"June is a BIG Month?"

 

A big one indeed as USDA Reports, weather, and trade issues are front and center in determining just how high markets can go this year. Many times we peak out in June when weather uncertainty, crop acres, South American production and projected carry out numbers are becoming more defined. On June 12th we will get the monthly Supply/Demand numbers from USDA, which will include updated and probably close to final production numbers from South America. It is important to note that so far this year, every month has seen declining production numbers, and with them shrinking world carryout numbers. Last month the market was surprised by the drastic reduction in world stocks year to year, and if this month continues that trend it will put more pressure on the US crops now growing to generate good yields or projected supply excesses of the past few years may not be there. On the flip side of the bullishness, we have the crop going in on time relative to normal, and the first corn condition ratings were as good as they have ever been for the end of May. After the 12th, we will look to June 29th for the Planted Acres and Quarterly Grain Stocks reports. This day has a long history of major market moves, often surprising the market with unexpected numbers both bullish and bearish. Without a major weather event in progress, these reports will likely set the tone in the market prices for the balance of the summer. It will be a big deal to make sure you have profits protected, and are positioned for unexpected surprises. It was not that long ago, (4 months?) that prices were lousy and profits for 2018 were not looking good. We are now in profitable territory, and can not ignore what might happen if all the negative possibilities come together. Lets look at some of the factors on both sides:

 

Bullish:

1) Demand is excellent for corn, exports and domestic use are not shrinking.

2) World weather is less than ideal, with dryness affecting Russia, Ukraine, and other competitors

3) South America production continues to drop in estimates, providing less competition for our grain

4) Ethanol production continues to meet or exceed projections, and stocks are not growing, its being used!

5) China is importing ethanol, and building plants of their own.

6) Crop acres in the US for corn and beans are below last year (projected) and wheat crop conditions are low historically

7) Midwest weather has been very warm in May, and in many areas, very dry

 

Bearish:

 

1) Trade issues, tariffs, and possible retaliation are major issues, NAFTA is not close and China is a major wild card

2) Planting progress and crop conditions are at or above normal, early reports are very good 

3) Warm and dry May weather has led to some much above trend yields historically. Its hard to kill a crop in May

4) South America has no reason to cut production, probably try to grow more

5) After last year, we will not underestimate the potential of producers to do what they do.........produce

6) We have more than ample stocks for this year, over 2 billion corn and 500 million bean bushels carry out on 9/1/18

7) Funds hold fairly large long spec positions

 

Given what we know, (a lot less than what we don't) we remain cautiously optimistic on corn prices as we approach these June reports. We have been incrementally selling on every rally, and now have over half our old crop priced in HTA contracts, and will be anxious to move more on further rallies. There remains good carry in the market, and using the September option is now worth 9 1/2 cents more than July. Make sure your elevator will use the Sept. option, as some go right to December for basis, and waiting too long in the face of a big crop may cost more in basis than the carry is worth. For new crop corn, we are now about 25% hedged with December HTA's, and will be looking to cover everything before the June 29th reports with puts, spreads or more sales depending on what the market will give us. Old crop beans are all sold here, if you have more, look to move them on rallies in the $10.40-$10.50 area. New crop are all hedged above $10.20 and we are content with that, looking to possibly purchase some calls on a major break, or on a close above $10.60 in the November contract. Without a major development, this may be it with the carry outs projected. We continue to reward rallies as these ARE profitable prices, and much better than anticipated a few months ago, and even though we remain friendly to corn we cannot ignore that the managed money (funds) are long, and there is always a possibility that a trade dispute, or any thing else for that matter, can cause the funds to sell. We don't want to be holding the "long" bag" if and when they do.

