Clear Focus Hedging – News and Views vol. 92 March 1, 2017
We ended February with a wild price ride yesterday with rumors flying about changes in the Renewable Fuels arena, with a big rally in corn, beans and especially bean oil, which was up over 2 cents per pound at one time. At midday, the rumor was denied by White House sources, and the market fell back. We mention this as an example of what is possible in this new age of high frequency trading and the volume of trade possible in the electronic order system. May corn traded well over 335,000 contracts alone! While this may seem scary, the bottom line was it propelled prices in corn and beans to very good levels to take advantage of, but without having the orders in, it would have been very difficult to react in sufficient time to take full advantage. So where do we go from here?
We always focus on March 31 reports when we turn over the calendar from February, as that is the most crucial day in terms of risk management for producers as well as end users. We get Planting Intentions, as well as the Quarterly Grain Stocks Report which history shows can be the bigger price mover. There will be a lot of ideas of just how many acres of corn will be switched to beans, where will the unplanted wheat acres go, and just how many prevent plant acres we can expect. Bottom line is there will be surprises with all the number of guesses out there. At this time, we have our price targets in mind, and will respond accordingly with plans to lay off price risk and be profitable.
Our first assumption here is that as long as the weather cooperates, farmers will plant crops on all available acres. We do not see large scale idling of crop acres voluntarily. That said, we feel the total planted acre number given by the Outlook Conference are too low, and will probably get planted to something, again, weather permitting. With the price ratio of corn and beans we could expect a higher percentage to beans, but in prime corn growing territory, $4.00 December futures may be good enough to stay with current rotations. With just these few variables to consider, actual report numbers may be quite different than some expect! Hence, we need some strategy to deal with price risk.
November 2017 soybeans
Starting with soybeans, we have been “sold out” for old and new crop since December, with an average price of new crop @ $10.24 basis November futures. Looking at the chart we can see the old high in the $10.40’s, and remain comfortable with our sales unless those highs are taken out, let’s say a close above $10.50. If the market does that, we would take action by buying some call options to defend our sale. For old crop, we do not like the combination of weak basis in beans and meal, and the size of the South American crops getting bigger with favorable weather. We would be sellers of old crop on basis and use the same formula of making new highs to buy calls if desired. Simply put, downside risk is quite large given all the factors, especially the fund positions.
Soybean and Corn Managed Fund Positions
We can see by this chart just how “long” the funds are, and since they do not consume anything, must at some point sell back what they bought. We also note that even though South American crops are bigger, the percentage sold is well behind average due to the change in currency values, and farmers are reluctant sellers. It is estimated that there are 7mmt’s of old crop beans in Argentina that have been held back to avoid export taxes that may have to be moved ahead of harvest. Combine all those issues, and without a game changing weather event, we could see some significant weakness in beans. Plan accordingly, and look ahead to our harvest this fall. IF, and it is a big IF, we grow a big crop of beans on top of a 420 million bushel carryout, and IF Brazil and Argentina are still moving through record production, we may not have the big export book on this fall to move supplies out of the way quickly. Big risk here is basis, and if you are needing to move beans right from the field, we advise being very cautious on fall basis, it could get quite ugly. On the other hand, a major weather event, and that concern goes away.
December 2017 corn
On the corn, we saw December futures hit $4.04 yesterday, and we are willing sellers to get started at $4.00 or better. Our outlook on corn is more friendly than beans just because of the “what ifs” leading to March 31. We have targeted $4.10- $4.20 to get more aggressive selling on hta’s or futures, or buying short dated puts. While we still believe we are trading in a range, events like yesterday can extend that range a bit, and that’s why we suggest having orders in place at prices that meet your profit objectives. 4 weeks from today we would like to have our price risk covered for the most part, so if those targets are not hit, we will own May puts to protect the downside. Any moves to the bottom end of the range will prompt us to buy “courage calls”, probably short dated July expiration call options to either defend what we have sold, or provide peace of mind in making sales on rallies to those targeted areas.
July 2017 wheat
The short covering rally in wheat got us into the area we have been talking about in Chicago wheat futures, July between $4.80 and $5.00. The quick one day move into the $4.80’s found plenty of selling and the opportunity did not last long. We would hope to get another chance at that level with some winterkill scares, but again, if none develops, owning some puts to lay off some risk may be a good idea, as while acres are down, world supplies are still quite large. We will need to see some weather concerns to spur on the funds, who have reduced their large short position substantially, the smallest in a long time.
Given the above thoughts, some ideas you may want to consider are:
Corn:
1) Sell old crop on good basis at the upper end of the range, around $3.80 May futures
2) Start selling new crop in the $4.00 area, ramp up sales or buy puts in the $4.10-$4.20 target zone, and consider putting in sell stops at $4.00 on remaining sales if we reach the target zone, moving stops up with the market if it would continue higher..
3) On down moves, consider buying calls or futures at the bottom end of the range, around $3.55-60 May futures. Keep risk limited by buying futures against puts.
4) Make sure you have risk covered going into March 31, if December puts are too expensive, consider short dated July expiration, or simple May puts. If the reports are bearish, usually the front trading months get hit harder.
Beans:
Sell old and new crop now or put sell stops in below the market. Sales can be covered with calls at any time you are not comfortable.
If the market takes out old highs, buy the cheapest (May) call options to defend, but keep an eye on them in case of market reversal
On a major sell off, we intend to buy call options to cover all sales just in case we get a weather market going later in the year. By owning calls, we can minimize the risk of not producing what we have sold. Call us for specific ideas and questions, as some elevators will accept calls or futures positions in exchange for cash contracts.
In conclusion, we know there will be a huge number of guesses on the reports and the ranges will likely be large. Someone WILL be surprised. We would rather not engage in the guessing game, and focus on what we know.. What we know right now is the funds are long beans in a big way, moderately long in corn, and hold a small short position in wheat. We feel downside risk is greatest in beans from a long term perspective, and want to lay off some of that risk. Basis levels on beans are the weakest we have seen in recent memory, and some elevators are completely full of corn. This is not a bullish signal, but as we all know, weather forecasts can change the picture very quickly. Call us if you have any ideas to explore, and make sure to get the plans together before March 31!
Mike Daube: 888-391-6330
Allen Gard: 800-205-1700
Dates to remember:
March 9th Monthly Supply/Demand
March 24th Cattle on Feed,
March 24th April options expire
March 31st Planting Intentions and Quarterly Grain Stocks
Export Inspections every Monday at 10am
Export Sales and Shipments every Thursday at 7:30am