentina and Brazil is difficult at best, and we probably won't know for at least a few weeks on the beans as combines are just starting to roll once again. What we do know is that damaged beans are unlikely to be stored, they more likely will be blended and moved as quickly as possible. If we do not see some serious selling pressue increase in the next few weeks, we may have to re-evaluate our long term approach to the bean market. As for now, we are watching the recent high in November beans of $10.23 as our reference point. Closing above that level could be a strong signal of more to come and we would consider buying short term calls to defend hedges. If the market is unable to take out that high, we would stay with our sales and hedges, looking for a decent break to add call options to our strategy. Trying to explain this type of rally is difficult, especially since we stayed in a depressed, narrow trading range for so long. We certainly did not see this much of a rally potential without major weather, but once again, money flow in can be huge and the impact on price dramatic. The question now is what will bean prices be come October? The old saying is, "whoever buys but does not consume must eventually re-sell". Do not underestimate the potential downside of this market if yield estimates in South America are not cut as much as feared, and our planting progress and weather remain good.
For corn, the very large short position held by spec money is now gone, as they now have reversed to a long position. Farmers who have finished planting under ideal conditions are scratching their heads, as they expected prices to fall as the crop goes in ahead of normal. Funds buying out of shorts off set that development for now. Will they buy more? Will there be more money flow in to commodities? Look at the spec long now in crude oil. Even with oil stocks at record levels and tankers full sitting off shore in floating storage, we rally price over $10/barrel. We now have deferred contracts up to levels that will encourage rigs to re-start producing again. Evidently the market feels like $30/barrel oil is too cheap, and needs to be higher out two years to make sure we have supply. Are we looking at the same idea in grains, encouraging maximum planted acres this spring to make sure we have enough a year from now in case something happens?
We are very pleased with the rally, and looking at our balence sheet here, it is very good news. Prices are now at levels we can make at least a small profit. While we may have more rally left, we cannot advise doing nothing, as we remember last year so clearly. About 2 weeks and 90 cents per bushel in corn were gone in a very short time. Fund money can move in and out very quickly, and the long position in beans they hold is large. We all wish we had held off on sales to the "high", but no one knows where that is, or if it is already in. What we must focus on is selling at profitable levels to start, adding sales or put options an rallies, and making sure we are selling futures or putting in sell stops to make sure we have every thing covered at prices that make us profitable. Do you remember how depressing it was last month? Prices could be at those levels again, and it may not take long to get back there or worse.
Keep in mind we have a Monthly Supply/Demand and Crop Production Report coming out on Tuesday, May 10. USDA may choose to adjust South American crop numbers, and will probably use March 31 acre numbers for US production. We will be watching the following potential price movers:
1) Weather and harvest progress in Argentina, and if selling pressure increases. 2) Weather in Safrina corn areas of Brazil 3) Daily and weekly export sales and shipments. Will the pace continue or back off? 4) The US dollar, and the relationship with other currencies 5) Money flow as we start a new month
We also believe that the following paragraph, repeated from last month still holds, but we do note the following diference: option premium is no longer "cheap" as volatility has increased dramatically. We are also not as enthused about selling corn calls yet, as we would rather wait and see if further fund buying develops. If we would advance to the $4.30-$4.40 area, then selling some calls may be a good idea. At the present time, it just feels like corn has more upside than beans right now, perhaps because we feel part of the bean rally is spread trade, buying beans and selling corn. Every opperation is different, however, and if you would be happy to sell cash corn at that strike price, and are willing to do so, we can certainly respect that.
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!
Don't forget that option protection is available every day, as well as sell stops. If you feel the rally is running out of gas, both of those ideas can work. Make sure you call and go over the implications, the pros and cons of each before placing the orders. Planning for the "what ifs" can take a lot of stress of when we are all trying to do 20 things at once.
In conclusion, while it is cold and rainy this 1st day of May, we have a little time to catch up and look at some numbers. Very impressive rally, and we are gratefull for the opportunity to sell at a profit now. Having orders in here or the elevator can come in handy, as the over night rally almost two weeks ago printed the high so far in December corn. If you have a price you would like to move either old crop or new, get the order in. That particular day, we had a 17 cent swing from high to low in corn price. With 200 bushel per acre corn, that is $34 per acre difference in just a few hours. Take a few minutes to prepare for the possibilities, and hopefully make some sales. When we look back at our crop insurance guarantees, we now are above those prices, and our deductibles have gone down. Making sales above those prices is a good idea, and if you think they could go higher, make sure with some short term puts. We never know when the picture might change, but when it does, it is usually swift and dramatic and ultimately painfull for those who did not take some cookies off the plate. Try to take a few, and also take some time to pay tribute to those who have served their country and all of us this month! With out their service, we do not get the chance to do what we do.....
Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central May 10th Supply/Demand and Crop Production May 20th June options expire May 20th Cattle on Feed Export Sales and Shipments every Thursday at 7:30 am
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