CFGAG News and Views   November 1, 2019

"Last Chance, Maybe?" 

The "maybe"  above relates to the chance that after November 8 and the Supply/Demand and Crop Production numbers release that "maybe" we could find a reason to rally grain prices. Maybe we will have adverse weather to finish harvest and maybe South American weather will go sour. Realistically, the market reaction to the numbers on the 8th will be the driver unless weather becomes a major threat instead of a minor nuisance. How we manage our risk going into the report may be as important as any time all year as we now have a very unusual situation in the cash market. Basis is extremely strong relative to "normal" in the middle of harvest with many finding 25-30 cents better than we have seen the last few years. Cash bids here are actually better now than in January even with the carry from December to March added in. The market wants more corn and beans NOW not later. Why the big change? Did the elevator suddenly become charitable? Here are some possible reasons why:


1) Late planted has led to late harvest, we use up 1.2 billion bushels of corn every month, so available supplies are tighter than normal

2) Plenty of storage available, no need to move grain so no selling of "extra bushels"

3) Cash flow covered by MFP payments, Crop Insurance payments, and possibly more to come.

4) Many are still convinced USDA will lower harvested acres and yield on November 8 

5) Elections in Argentina suggest more export taxes and possible tight farmer holding.........inflation near 50% now...maybe less competition?

6) Harvest weather may continue to delay incoming supplies and possibly reduce yields. 


All of this is good conversation fodder, and good arguments are there for both bulls and bears, but we are more focused on what our opportunities are to reduce our risks and be profitable. As outlined above, we have the strongest harvest basis we have seen in recent memory. Because our overall price risk is made up of futures AND basis, we have a real chance to reduce our risk now. Looking ahead, do we really feel basis will improve? Right now the cash market believes that we will be more willing sellers after January 1, and that is probably the case. Do we want to take that risk going forward? We understand reluctance to sell based on flat cash price relative to hoped for targets, but removing basis risk may be more valuable now more than ever. Doing a basis contract or selling cash and re owning may be an option worth looking at on at least part of your production. Even with storage on farm, if it doesn't pay you to use it, why do it? The carry between December and March is relatively low, less than 10 cents, and with basis bids where they are here locally, we are better off moving grain now and re owning March or later futures or options. Call us on one of these rainy days to compare notes and see if this is something that works for you here locally.


We also want to reduce risk on futures when we have that chance. The report on the 8th will be very important in regard to price direction and we do not want to ignore that.

If you are concerned that USDA may NOT lower yields and/or acres, owning put options ahead of the report may be a good step. Besides offering downside protection, they can be used to backstop a long futures position if you choose to sell good cash basis and re own with futures. Using this strategy reduces risk of both basis and futures and limits downside risk to the price of the put with upside completely open. Call us for specifics on timing and time length desired. We do not like paying commercial storage or paying for unnecessary time value on option premium. Lets make sure we have your needs in mind relative to cash flow needs, timing and delivery.


With all this in mind, here is some of what we are doing on our farm:



1) For corn, we have set basis on our HTA contracts for fall delivery, taking advantage of the best basis we have seen at harvest in many years and own March futures with a 10 cent stop in place 

2) We are targeting 4.15-4.20 in December 2020 to start making sales of HTA contracts on a portion of next years production, at least bushels we cannot store

3) We are still somewhat friendly on corn price going into the next report, but will be quick to cover downside if $4 December corn trades before then. We will look to own put options on grain not covered by previous hedges before the 8th 

4) For soybeans, we sold our calls for a decent profit, and used the good basis (even) to price out our hedges and deliver out of the field. Stored beans are now covered with futures hedges rolled from November to July for 49 cents carry 

5) We will be looking at November 2020 price of 9.75 or better to start selling HTA contracts on bushels we don't want to store 


Looking ahead, we have a potential deal on "phase one" with China, but there is some debate on what they will actually but and when. November 17 was mentioned as a possible date, but now with the meetings in Chile canceled due to domestic issues, that timing is now in question. After the report on the 8th, our harvest weather forecast and more importantly South America weather will take center stage. We are concerned about demand going forward, especially on corn, which is one reason we want to lock in basis now instead of rolling. Our cash flow needs are met, and we don't have to worry as much about demand later, its good now. By doing this and getting long on paper with limited risk, we now have the flexibility to stay in the market if weather or trade deals give us a good rally. Depending on your actual yields, it may be time to run the numbers and consider more sales or at least set some targets up and get some orders in. We have to accept that if Brazil and Argentina both have production years like last year, we could be heading much lower in price AND basis. Make sure you know that line of profitability and  to make good choices on selling or protecting. November 8 could be bearish as well as bullish and depending on how the trade reacts, it could be a long winter..........make sure you have your risks analyzed and covered if needed!


In conclusion, we are all about profit and risk reduction, and hopefully the above has helped revisit some of the issues we face now. Basis is as strong now as we have seen during harvest in quite some time. Is it delayed reaction or the crop not there? We don't know, but passing up this chance is not something we want to do. Flexible marketing plans always look for this type of opportunity and once taken, has a plan going forward to utilize it for future gains. This is why we are here, to make use of the tools to do what we want to do when we want to do it. Making sure we have adequate cash flow based on profitable prices to go forward eases a lot of stress and makes everyone happier even with ugly weather. USDA will enlighten us as to crop size and carry out, but we suspect with late planted crops and maturity in question in so many areas before killing frost hit may keep the debate alive until January, but in the mean time we have to take some action to protect what we have. We still lean friendly on corn given fund short position and questions on acres and yield, but we are wary of long term downside if the report is not bullish and weather improves both here and in South America. Don't fall into the trap of passive indifference, there are reasonable actions to take if you get that "gut" feeling to cover some risk. Make sure you call to protect equity and go over ideas that can reduce your overall risk. Have a safe harvest and a very Blessed Thanksgiving!


Dates to Remember:

  • Every Monday: Export Inspections, Crop Progress
  • Every Thursday: Export Sales and shipments
  • November 8th : Monthly Supply/Demand Report, Crop Production
  • November 22nd: Cattle on Feed
  • November 22nd: December Options expire



Mike Daube: 888-391-6330 or 574-586-3784

Allen Gard: 573-7694193



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