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CFG AG
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"A Fresh Look at Old Rules"
With the turning of the calendar to 2018, looking at the supply/demand balance sheets, we find carryout projections are very similar to last year. With two very large crops harvested in a row, and no major weather problems since 2012, one might think that we would be swimming in grain! Demand and usage however, has been growing as well. All classes of use are higher, not just here, but world wide. China has imported more beans every year, and they are reducing their huge corn supplies as well with increased ethanol production. What we have with 2.4 billion bushel corn carry out is about 2 months of use. While this number is certainly not bullish, it does remind us of how quickly market attitude could change IF supply production is threatened in any major way. This includes South American production that will start harvest soon, and our 2018 planting intentions and spring weather conditions. With the funds carrying a large short position in corn and wheat going into the new year, and end users basically buying hand to mouth, we do not want to get caught sleeping at the switch if a marketing opportunity develops. Our basic philosophy is to move corn on a good basis bid, either with a cash sale or basis contract, and replace with minimal risk futures or option positions, for the following reasons: 3) Basis risk is removed from our equation, if corn rallies sharply, we would expect basis to erode as more bushels get moved 4) If call options are used, they can be sold or rolled up at any time, capturing gain, stops can be put under futures protecting gain if realized, or limiting losses 5) Profit goals and cash flow needs can be identified and protected more easily if the grain is moved and quantities known 6) A plan of execution is in place and removes the risk of "brain freeze" that often happens when markets rally
We want to have a "starting point", a price that you are willing to start selling or protecting grain. For us now, we would look for a 10-20 cent rally on corn and 20-40 cents in beans. This may be optimistic, but for now we will go with that for our farm, looking at fund positions and good demand to give us that chance for now. For price references, this would mean July corn futures around $3.80-$3.90 and March bean futures at $9.80-$10.00 for old crop, and new crop December corn around $4.00 and November beans above $10. We think these prices offer us some realistic profit goals to get started, and with options as cheap as they are, we would be more than happy to sell cash or futures and own some cheap calls to defend against a weather crisis. What we don't want is to be as undersold going into summer as last year when we missed our only opportunity to make sales and watched profitable prices disappear when late summer weather balloon the 2017 corn crop to record yields. Our selling opportunity is usually when there is the most uncertainty about crop size, and by July, that uncertainty is usually going down. Lets work together to remind ourselves that to be profitable, we need to pull the trigger when we have the chance, as the last two years has taught us that the price may only be there for a couple days!
For soybeans, we have been sold out for some time as written in these monthly articles, but if you have beans to sell, the same old rules apply as for corn. Sell cash on good basis, or write basis contracts for delivery when you want cash flow, and re-own with futures or options if desired. We are more concerned (defensive) about soybeans this year, as Brazil has planted more "first crop" beans and conditions there are very good so far. Argentina is more iffy, with some weather challenges both early and lately, but conditions have been improving the last two weeks with some timely rains. If these "just in time" rains continue, and Brazil continues to experience good overall conditions, we could have more downside to go. Funds have liquidated their long positions in beans, but could still drive prices lower by going short. We just don't want to carry that risk if we can move grain on good basis and own cheap options. Make sure your cash flow needs are met by sales you want to make rather than being forced to sell on weak basis. Futures or option gains cannot make up a bad basis! Other things to keep in mind about beans:
1) Argentina peso is very cheap historically verses the dollar, this usually encourages sales 2) Brazil bean planting was delayed, early harvest pressure should not be as large as last year, but may reduce safrina (second crop) corn acres 3) China is reducing FM limits to 1% which may be a bargaining chip in trade negotiations with the US 4) Early talk is bean acres may increase at the expense of wheat and corn in fringe areas of the corn belt. 5) Bean export projections were reduced in the December USDA Supply/Demand report, they may be reduced further
We also need to remember the big report day on January 12th, where we get final production numbers for corn and beans, wheat plantings, and the Quarterly Grain Stocks Report. A lot of numbers, and a lot of chatter going into that day will undoubtedly drive the market along with weather from South America. We will be watching carefully for any decent rally to reward, or take some protection on price. Puts are also very reasonable, and can be used to backstop futures, so owning some with some buy target orders in can also be a good strategy. Make sure we go over the risk and reward potential for any idea well ahead of time so emotion does not ruin a good plan. If you are a producer and are concerned with downside or a user of grain and concerned about upside, there is an option strategy that can reduce that concern, and it wont break the bank to get it on. We have to repeat over and over to ourselves as well as our clients, that owning grain unprotected is SPECULATION! The question we all have to answer is, if that speculation is warranted. Are we really comfortable sitting on all this grain with no price protection? Is there a price to sell or option premium worth the cost of reducing that risk? These are all individual decisions that unfortunately do not get enough attention in our minds, and we fully recognize and admit that we are just as guilty at times. No one has all the answers or a magic price calculator with the high and low for the year, but what we all should have is a price in mind that pays the bills and rewards our work and risk taking ability in producing a crop. Lets all "resolve" to spend more time on that area of our business this year!
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