 

For trade ideas to protect the floor price, we continue to like buying puts on rallies, adding to cash sales (HTA contracts) as you are comfortable, and also selling futures with some call option protection in case the weather remains hot and dry too long. Another idea is to use a spread, specifically selling December 18 corn, and buying December 19 corn. This spread has been trading at a small inverse, (December 18 greater than 19) of about 5 cents earlier this week. With the amount of carry out into next year, we do not see the need for this inverse to continue into harvest. Typically, this inverse happens when funds (speculators) buy up the nearby December and this is where we feel a lot of their longs are. At some point, these funds either sell out of these positions, or roll them forward. We feel there is a decent chance that they will in fact roll them out, and the likely place would be next December given that world supplies are shrinking, and MAY get tight next year. There is no guarantee this will happen, but looking at a chart tells us that many years we go back to a carry market, and sometimes by as much as 40-50 cents. How could this happen? IF we find more acres in the June 29 report, and more grain stocks than anticipated, and crop conditions remain excellent, we could easily see the kind of market price drop that would make this happen. The other side is IF we get a repeat of 2012 weather, that spread went out to over a dollar inverse as funds and end users scrambled for coverage, blowing out hedgers to the margin clerks. If margining this spread is a concern, owning some cheap calls to limit exposure may be a good idea. For specific ways to use this spread, make sure we talk it over first to understand the management plan in case something very abnormal happens. The bottom line is it make sure it is something you can understand and be comfortable with!

 

Another spread we will likely use for re-ownership of sales made, especially if this crop year looks to finish below trend in yields is buying the July 19 and selling the December 19, because if the crop is short, buyers will focus on old crop and get what they want before someone else does. There will be a crop in the fall, and more supply. If this crop year is threatened in a major way, look for that spread to go out to a large inverse, July over December. It is currently about 16 cents inverse, so if you are feeling like this is a below trend year, this may be another choice rather than buying calls or futures without options. We would expect increasing volatility and erratic action going into this months reports, and timing will be important. Make sure to go over this and all ideas with us first to make sure this is something you want to do and is fitting your overall plan and risk tolerance. Our position as hedgers first is to make sure that if we lose money on a trade on paper, it is more than made up for on the cash side. For instance, if we sell Dec 18 and buy Dec 19 and the market races higher, we will at least get the gain on 19 to add to our gain in cash grain we haven't sold yet, more than off setting the loss on paper of the Dec 19. You have to weigh this possibility against other choices like put options and paying for the time value, and being limited to that time value you purchased. Futures spreads have a lot longer time frame in which to work, and can be traded, rolled out, or legged out of depending on what your cash positions are. This is a lot to consider, which is why we want to visit for what ever time you need to make sure it fits your marketing plan and objectives. The most important thing now is to make SURE we are profitable, reduce risk, and stay flexible. We are confident that some combination of the above ideas can help.

 

In conclusion, we are happy to have the opportunity to protect some decent prices, and still have some optimism going forward that makes us want to keep the upside open for a while longer. It would not surprise us, given the lower acreage projections here and production shortfalls in South America to see the markets well supported farther out in June. What we cannot overlook, even if it doesn't rain for a week, is that these numbers and carryout projections can change quickly, on report day, and there is no way to get ahead of the high frequency traders computer based selling. If we are not protected going into these reports, we as producers are taking a lot of risk, risk that can be managed and reduced. No one has to go into these risk areas unprotected unless they want to, and if you do, that's fine. I know that I will sleep easy knowing that all I have to do is grow the crop this year, the minimum value is already set, and a plan is in place to add to it if the market reacts favorably. We will have a combination of all the ideas above in place BEFORE the reports come out. We have spent too many days after bearish reports listening to complaints about USDA and the markets in general being rigged. To us, we have the tools and power to lay off as much risk as we want and will not blame anyone but ourselves if we did not get the job done. We will celebrate Flag Day on the 14th, a symbol of our freedom to do just what I was talking about, either accept risk or lay it off and we celebrate the opportunity to be successful in this great country. It is not easy life, but the best we know of!

Dates to Remember this month

• Crop Progress and Conditions every Monday at 3:00 central time
• Export Inspections every Monday at 10:00 central
• Export Sales and Shipments every Thursday at 7:30 am
• June 12th: Monthly Supply Demand and Crop Production
• June 22nd: Cattle on Feed
• June 22nd: June options expire
• June 29th: Quarterly Grain Stocks and Planted Acreage!

  

Mike Daube      888-391-6330

Allen Gard         573-221-9234