Clear Focus Hedging News and Views
February 1, 2021


 "More Rally, When Do I Sell?"



With the continued, seemingly endless days of prices rallying, we get a lot of calls and questions like "how far can we go?" or "how long will this last?" The easy answer is when we run out of buyers, but realistically for us as producers is for each one of us is to ask the question "how high is high enough?" Each of us must decide how much risk we want to accept while waiting for more, and when it is time to lay off some or all of that risk. One way is to use crop insurance, which will begin calculating spring price guarantees today. We are looking at some really good profit opportunity, and yet there are still legitimate questions about supply and demand going forward to keep a lot of emotion driving prices higher at least for now. Let's look at some of them:


1) South American weather is much improved, but delays in planting the Safrina corn crop raise concerns, as well as some areas with too much rain delaying harvest and delivery of beans to the ports

2) A trucker strike has been threatened in Brazil adding to concerns that further delays in shipping beans may lead to more Chinese business for old crop beans

3) China has bought a LOT of corn last week, and may buy more. Will it all be shipped or deferred to new crop?

4) Ethanol producers are slowing down production, older plants may not be able to pay up for corn as prices rise further.

5) Covid 19 continues to be a problem, when will driving miles and travel in general "return to normal" if ever?

6) Funds continue to hold large long positions in corn and beans- how far and for how long will they go?


Adding to the bullish psychology of shrinking demand was the Quarterly Grain Stocks report on January 12th, where USDA again reduced the size of the 2019 crop by about 76 million bushels, when added to the September reports implied that the 2019 crop was OVERSTATED by about 400 million bushels. While many producers have felt all along this was the case, it took quite a while to "figure it out". While many feel it has nefarious implications, it is our opinion that quality and test weight is the culprit, and extreme years like 2019 are more likely to have these types of discrepancies, as a 30,000 bushel bin may have only held 27,000 bushels in 2019, but with much better quality and test weight, a bin full of 2020 corn may in fact have 33,000 bushels in it. Maybe an oversimplification, but in our minds quite likely. We also know from our livestock feeding experience that low quality corn doesn't go as far as good quality, so add it all up and it kind of makes sense. We mention this as something to remember just in case the USDA "finds" some extra corn in future Quarterly Stocks reports, which come at the end of March, June, and September. Remember, each report going forward should be more accurate as more grain leaves the farm and is in commercial hands, as those bushels have to be accurate, and inventory must match up. When assessing our risk, we have to keep these dates in mind.


So, given our list above, how high is high enough for you? One thing we have tried to do each morning is to ask ourselves "at this price, do I want to be long, short, or neutral?" In other words, at $5.47 March corn, $4.45 December corn, $13.70 March beans, and $11.43 November, do I want to be holding grain in the bin, and NOT hedging or selling all the new crop I plan to produce? It is very easy to just "watch it" and see it go higher and higher, and we did make new highs in corn last Friday. Beans on the other hand, as still over 50 cents off the highs in old crop, with March still holding a $2+ inverse over new crop. What is our risk to the downside? Will Brazil be able to ship beans quickly and efficiently enough to satisfy China demand? Will China continue the corn buying spree or are they done for now?

Will livestock feeders and ethanol producers cut back, or continue to use as much corn? Make sure you are comfortable "waiting" with these types of prices, if not, consider all your choices to lay off some of that risk, or get to a more "neutral" position. Many producers are lamenting "selling too soon", but if your profit goals are met or exceeded, you didn't "sell too soon", you just made a decision based on profit and good business. If you bought a put, and it expired a dollar out of the money, then you didn't "waste" money, you simply protected a price that made sense at the time, and were able to sell at a much higher price later. As producers, we are always long the market in some form, be it grain in the bin, or anticipated production in the year (and years) to come. Buying puts has been something we have not done enough of in years past, as they afforded a way to "wait and see" how high we could go without committing the actual bushels. We are feeling more and more strongly that as prices go higher and downside risk increases, we need to seriously consider more of them to make sure something does not happen to take away some or all of our profit potential. What are some of these? While not predictions, here are some that can take away profit in a hurry:


1) Funds sell out of some or all of their longs

2) Brazil settles dispute with truckers and harvest goes well with better yields and production

3) Producers in all countries amp up production in response to higher prices (more Safrina corn, more double crop beans)

4) While drought monitors show a lot of dry areas, a dryer start to planting means we get maximum acres planted (little or no prevent plant) and if we get timely rains...….

