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CFG AG
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CFGAG News and Views vol. 100 November 1, 2017
Yes, it has been 100 monthly issues now, and what a ride. Look at a price chart from August 1, 2009 to the present of December corn and November beans. When we look back at what prices were in 2012 compared to today, its about half for both. It is rather depressing right now in terms of price, and many producers are looking at trying to cut costs again and decide on what crop mix to plant in 2018 to generate enough revenue. What have we leaned since 2009 to today that can help us decide? 3) The news follows the market, not the opposite 4) The best time to sell next years crop is in the middle of a drought (2012) 5) The worst time to sell next years crop is in the fall of a record crop (2016) 6) Lack of rainfall in the summer can be offset by cooler temperatures.(2017)
It all looks quite easy looking back at charts to see what we SHOULD have done, but as we all know, emotion and ego become involved because we don't want to "sell too soon". We should add another line above, which would probably be the most important, would be to always have a disciplined marketing plan that has well defined price objectives and action points along with as much flexibility as possible. Again, this sounds easy, and it is to talk about, but actually doing it is another thing. Some years, like this one, we had what we felt were reasonable targets, but did not quite get there on enough bushels. We can blame the funds, the USDA, and everyone else we can find, but the bottom line on corn is, we did not get enough sold. While we are happy with our bean sales, corn is a major disappointment on our part. Looking at why can help us learn to do better in the future, something Grandpa always taught me, "experience is the best teacher, learn from your mistakes and go on a better man!" Hopefully we can follow his sage advice that lives on by making sure that:
1) We make sure we know our cost of production, and realize all our marketing tools available 2) We do not get traumatized by adverse weather in some areas, that is what "normal" is 3) We do not continually search for the "holy grail" in marketing, basing decisions on what someone else says or does, but rather what our own cash flow and balance sheet tell us 4) We make sure that when prices reach profitable levels, we are ready to sell or own puts, the orders are in and we don't spend time worrying about a "bad sale", just excited to sell more if prices continue to rise.
For now, we can now see our concerns over this years production were overstated. Many areas are finding yields above expectations, and the market has pretty well digested the crop size USDA has put forth. We will get an update on November 9th with the monthly supply demand and crop production report, but unless there is a major surprise, we now trade demand and South American weather, along with the simple equation of what price it will take to find a willing seller for every buyer. We have plenty of supply, but how long can it be held off the market before we have some "forced selling"? Right now, we have the following list of opposing forces"
1) We have a big crop, but end users are not well covered 2) South America has unsold grain from last year, and a new crop going into the ground, but world demand remains very strong 3) Currency values: weaker SA values and strong $ equal more selling, and vice versa 4) Corn/bean ratios for next year are starting to lean more beans 5) Cash flow needs verses price, How long can we hold?
Our position now is sold out of beans north of $10.00, and only 15% of our corn is priced over $4, so we have a lot of corn to sell, but are able to hold off for now with cash flow needs covered by the beans. We currently are long December 17/short December 18 corn at around 45 1/2 cents, and we like this spread for the following reasons:
1) Funds are short corn in a big way, and probably most of it is in the front month, they will need to roll out of them at some point 2) Producers are not willing sellers at this point, they may have to sell some, but as little as possible 3) End users have little forward coverage on, basis locally is improving as more crop is put away 4) Harvest is dragging on slower than normal, so demand of over 1 billion bushels per month is taking some pressure off storage 5) Demand remains excellent, ethanol production is exceeding USDA projections, and animal units are still growing
If we do not get a reasonable profit, (10-15 cents) by first notice day, we may consider staying with the spread by rolling to Dec 17 to March 18, but if we do narrow the spread, we can either take the profit, or sell the Dec 17 and be hedged for next year at price above $4. Call us for specifics and pros and cons of this. A hedge in futures is a sale, and may require margin so be prepared to defend this position if something changes. For beans, we like selling above $10 for old and new crop, getting some coverage at profitable prices. Old crop basis is not favorable now, but should get better with harvest wrapping up. Look for any decent rally to sell more if you have them, and re own with calls, they are quite reasonable with the quiet trading and low volatility we have experienced lately.
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