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CFG AG
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"June 2016: Make Or Break?"
Yes, June is going to be very important in terms of price discovery, and we want to begin this month with a short look back. Just two months ago, following the March 31 USDA Reports, corn was trading in the $3.50 area, and as this article is written, we are trading at $4.14. Sixty cents per bushel times a 150 bushel aph is $90 per acre difference. We now have the funds out of their big short position, and owning a small long one. Funds have a very large long in soybeans, and a big short position in wheat. Planting progress is average to above average now, with the Eastern belt catching up. There are some problem areas, but overall the US is off to a reasonably good start with no major drought areas on the map at this time. With this in mind, we look to the important USDA Reports, Monthly Supply/Demand and Crop Production on the 10th, and the ALWAYS important Quarterly Grain Stocks and Planted Acres Reports on the 30th. We will say this over and over, being protected on BOTH long and short positions is very important, especially the 30th!! Major price moves are very likely as weather, acreage expectations, and a more accurate picture of ending stocks combine to potentially offer big surprises to the market. Looking ahead, we note the following price moving questions as we prepare our marketing plan for these reports:
1) How many acres have been switched from corn and spring wheat to beans? 2) How many prevent plant acres will there be, compared to last year? 3) Will corn exports maintain the pace of the last 8 weeks? Will beans and meal pick up the pace? 4) Will the US dollar sell off or rally on news from the Fed this month? 5) Will China be successful in auctioning off corn and bean reserves? 6) Will ending stock projections be growing or shrinking?
With weather non threatening at this time, it can change quickly. Here in the Eastern Belt, the month of May was less than kind as cool and damp conditions delayed planting, caused uneven emergence, and left overall conditions far from ideal. Now we are hoping for some rain and warm temperatures to catch up. It is not a disaster like the flooding of last year, but certainly has lowered the chances for bin busting yields. It is easy to get bulled up when the crop looks bad, but overall, the first crop conditions report yesterday showed average to above average progress and conditions. We have a long way to go, but we have to believe a lot of "weather hype" may be in the price as some well respected weather folks have been calling for a hot and dry summer based on the transition from El Nino to La Nina. While we are not wildly bullish or bearish on the corn market, we simply ask, given the price rally of the last 60 days, is this a price worth protecting? In our minds it is, as $4.10 corn and $10.50 beans give us a profit for the year. On this farm at least, we will NOT go into these big reports without covering our downside risk in some fashion. There are many ways to do this, and we prefer a combination of cash sales, HTA contracts, put options, and futures with calls. Make sure to take a minute or two to visit on these and other choices you have to remove price risk now that the crop is basically in the ground.
We remind ourselves that even with some adverse weather, money flow into or out of these markets are the most important driver of price, and with the funds heavily long the bean market, even a minor weather threat can be sold off. It is a FUTURES market, not yesterdays news market, and many times bullish "news" has already been factored into price, or at least been anticipated. Also, with ample carry outs of all grains, and a surplus of wheat, there are substitutes available. Look at the wheat/corn spread, about 62 cents in the July contract. This is historically very tight, and will certainly attract some wheat into the feed bunk in place of corn. This situation reduces the potential impact of a weather market, as end users have alternatives and do not need to compete for supply with the fund money as aggressively as they have in short supply years. Once the fear of a crop failure is remove, albeit gradually, there is no reason to push markets higher and they fall under their own weight. That is a major reason we want to be fully protected before month end. Too much risk, and no reasonable safety net, as crop insurance prices are now far below market prices!
Consider the following questions when planning for the report news:
1) What is my production estimate of this crop now? 2) How much do I have sold, and how much is unprotected? 3) What are my storage capabilities, and cash flow need going into fall? 4) What is my local basis for new crop grain? 5) What are the spreads doing? Will the market pay me to store my grain into next year?
By answering those, we can formulate a plan to effectively market your grain, and keep you flexible for big price moves. It just involves using some "tools" that the market place has to offer. If you have old crop grain left, lets make sure we at least put some floors under those bushels as well, as we can lose these price opportunities a lot faster than we got them in our favor! We do not want to let the reality of being profitable now come and go without at least reducing some of the price risk. We have enough risk just getting our crop planted and established, and we do not want to "donate" our time and money to the world food supply without getting a reasonable paycheck!
In conclusion, make sure you are ready for the major reports coming out this month, taking some time to go over your marketing plan given the crop conditions on your farm now. We are always available to kick around some ideas, but it really comes down to a simple question: Going into these reports, do you want to be long, short, or neutral? If you have large amounts of unpriced grain in the bin or a crop in the field that is not sold or protected, you are heavily long this market, and carry major risk. If you have sold "too much" and are betting on prices to fall, you have risk as well. My choice is to be neutral as possible, letting the market do what it will and not worry and stew about what I should have done before the report. It is quality of life issue here, and I choose to make sure someone else is doing the worrying about price risk. That may sound over simplified, but it really is not. We just need to work on a plan that fits your needs, and put it to work. Lets talk soon so you can do what you do best, produce, and let someone else worry about price risk!
Dates to Remember this month Crop Progress and Conditions every Monday at 3:00 central time Export Inspections every Monday at 10:00 central June 10th Supply/Demand and Crop Production June 24th July options expire June 24th Cattle on Feed June 30th Quarterly Grain Stocks and Planted Acres Export Sales and Shipments every Thursday at 7:30 am
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