CFGAG News and Views vol. 87   October 1, 2016

"Big Supply, Big Demand, What is the Magic Price?"

With harvest well under way, we can begin to assess some yield results and even though it is early we can see some patterns deveoping. A snapshot so far would indicate soybean yields exceeding expectations with rare exception, and corn yields very good in most areas, but not consistantly breaking records or exceeding expectations. Maybe our expectations were too high on corn, but some disease issues as well as warm summer nights are being blamed for yields falling a bit short of what was hoped for. This is not to say it is a short crop in corn, it is not! Yields exceeding 170 bushel per acre on a national average is quite a feat indeed, and some are surprised that corn prices have not gone below $3.00 on the CBOT. We want to focus on some simple economics that will drive our thought process on marketing this years crop and position ourselves accordingly for the winter months and beyond.

Lets start with demand. It is quite impressive as both the livestock and ethanol numbers are good, and profit margins for ethanol remain solid. Export sales are also doing quite well, especially compared with last year when Brazil was selling a lot of corn cheaper than the US and eventually sold too much. Combine their aggressive sales pace with a poor Safrina (or second corn crop) and supplies came up short and forced some imports into that nation. At this time, we are the best store house in the world, and our cumlative sales reflect it for this marketing year. Soybean sales are also exceptionally good as well, and the pipeline will need timely filling to get supplies to where they are needed to fulfill obligations and shipping dates. It is a big crop, but we have excellent demand, and herein lies our potential opportunities if we are willing and able to prepare for them. We have to keep reminding ourselves that it is a FUTURES market, and things that were traded last week are old news, the yield reports and weatherforcast both here for harvest and in South America for planting will impact prices going forward. New sales announcements, or cancelations, will also be reacted to quickly. We want to position ourselves to make good sales, but also keep our ownership options available to take advantage of future rallies.

Basic economics says any transaction requires a willing buyer and a willing seller at a given price. How many willing sellers of corn do you know at cash prices of less than $3.00 or even $3.50? Even with record yields, very few are going to be willing to take that offer unless forced to do so.We believe it is possible the fall corn lows were made at the end of August, as forced selling came into play with the expiration of free DP contracts and the need to move old crop out for new crop to come in. Sellers were not willing, but forced to take whatever they could get to avoid more charges and fees. The clock had simply run out. We want to make sure that does not happen to us this year! We have a list of assumptions that we are working our ideas from at this time, see if they make sense to you:

1) Funds still maintain a  large short position in corn and wheat

2) With the current price set up, producers will be more willing to sell or move soybeans rather than corn

3) IF producers are effective in holding grain off the market, futures and basis could strengthen until we pull out what is needed to satisfy demand

4) Basis opportunity could be strongest at the end of harvest through December if grain movement is slow

5) Any major weather issue in South America could cause a sharp rally in futures as funds cover short and possibly go long. Where is the price that we find a "willing seller"?

This is the key, where are you willing to sell? As producers, we have 3 areas of major risk, futures price, basis, and quality in storage. These are important in constructing a marketing plan, as not addressing each one can have severe consequences going forward. We are aware of many reports of disease in corn, and some indication of excessive damage in some areas due to ear rot, diplodia, etc. The first thing we need to do is assess our grain quality and make a decision on when we want it in someone else's hands. The next step is look at basis opportunity, and when it might be the best time to take advantage of it. Quality issues and basis are risks we cannot cover on the CBOT, so we have to make sure we cover them first. Our feeling at this time for our local basis is it should get stronger for corn as harvest winds down for corn, and beans will depend on just how big this crop is and how many need to be moved. If storage space is available, and cash flow needs met, we could see some pop in bean basis as well if producers are able to hold off. If not, we could see a weaker tone into the winter if sales or crush slow down. China is always the major player to watch, and their crush margins are very good at this time reflecting in excellent sales. If that changes, we may have to lower our expectations on basis. Many producers already have a good portion of beans sold in forward contracts, but corn sales are well behind average according to our commercial contacts, so this will have to play out as well as harvest progresses, but keep looking at those basis bids to see if the pattern is changing.

