"Sell Off, Rally, and ???"

We started the spring off with a nice rally, sold off after Memorial Day, and have now rallied back over 30 cents in corn, 80 cents in beans, and over 60 cents in wheat to finish the month of July. You only have to look at money flow to see how price is affected. Funds were long significantly in corn and beans at the end of May, sold off to big short positions, and have now covered back about half of those shorts. Wouldn't it be great if we could figure out what they will do next? Not possible, as managed money comes in all sizes and with different objectives, different rules for every fund and management system. What we MUST focus on ( I have to keep reminding myself too) is that price risk management along with crop insurance and farming practices are what will make me profitable, or not. Period. We would all like to know what USDA will give us for production and carryout numbers on the August 10th Supply/Demand and Crop Production Reports. We would love to have a peek at what the world numbers look like before 11:00 am that day, but the truth is that what we really need is a plan to deal with whatever comes out, and maintain our businesses with profitable outcomes.

This issue will deal with some ideas on how to accomplish this, hopefully some will work for you, but make SURE you talk these through with us to make sure the idea fits what you want and need. We start with a look at our Profit Matrix, where you can play "what if" with different price and yield combinations as they relate to your farm. By finding your best estimate of yield, go down to the price that gives you the gross dollars per acre that you would like to have. That is your price target, and if we get there, we need to have a plan of either cash or futures sales, put options, or a combination depending on risk and margin tolerance. (This is where we talk strategy and potential cost at it relates to you only). After finding your combination, we will go through some thoughts based on some of your questions we have received over the past few weeks, but first have a look at the tables:

Question 1: "How do I avoid paying storage charges when I can't store everything?"

                  2:" I have some grain sold, but not enough, how do I protect the rest?"

                  3: " Is there much upside left in corn and beans?"

                  4: "Will this trade war and tariff garbage ever get settled?"

                  5: " What about South America? What will our competitors be doing this fall?"

Lets look at the different factors and then give our ideas on strategy:

Bullish:

1) Demand is excellent for corn, exports and domestic use are not shrinking, and current prices will not hurt demand

2) Estimates of world production have been going down, weather issues in Russia, Australia, Ukraine and South America

3) Logistic issues in Brazil are still a major problem, not only for grain shipment but also for fertilizer used this fall and winter

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

5) NAFTA negotiations are moving, ideas of an agreement now seem possible very soon.

6) Negotiations with the EU are improving, some framework on soybeans and liquefied natural gas looks promising.

7) Brazil has more incentive to plant more soybeans given the price, and less incentive for corn given the transportation issues (friendly corn, negative beans)

Bearish:

1) Trade issues, tariffs, and possible retaliation are still major issues

2) Crop condition ratings remain very strong

3) Crop development has advanced with warmer than normal temperatures, harvest should start earlier than normal

4) South America has no reason to cut bean 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, and earlier than normal harvest may add pressure

7) Funds are short corn and beans, but have "room" to sell more, index (long only funds) have been liquidating as well

Given the questions and factors listed above, we still remain more friendly to corn first, neutral on wheat, and a little concerned on beans. We are friendly corn given strong demand, crops in Europe and Russia declining, and the ongoing saga of Brazil and trucking issues. While not wildly bullish because of what USDA may give us for a yield and production estimate on the 10th, we are friendly corn longer term, as demand and usage remain quite strong, and price has given no reason to slow it down. What we do have to recognize is that in some areas, especially those with large old crop supplies left and good crop conditions now, basis may be under a lot of pressure and storage costs may be quite high verses normal. This could get really bad if harvest is early and quickly finished, so our number 1 rule of selling cash when basis is good may be challenging. Check on your local basis early and often to see if bushels you can't store can be moved at a "reasonable" basis. Then, here are some ideas based on a hypothetical assumption just for illustration.

