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CFGAG News and Views Vol. 104 March 2018 "Opportunity and Timing"
We have to say first of all, how much more fun it is to write this after a nice rally in grain prices! With the close on the last day of February, corn beans and wheat are all at or making new highs for the year. This rally has been driven by fund buying, drought conditions in Argentina and the Southern Plains in the US, and excellent world demand. Just a couple months ago the outlook seemed quite depressing. Now we have $4 new crop corn futures, November beans over $10.25, and July wheat over $5. We are now looking at prices that can make us a little profit: this is our opportunity. Now for the timing! When is it time to pull the trigger? How much should I sell? When should I get aggressive? These are all good questions, and we ask ourselves the same ones. Hopefully we can give you some ideas and thoughts to help.
First of all we go back to our cash flow and breakeven price figures for direction, and ask ourselves the following: 2) What percent of the crop can I store? 3) What percent of my crop am I comfortable selling now? 4) How much more upside is possible? 5) Given what I know today, what is the downside risk from this price level? 6) What tools am I comfortable using to protect price beyond cash sales?
Right now, there is much uncertainty about crop size in South America, and it may be a while before the market is comfortable with available supplies of our competitors. We know demand is good, but we also know our old crop supplies are plentiful. The uncertainty is also present in the wheat market, where state by state conditions are quite low for this time of year, and with spring planting getting closer, there is concern over our acreage mix and planting conditions. This is what we call the "too" season, too wet, too dry, too hot or too cold to grow a crop. We usually see this in some form every year. So we have opportunity now, what should we do? This is where timing becomes the main issue. We look now to our major risk times, those of USDA Reports, extremely large fund positions, and geo political events that could change the landscape dramatically. As time goes on, we get more information and comfort with available supply for the present and in the future. The monthly Supply/Demand Report will come on March 8, and the big ones, Quarterly Grain Stocks and Planting Intentions come on March 29th. These reports will have a major impact on the market, and likely set the tone going into planting. We have seen many surprises in these reports, and feel that covering a major portion (if not all) of our downside risk is very important to have done. There are many tools to make this happen, and we will go through some of them today.
At this time, we have reached our initial targets of $4 corn and $10 beans to get started, and we have started by making some HTA sales for both. We would add increments on continued rallies, until your comfort level on cash sales is reached. For the month of March, until the 29th, we feel friendly to the corn market, but cautious, remembering last years high was about $4.17. Do we have the set up to greatly exceed that level? We don't know, but from a timing standpoint, we are more comfortable being patient than beans. Last years high in November beans came in around $10.54, and we had a lot less projected carry out than this year. This makes us more nervous than corn, as bean exports have underperformed lately, while corn has done very well in the export news. Funds are heavily long beans now, and slightly long corn. This tells us to be a little more pro active in making sure our price floors are in. If you have already made some cash sales, but want more coverage, here are some ideas:
1) Sell futures, and cover with call options if there are margin call concerns 2) Buy put options, depending on time needed, consider short dated or old crop puts to roll later. There is carry in the market that may or may not be there depending on developments in South America 3) Use sell "stops" below that market, at a price you do not want to go below. These can be ratcheted up if the rally continues 4) Buy puts and sell calls at a price you would be happy to live with
Number 4 is the one we want to focus on, as last month we criticized the selling of options in a non hedge position, and feel it is very important to see what one of these strategies looks like and explained. We have no problem selling calls when the seller fully understands the risks and rewards that exist, and have a management plan in place to deal with the risks. The one we are using ourselves is this: Buy a short dated, July expiration $10.20 put, and sell a full November $11,20 call option, currently at a 3 cent credit. The put option expires in late June, so less time value is being paid for. The call option expires in late October, but can be exited at any time. Our reasoning is that we should have a much better idea of South American production, and a good handle on our planting progress and crop conditions by the end of June. We should have a much better idea of available supply and weather by then. If the market breaks hard, depending on time and potential risk, we may choose to buy back the short call at a much lower price, and we could simply exercise the put and be short November futures at $10.20, and either go with that or buy a call to cover that sale if we think we need to, given our outlook then. If the market rallies further, and takes out last years high convincingly, then we would consider either margining the position and riding it out, or exiting the short call and rolling up our put to a higher level, always looking to sell more cash when comfortable. Either way, we are increasing our bottom line price, and that is the whole idea. If the market does rally further, we may not get all of it, but the trade off is more certainty of price floor now verses more upside potential. This is the question each of us must answer for ourselves, looking at our own checkbook and risk anxiety, and weighing out each option. This trade requires thought and management, and a non emotional look at profit potential verses downside risk. How much is knowing you have a $10,20 floor worth to you right now? We know that markets can do crazy things, rally for no apparent reason and stay "overbought" for months, but given the fund long, our proximity to last years high, the strong potential for more bean acres this year, and the rally we have already seen, we like getting ourselves covered, and on our farm in Indiana, we have all our beans covered now.
For corn, you can do much the same thing, using short dated puts and full length calls to create a "window" for price to work in, and remembering last years high of $4.17 and the previous years high of $4.49 1/2, we would like to see if we can get closer to the highs for selling call options. With funds just about neutral last Friday, there still could be some buying enthusiasm left, so maybe buying a put soon and selling the call later would make sense. The market conditions will change every day and quickly, so making price predictions are futile. We emphasize again the importance of the USDA reports and their potential impact on prices, so we want to be covered before then. Make sure to call and get some prices on options and different ideas to compare to see which one is attractive to you.
For old crop corn and beans, we would encourage incremental sales as usual, but certainly want to reward this rally! We moved some corn when July futures reached $3.90, and will add to them fairly quickly. Just a couple months ago we targeted that level, and see no reason to let it go by unrewarded. For any unsold and unprotected bushels of corn or beans, we would be seeking that price protection now. If basis is good, go ahead with cash sales, but if not, use HTA contracts to at least remove the futures price risk. If futures prices fall, basis could improve then, and that's when we would complete the sale by setting basis and delivering. Its all about TIMING!
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