Our strategy going forward is very simple, we want to sell cash grain on strong basis, and maintain ownership in a limited risk position.To accomplish that, we go back to our 3 risk areas above. Will you have grain that must be moved by winter? If so, we need to aggressively sell cash or set a basis contract for when you want to deliver the grain. If basis pops post harvest, get it done and use any of the following you are comfortable with to re-own the cash grain:

1) Buy March call options at the money

2) Buy March put options at the money, and own March futures at that strike price of below

3) Buy March futures at a price you like, and use a protective sell stop to limit risk

4) Buy March calls at the money, and sell out of the money calls at a price you would be happy with in terms of sales

There are advantages and disadvantages to all these, please call to go over them in detail.We want to make sure you fully understand each one and what they will or will not do for you. The most important thing to remember is everything we are trying to do is LIMITING risk. By setting basis or selling cash we are ending basis risk, and quality risk if the grain is delivered. Our re-ownerhip plans also limit risk to either the premium paid for options, or the stop loss orders we choose to use. The transaction costs should also be included in any calculation, but the bottom line is, if we can move grain and limit risk we are in a better position than just throwing grain in the bin and worrying about it in a few months. Our opportunity may come early for basis, and later on for futures, we do not know, but what we do know if by using March futures and options, we have until the end of February to see if a problem developes in South American growing regions, and that is a time frame that encompases a large part of their growing season. We like those odds, and also the fact that we are at least moving some of our inventory as the time clock starts ticking on the old crop as soon as harvest is over. We have to also remember that while we have few willing sellers now at these prices, there will be fewer willing buyers as prices rise as long as supply is not severly threatened. Making sales in increments on a rally keeps our selling average moving north, and our inventory risk going south, and as the clock ticks forward, that is a good place to be!

With the Quarterly Grain Stocks Report behind us, there were no real surprises in terms of trade expectations, but corn and wheat closed strong. Why? End of month and end of quarter short covering is our best guess, but this could be a very something to watch. We could easily see a trading range develop as rallys find sellers and dips find buyers, or we could see a repeat of 2014 when we started a major rally on October 1 that saw the funds buy a lot of grain contracts. Even though we had a new record crop, they bought it like there was no grain left. We hope to see these types of rallies come our way, but they will be useless unless we are prepared with a plan of ACTION, not discussion. For our farm, we are prepared to move all our cash corn on a strong basis, eliminating quality and basis risk early, and using the tools of futures and options to maintain ownership.You may want to consider buying some March calls now at a futures price you would be happy to sell at, so you have the "courage" to make the sale if it comes. We have found that spending a few cents now takes a lot of the stress of making that decision later off your plate, as when weather markets come, they add lots of emotion to the mix, and rarely does that end well for the producer who is afraid to sell because it "might go a lot higer". Remember, we do have a big crop out there, and world supplies are more than adequete. It will take a major weather situation to take prices above this years highs. Our thought is to be conservative but flexible, and get all we can in a reasonable price range. Call us for some of those chart points if you cannot see them.

For example, if you are storing unpriced or unprotected grain, consider a March $3.80 call for 7 or 8 cents. Buying that call now will give you the confidence to sell some corn if we get there while maintaining ownership via the option. This will allow you to put some cash in the bank while staying in the game to see if some major weather event develops and reduce the quality and price risk that goes with stored grain.The same idea can be used in beans with either a January $9.80 call for 20 cents or less, or a March $10.00 call for 30 cents or less, it depends on your view of the market and how much is too much to spend fot the time value. Either way, you have a sales target and a plan going forward to reduce risk and maintain ownership as long as you feel needed.

Going into the October Supply/Demand and Crop Production Reports, make sure you have as much risk covered as you feel comfortable with. We feel the trade will be looking for higher bean yields, and possibly lower corn. The big question is on acres of each, will they go up and if so, how much? The biggest impact will come from the projected carryout numbers, as there take in to account both supply and demand and give us a look at how comfortable supply will be. Our price targets may change after seeing these numbers, so stay in touch. We would always advise owning puts on unprotected grain, especially if we are trading at the high end of the most recent range, but we can also use these puts for our re-ownership plans if the conditions develop that we went over earlier. Take a few minutes on a rainy day to go over your options as we approach report day.

In conclusion, we feel there may be some excellent opportunity to get some grain moved and risk reduced in the near future. We do not want to go through the "give up" or throw in the towel exercises if we can avoid them. By starting now with some planning and goal setting primarily to limit financial risk with every move, we feel like this positive and pro-active approach is a good one. With big crops comes a bigger responsibility to market better, so cash flow needs and financial goals can be met. Willing buyers and willing sellers will always find a price, and we need to accept the fact that there is a lot of grain out there this year, our opportunity may be in timing, and being ahead of a big crowd of sellers that HAVE to sell. Keep those timing issues in mind as we look at your options of sales verses re-owneship, and when you will need cash flow. The market has lots of tools to help you do what you want, we hope to be able to help you execute those ideas that make it happen. Stay safe and have a great harvest!

Dates to Remember this month

Crop Progress and Conditions every Monday at 3:00 central time

Export Inspections every Monday at 10:00 central

October 12th Supply/Demand and Crop Production

September 23rd October options expire

October 21st  Cattle on Feed and Cold Storage

Export Sales and Shipments every Thursday at 7:30 am

Mike Daube      888-391-6330

Allen Gard       800-205-1700