1) We have a chart "gap" in December corn around $3.92. If we were able to reach that area before August 10, we will buy March $4.00 put options, probably for around 20 cents. We will do this to set a floor price in March futures, it may seem a little pricey, but having downside covered before a major report is worth a lot. This is not the only reason to own them, however, as we will use these puts to buy futures against if and when we sell cash corn. Given all the potentially friendly items listed above, we want to see how the South American crop size develops, as well as how demand responds both by end users as well as funds. We look at this put purchase as a "2 for 1", as they first cover our downside risk, (first and most important) but then allows us to be "in charge" of our cash marketing WITHOUT  paying commercial storage which by our informal survey will be MORE than 20 cents just to get to January. Instead of paying that storage, why not buy the put, sell the cash whenever YOU want to without the pressure of another months storage payment of loan extension, and simply buy futures backed by the puts. Your total risk is what you paid for the puts, transaction cost, and the difference between the strike price (4.00) and the futures purchase price. If the futures are under $4, then you have less risk than the put price by that difference. We will be doing this ourselves on any unsold bushels if given the chance, and even if we don't quite get to the 3.92 level, will probably get some on anyway to reduce risk and guarantee a reasonable price. Our final thought on this is we have seen early harvest years bottom basis early, only to see bins locked and a strong basis rally in November/ December as selling slows quickly.

After looking at the Profit Matrix, you may just want to make some cash sales on bushels you don't think you can store, or sell futures and buy some cheap calls to possibly add value later. Our point is, save the storage payment and possibly let those dollars work better for you over a longer period of time, but also remember our first objective is to cover downside risk in front of major reports!

On the beans, we have lingering concerns with no agreement in sight with China, and the longer it drags on, the burden gets bigger. Yes, there are only so many beans in the world, and if China is going to buy every Brazilian bean, then some demand must come to us from other places, but DDG's, wheat, and other higher than corn protein sources can be substituted temporarily to get by. It may take awhile to get equilibrium back, and in the meantime we "could" be producing a crop that exceeds 50 bushels per acre, adding to an already large carryout number. If so, could we see prices back down to the $8.00 level or even lower? Yes, we could, we don't want to, but we could, and we could also see harvest basis a lot worse than it is now. This is another factor that concerns us, corn basis improved when the market sold off in June, but bean basis did not, and remains flat. For this reason, if your bean crop looks good, and you must move beans off the combine this fall, it may be a good idea to lock up some of that basis now. Check soon so as not to get a big surprise later. If trade issues are not resolved, don't expect the commercial grain industry to suddenly become charitable!

We like the same approach to soybeans as corn, owning puts for January or March going into the reports, protecting downside risk as well as offering the ability to re own futures after cash sales. You can also buy puts and sell March calls at a price you would be happy to sell cash beans at if storing them. Bull call spreads may also work well if we find adverse weather in South America this winter. We emphasize: this in an individual call, no cookie cutter approach, as each of you has different storage capabilities, cash flow needs, and risk tolerance. NO ONE should do any of these just because somebody else thinks its a good idea for him or her. Make sure what ever you choose is the best option for your plans, and we will take the time to go over it. Just call. We plan to make farm visits starting very soon to go over details and what if planning, so let us know when a good time is. With a good crop coming, we need to spend more time, not less, in marketing to get every dime out of all the hours of hard work, and we really like that challenge!

In conclusion, we made an early "high" in May, sold off quickly into July, and now have rallied back about a third. We don't try to guess what will come next, only look at our bottom line and make risk management decisions. Take another look at the matrix and see where you will likely end up. If the price/yield combo is attractive, lets get the orders in either in the cash market or with us. Buying put options last May seemed pricey and too early, but we all wished we had more by the middle of June. We would rather not repeat that feeling at the end of August if possible. No one wants to lose money buying puts, but that just may make more money in the end and make sleeping at night a lot easier. Don't let fear and emotion dictated selling decisions, rather keep yourself in control even if you can't store everything, buying puts is cheaper than storage in most cases! Keep it safe, sane, and under control even if the trade negotiators can't!

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

August 10th: Monthly Supply/Demand and Crop Production

August 24th: Cattle on Feed

August 24th: September Options Expire

Mike Daube  888-391-6330

Allen Gard     573-221-9234