5) USDA comes out on March 31 with big increases in planting intentions, and "finds" some extra stocks


Because we already know that a lot of bullish news has been traded, we always want to look at the "other side" to keep our marketing plan in perspective. Bull markets many times end abruptly, with many "wishing I had sold more", and while we are NOT predicting an end to the current one, we simply want to recognize what can happen, and hopefully be prepared well in advance. Looking at our spreadsheets, with input costs locked in last fall, the profit per acre looks really good right now, with the question again, how long do we wait before cashing in on at least some of this? How much and how soon? For us, making sure we have bushels we can't or do not wish to store is the first priority, as those are the bushels with the most risk if all the negative possibilities play out. We do not want to be looking at a bad futures AND bad basis verses high storage fees. Making sure these bushels, (and cash flow needs) are covered at good profit levels should be strongly considered. Using HTA contracts if basis is not acceptable gives one the flexibility to at least have one half of the price equation (futures + or - basis) covered with the decision to pay storage or not totally dependent on the carry available at harvest along with basis improvement possibilities, in other words, will the cash bids later on pay the freight of holding or not. If so, roll the contract out, if not, sell the grain and use the money you would pay for storage to buy an option. Past experience, although not a guarantee, tells us most of the time the cost of an option will be less than the cost of storage. For us, paying storage is not an option, as usually the cost eats up any carry and potential basis improvement, as the commercials have the upper hand once the grain has been stored in their facility, and they know what the cash bids look like over the following few months. Don't expect them to be generous, they like to make money too, and stored grain is a money maker for them, along with capturing the carry in the market. It is unlikely they will just pass the "gain" along to you!


 Given all the above, we have a few thoughts and ideas on how to "cash in" on at least some of this, but they are just that, general ideas that we ourselves will be considering. Please call or stop in to go over these, as while the idea may sound good, it has to be consistent with your individual needs and goals, as well as margin call aversion, cash flow needs, and storage availability. For old crop corn and beans, we believe, (and have been doing this on corn as beans are sold out) that incremental sales of are still  a good idea, as we have no idea when the current trend will end. You can also use put options, but keep in mind, March options expire on February 18th, so only 3 weeks. There is little carry between March and May, and actually March is trading 10 1/2 cents above July so it may be time to sell the cash if basis is good, and simply own a call for May or July. This reduces downside risk to the value of the call you select, and pockets a really good price that last August we would have never thought possible. The same can be said of beans, with March trading 22 cents over July, we like the idea of selling the beans and owning July calls, reducing total risk substantially if any or all the above listed negatives come to pass. A bird in the hand if you will, with upside unlimited, and only the call to manage. Deliver before the busy planting season with plenty of cash in the bank, grain stored on paper, and no worries about grain condition, insects, or other on farm storage concerns. We like this approach and will continue doing it, probably sweeping the bins before May.


For new crop corn and beans, we have now covered our bushel we don't intend to store with HTA contracts basis December, and have one increment of new crop beans sold to cover the same. While we certainly would not tell anyone NOT to sell at these prices, we are more apt to be patient with new crop, as we feel November beans and December corn are still looking for acres, and right now, on our farm, corn is penciling out a little better than beans, but maybe not enough to drastically change our rotations. While we are a little more patient, we will certainly have most if not all of our new crop covered BEFORE March 31, the day of major reports, and in our minds, a day of major risk. We have a lot of choices, depending on how one looks at the market and all the individual circumstances, and we list some of them here for new crop corn:


