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CFG AG
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"Reports In, Weather and Trade Now"
The long awaited USDA Reports are now in, with few surprises. USDA found more planted acres of corn, beans, and spring wheat in the surveys they collected, and quarterly stocks came in very close to trade expectations. The increase in acres was not a total surprise, as the spring rally in grains produced a little more incentive to get more seeds in the ground, and the totals reflect less prevented planted acres than projected in March. We must also caution that these are surveys, actual certification will not take place until July 15, and could change the mix from this report. The last two years bean acres have increased by about a million acres, so a gain there would not be without precedent. The bottom line coming from these reports are the acres are there to keep supplies comfortable, but it will now be up to final yields to determine if they are too tight at this price, or if they become "burdensome". Implied stocks to use ratios in corn will still be relatively tight even with a trend yield, so for the next few weeks at least, all eyes will be on the weather forecasts to see if the recent heat levels off and timely rain falls for pollination and kernel fill. Every producer knows how important the next few weeks are, crop condition ratings look very good now overall, but all could change quickly with hot night time temperatures and a couple missed rain events. Lets look at the list of factors that we see today:
Bullish:
2) World weather is less than ideal, Russian crops are especially under significant stress 3) Safrina corn in Brazil is being harvested, but trucking issues and government conflict are causing problems 4) Ethanol production continues to meet or exceed projections, and stocks are not growing, its being used! 5) Rumors circulating indicate some "back channel" discussions with China over the tariff issues may lead to a delay in implementation slated for this Friday, July 6. 6) Latest weather forecasts have been leaning warmer and dryer for the next 2 weeks 7) Actual acreage mix may go with more soybeans and less corn given adverse planting weather in the northern states
Bearish:
1) Trade issues, tariffs, and possible retaliation are major issues, NAFTA is not close and China is a major wild card (watch July 6) 2) Crop condition ratings remain very strong 3) Crop development has advanced with warmer than normal temperatures, less concern now over early frost 4) South America has no reason to cut production, probably try to grow more given Chinese demand and trade issues with US 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 are now short all grains, but not excessively, they could sell more
The trade and tariff saga goes on, and will certainly dominate the newswires this week as we search for answers on just what the impact will be. If the implementation of these tariffs is delayed, we could see a good pop up in the markets led by beans. Remember, beans and wheat are the most at risk in a trade war, as more of these commodities are exported than corn by a long shot. A recent quote by a US trade official summed it up this way on beans, saying "if China bought every available bean in the world, they would still have to buy 20 mmt from the US." In other words, China cannot source enough beans elsewhere in the world to meet their needs they would still need an additional 20 million metric tons. The current thought is that China has much more to lose in a trade war than we do, but we do not want to speculate on that. What we will do is protect our hedges for the next few weeks and let others worry and stew about price risk. We have all our beans covered here on our Indiana farm with cash sales, November futures from exercised $10.20 puts, and have now bought short dated November $9.50 calls that expire July 27th to defend our sales and hedges. We like that set up, making sure we have a good profit protected, but also with upside open in case weather goes hot and dry for a while. If prices rally, we can add to our sales price by selling or rolling up the call options, and if prices crash to sub $8 we have only risked 15 cents for the call. In our minds here, we like those parameters, and are comfortable with letting the market go where ever it wants to go, our profitable price net is still over $10.
For corn, the next few weeks are crucial to final yield, and with the uncertainty of the weather, we like buying short dated December calls that expire July 27th to possibly re own sales already made, and also for the "courage" to sell corn in the cash market that you may not be able to store this fall. By owning the call option, you can sell cash corn on a rally, and if we "take off" to the upside, you can exercise that call and be long at $3.80, and have to opportunity to stay long on paper for as long as you like. Using sell stops below the market will limit risk and should be used to make sure any profits are protected. For instance, looking at the December corn chart, there are 2 gaps to watch, one at $3.92 and another at $4.10. If prices reach those areas, consider putting stops below them in case the market fails once the gaps are filled. They don't always "fill", but traders watch these technical points closely. We do not try to out guess them, only have a plan in case these things play out, and have orders ready to go in quickly in case they do. Make sure we talk these ideas over completely in advance, weather markets and trade issues are traded by computer program instantly upon release. Opportunity comes and goes in seconds, and without orders in, there is no way to "catch up" to them. We all remember when China announce a tariff retaliation last month, beans were down 54 cents in the overnight session, and recovered over half that in the day session.
It is very important to remember this weeks trading time, we close at noon on Tuesday, July 3, and do not trade again until Thursday morning at 8:30. There will be lots of weather and trade news, some of which may be released in non trading hours. Make SURE we know what you want to do and get orders in early this week, and have a management plan for what we have in place so no matter what the news is, we can be ready!
In conclusion, we have lost a lot of value since the first of June, and there is still a long time to go. Final yields are far from being reality, and the next 4 weeks will be crucial. If you have more old crop to sell, take advantage of good basis and call for re ownership ideas that fit your risk tolerance. Planning for fall starts now with storage and logistic issues to cover and a plan to get the most value for your production going forward. We will need to evaluate crop size, crop insurance guarantees, basis, and costs of storage as well as what carry there is or is not in the market. Lots of things to think about, along with our regular chores, but a very important part of the big picture. Call with ideas and thoughts on how we can maximize your production values, and lets all celebrate our INDEPENDENCE to make up our own minds and do what we feel is right in our pursuit of happiness. God Bless all those who made it possible for us to do just that today!
Dates to remember this month:
Export Inspections every Monday at 10 am Export Sales and Shipments every Thursday at 7:30 am Crop Conditions every Monday at 3 pm July 12th: Monthly Supply/Demand Report July 20th: Cattle on Feed July 27th: August Options Expire
Mike Daube 888-391-6330 Allen Gard 573-221-9234 |
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