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CFG AG
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"USDA Comes Through- Another Shocker!" At 11 am Central last Thursday, USDA released the Quarterly Grain Stocks Report, which was bearish, but also the Planting Intentions Report, which was very bullish. The bottom line is we have plenty of grain for now, but IF the planting intentions numbers prove to be reality, then carry out numbers for all grains will likely decline. We have looked at balance sheet numbers that have next years corn carry out around 1.5 billion bushels, and soybeans down around 350 million. The market chose to buy, and buy big with corn up over 14 cents and beans more than 30 cents. The question now is "what about the stocks, aren't they pretty big?" The answer is yes, very big, and the planting intentions are just that, a survey of intentions. We have been hearing of possible switching of corn to beans, but the market was not ready for this big of a drop in "intentions" for both crops. Going forward, we will have to monitor a number of things to see if these numbers are in fact realistic, or will the rallies in grains cause farmers to change their minds as we start planting. We have some concerns about becoming overly bullish given the numbers released last Thursday, and list them below: 2) Funds hold big long positions in beans, and are moderately long in corn, short in wheat. 3) Brazil is harvesting a record bean crop, and has lots to sell 4) We have plenty of grain to sell here as well 5) At this point, the Brazilian safrina crop is in good shape, but critical time is still ahead 6) Trade issues are still a concern, with Chinese buyers reportedly trying to source more supplies outside of US in case tariffs are put in place on beans These are concerns, but we also recognize the potential of adverse weather to really get these markets fired up. Argentina has been hurt badly with drought, and now we watch Brazil as weather becomes more critical as we move into April and May. Our planting season is looking at a sub optimal start with wet and cool conditions keeping early planting to a minimum. The market should be more nervous until we have our acreage safely in the ground, and you can bet that the "acre counters" will be very active trying to determine just how many corn and bean acres are going in. Our next big report is the monthly Supply/Demand Report released on April 10th. This will be a big one, as we look for a better handle on production in South America, how big is the Brazilian crop, and how bad is it in Argentina? All the data released last Thursday will translate into projected carry out numbers for corn, beans, and wheat. Remember, the last two months, USDA has increased export projections for corn, but has lowered them for beans, lowering carry out for corn and raising it for beans. We will get a much better picture of what the government expects as a result of all these factors, and we will be watching closely if any carry out numbers go up or down and by how much. We should also have a better idea on wheat conditions and if prospects are improving after some rain events, or if we could see more abandonment than normal. We would be looking for those acres abandon now to find a different crop with prices well above insurance levels, the question is how many, and to what crop?
We also have to remember that as of yet, only November beans have made a new high, trading about a penny above the previous high, and July beans are below the old high by over 30 cents. Corn is close in new crop, but still below the high in July futures by over 6 cents. If we truly see shortages develop, we would expect the market to be led by old crop higher, and a rationing situation begin to take place. With the stocks we have on hand, this is not likely, but we would expect to see end users add some coverage on breaks until we are more confident with prospective new crop supplies. This leaves us with some very interesting choices as we approach trading on Sunday night. Do we stick to our plans, or do we pull our sell orders and wait? For our farm in Indiana, we will stick to the plan. While we are impressed by the rally on Thursday, we also are looking at profitability and what we do not have sold yet. We had a chance at $4.12 corn before, and then we broke over 20 cents. We had a chance at $10.48 November beans, and then broke 40 cents. Through our planning early, we have identified profitable levels at which to sell or buy option protection, and we still like those levels. We like rewarding rallies! Given the downside risk we now have, we would be looking to extend coverage as we approach the next big report on April 10. Depending on how much you have sold and at what level, there are plenty of choices to be made, and getting positioned ahead of the 10th may be a good idea. Here are some thoughts:
1) If the rally continues, we can roll puts up to a higher strike. Call us with specific recommendations 2) If you have sold cash or futures, and feel the market may go much higher, short dated calls can be a good choice to see how much is left in the rally. 3) Making incremental sales, or buying puts to extend coverage increases the floor price average. Keep the average going up! 4) Keep in mind it is a FUTURES market. We have to question how much "bullishness" is already priced in. Taking advantage of extended fund longs has proven wise the past few years. We don't know if this is another one, but we do remember how painful not having good floor prices was after the market broke and funds sold heavily.
We have a lot of these positions on, so we want to repeat this paragraph from last month, and remind ourselves why we put it on, and how we plan to manage it:
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.
Because of the rally Thursday, we can put on this spread at much better credit than before, assuming we do not open 20 cents lower Sunday night. We still think the idea has merit, and will manage it as outlined. Again, bull markets are most often led by supply concerns, possible shortages, and hence the front months of a market. Unless we see the July contracts leading corn and beans, we will remain comfortable. One way to be more comfortable in the short term is to own May or July calls, as these will be cheaper, and will respond very quickly if we have a major weather event to deal with in the next few months. We would not jump into these right away, but see how the market reacts on Monday to the 3 day weekend news and a full trading contingent is on board.
Mike Daube 888-391-6330 Allen Gard 573-221-9234 |
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