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CFGAG News and Views vol. 86 September 1, 2016
"Big Crops, Marketing Challenges"
On August 12th, USDA released the monthly Supply/Demand and Crop Production Reports, and gave us some very big numbers: a 175 bushel national corn yield and 49 bushel bean average yield, both records if realized. Within minutes, the data used to prepare these reports was under fire as USDA reported record ear weights for corn even though the number of ears per acre was less than the previous two years. Corn actually closed higher on the day and rallied over 30 cents from low on the 12th before selling off to make new lows this week. Likewise, beans rallied after the 12th only to sell off the past 5 trading days. A stronger dollar lately has contributed, and other factors are at work as always, but the bottom line is at the end of August, market prices are very weak and producers with old crop grain unsold along with unprotected new crop are rightly concerned. We have a lot of decisions to make with harvest starting in many areas now or in the very near future. Sometimes when it looks the darkest, a change in market perception can trigger an entirely different direction. While we do not know what or if that can be, we only note how quickly over the past few years a very bullish or very bearish outlook can change course quickly and with little if any warning. We want to use this issue to go over the market picture now, but also prepare ourselves to take advantage of good opportunities going ahead. We think there may be some! We already know it is a big crop, but not exactly sure how big yet, but the fact that supplies will be more than ample is old news. What is also true is the fact we have a lot more export sales on the books this year as well. Last year at this time, our book of business was very small thanks to aggressive sales by Brazil, who now must import corn because the safrina, or second corn crop was very disappointing. This underscores the need for at least decent crops in both hemispheres or move quickly to more rationing with higher prices. To make a market, any given price must find willing buyers AND sellers at a given price. We do not feel there are many willing sellers at these price levels, but if sales are forced in the cash market, we need to have a plan to re-own those sales and have some time to see if in fact South America can produce a big enough crop to keep demand satisfied. Consider the following: 1) Funds have a very large short position in corn and wheat 2) 2014 saw similar conditions with a record crop coming on, but starting October 1, corn rallied substantially 3) Weather concerns will now shift to harvest weather here, and planting weather in South America 4) Brazil is in the process of impeaching a President, volatility could increase with changes there 5) Storage will be at a premium in some areas following a big wheat harvest, basis may under pressure until every bushel finds a place to be While it is not our point to be wildly bullish here, we want to be clear that this is not a place to make sales if it can be avoided. If any weather event poses any threat to crops in South America, fund short covering could rally grains quickly and sharply. Remember last spring? Very bearish psychology, markets stuck in narrow ranges until a spark opened the door and our selling opportunity came very quickly,and left even faster! Being on board and ready never meant more. For these reasons, we want to get ready mentally to take advantage of any decent market moves. That means getting a plan together with targets and orders. Lets start with these steps: 1) Crop insurance: are we at prices that your policy kicks in yet? If so, we may not want to be "short" the market in futures, options or cash sales 2) Estimate production and subtract sales. How much do we need to move and by when? 3) Look at basis bids for fall delivery verses deferred months. How much is the market willing to pay you for your storage? 4) Decide how much you are willing to risk for re-ownership, and how much it is worth to have options in place for reasonable selling target prices now. For instance, if you know you need to move some corn at or right after year end, consider owning March $3.70 calls for around 7 cents. If the market does rally, like 2014, and March futures get to $3.70, you can make those cash sales and still hold the calls to see if the market has more strength in it, but you will have a good reason to take advantage of the rally and not worrying if you might be "leaving money on the table". We have found over the years that being pro-active with options makes those selling decisions a lot easier, and they are worth the investment! Having a plan to do this based on a solid cash flow and balance sheet is just good business. That is not to say it works every time, it does not, but doing nothing rarely leads to positive results as well. The same can be said for buying calls in the winter at prices that are selling targets for new crop. If you own cheap $4.00 calls it becomes very easy to make those sales when we get there instead of worrying there might be more in the rally. We are not advocating new crop options yet as time value is quite high, but we want to be thinking about this and will keep this thought in preparing for our next crop soon. For this farm, it has been very beneficial to set those targets ahead of time and adjust over time if necessary. The bottom line is, we sell or buy puts when we are profitable without falling victim to emotion. We maintain flexibility without being forced into a bad decision, and to us, this is what successful marketers do. For re-ownership, we have added a tab on the home page for our fall hedging and re-ownership ideas, where we lay out some ways to maintain ownership and manage risk as well. If you have good basis, it may be a good move to sell grain, (especially grain in excess of storage capacity), and use March puts and futures to maintain ownership. You can also buy calls, but this option limits your upside to a portion of the rally, and does not provide the flexibility to trade ranges if they develop. How many times have you seen a market trade a dull, boring, 20 cent range? Last winter perhaps? Indeed, those who used their puts to buy futures against were able to trade from the long side against those puts multiple times for 10-20 cents. This may not happen, but we feel it has possibilities for the following reasons: 1) Harvest should be early this year, especially corn, and selling will be limited 2) Producers will be reluctant sellers, but may move a little on any 20 cent rally or a pop in basis 3) With funds so short in corn and wheat, short covering rallies can happen any time 4) Any new demand news or threat to South American crops could cause this type of rally 5) With demand for exports high, and ethanol production very high as well, the pipeline will need to be filled from time to time.
There are many reasons we do not want to get overly bearish at these prices, but we do want to make sure we understand that right now our carry out projections are quite high, much higher than the previous few years. We cannot ignore that fact, but also look at how fast those projections can change. It only takes adverse weather somewhere to change the landscape, and cause the funds to change course with their investment money. We may lower our targets on selling price targets after the September 12th Crop Report, but until we have a better handle on actual yields, we will not advocate new sales without re-ownership at these prices. This looks to be a good year to target small rallies to sell, and re-own on dips untill the marketing landscape changes, but always keep those targets in mind to unload old crop and start new crop. With the option ideas we laid out, we hope you will call or stop by and see if those ideas or tweaks in them will make your plan work. In conclusion, remember as harvest starts, how hard we have worked and how much we have invested to get to this point. We have a good crop in most places, and some best ever in others. The hard work and weather combined to make a bountiful harvest of which you should be proud. Now is the time to make sure we generate all the revenue we can and put ourselves in a position to capitalize on changes in weather or anything else. While we hear plenty of bearish noise out there, we still have to find willing sellers for every buyer at every price. There is time available for the outlook to change, and we want to be ready if it does. Last summer we got about a week to make good sales, that is not very long with a crop that takes a years worth of work to produce. Let's make sure we are ready and in the right mindset to take those opportunities, and don't forget to celebrate your hard work this weekend! Dates to Remember this month
Mike Daube 888-391-6330 Allen Gard 800-205-1700 |
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