1) Sell more cash or do more HTA contracts

2) Buy short dated puts (December puts that expire like July or August puts)

3) Buy short dated puts and sell full December calls at a strike price you would love to sell cash bushels at

4) Sell September futures, or find an elevator that will allow you to write an HTA for September and roll it to December later


 Number 4 is a somewhat unique opportunity, as September rarely trades premium to December, and as far as we can remember, has not gone into delivery at anything other than a carry, as harvest has begun in the south, and crop size and demand factors are usually settled out long before. That does not mean it can't happen, anything is possible, but again, it is very rare. We reference this as the last time it happened that we can remember was the fall of 2012 after the drought, was trading a premium to December, and we hedged our entire 2013 crop in the September 2013 futures, and it took quite a while, but by the middle of August, did in fact go to a 10 cent carry, allowing us to roll to December an capture the gain. While not a guarantee, we are looking at a 25 cent inverse, September over December, and are quite tempted to sell some here. We are also remembering the most recent high in December futures, back in 2019 at the height of planting concerns when December 2019 futures made a high of $4.71 1/2 on a Sunday night, and we never took that out. Our management plan, if we do sell September futures, would be to use that "old high" of 4.71 1/2 as our call to action, if in fact we have enough buying power in the market to take it our, then we would either buy calls or March futures with stops to defend the hedge. We always want to have a management plan in place, as markets can do crazy things, and being prepared with a plan ahead of time reduces a lot of stress and poor decision making. Any position of this nature should involve a conversation with your lender to make sure he or she understands what the plan is, but as we found out on our farm in 2013, our lender did in fact understand and was fully supportive, making life a lot easier when we only had to grow a crop, and knew we had a great  price locked in! Be sure we spend some time going over this so you know exactly what you want to do, and how we can make sure everyone connected is on board.


For new crop beans, many of the same issues listed for corn apply, as September beans are trading 56 1/2 cents premium November, so along with HTA contracts, options and option spreads, you can add hedging in September futures and rolling later. We can probably assume that producers in the Southern Delta will plant early and often in order to capture that inverse in both corn and beans, and again, by the time late summer rolls around, we will probably have all the logistics and movement of grain taken care of to bring markets back to a more normal carry condition. Not guaranteed by any means, but history says it is more likely than not, and we like the odds of the same holding true. Above all, we know that when there is financial incentive, producers produce, and more often than not, produce more than what is needed. As soon as the market is "comfortable" that supply will meet demand by either reducing demand or increasing supply, lower prices will be the case. How much and for how long we don't know, but at some point, high prices will cure high prices! Our task is to make sure we can be as profitable as we can for as long as we can before that tipping point is reached.


In conclusion, while we have no idea how far and how long this bull run will last, we can only look at all the factors we discussed and say it could last a long time if weather is adverse and demand continues strong, or it could be over as soon as a few days or maybe March 31st when all the big reports come out. The bull market is fully invested in China demand and uncertain weather, and anything that changes the psychology from extremely friendly to negative will bring on the sellers. Making sure you have risks covered through crop insurance, price insurance, or a combination is totally your call. We only want to point out that there are reasons to be cautious, and ways of reducing our long exposure to a more neutral one in terms of overall risk are at your disposal. It is hard to look back at previous sales and wish we had waited, but it may be harder to wait too long to do something and look back at what could have been and wonder why we didn't cover more in some way. We like the flexibility of making some sales, and hedging the rest with upside open positions limiting risk to 10-20 cents instead of carrying all the risk. We will have some breaks in the market, just like a couple weeks ago, and we can use those to load up with some calls, but if the break comes before we sell or cover, then we are left chasing hope. Lets work on getting some certainty into your plan this year!


 Dates to Remember:

  • Every Monday: Export Inspections, Crop Progress
  • Every Thursday: Export Sales and shipments
  • February 9th: Monthly Supply/Demand Report
  • February 19th: Cattle on Feed
  • February 19th: March options expire





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

Allen Gard: 573-769-4193