Clear Focus Hedging News and Views
December 1, 2024
“Demand, Weather, And Trade”
As we start December, the three items in the title covers the major price movers until we get final yields and the Quarterly Grain Stocks Reports in January. Demand has been very good, with excellent export sales this past month, strong ethanol grind and record soybean crush domestically. Funds have exited short corn positions, and actually gone long over 100,000 contracts according to the latest CFTC report. They remain short beans and wheat, however, as decent rains have given the wheat a boost in crop conditions in the past few weeks, and the weather in South America has been very favorable so far, with the critical months of December and January yet to come. Our questions and topics to watch are listed below:
- Export demand has been excellent. Will it continue or were importers buying ahead of potential tariffs?
- South American weather has been very good overall, extended models have been hinting at heat and dryness especially in Argentina later this month, but so far it has not developed
- Funds have bought corn, will that continue, or will they start to sell carry as they did last year?
- Will US producers ramp up selling as we approach the new year for cash flow needs?
- Will threatened tariffs lead to a trade war? If so, what will be most affected?
- The US $ has rallied sharply after the election, has it topped out for now?
As we see it, there is much risk both ways, and when we have a lot of risk to our profitability, we want to cover that risk as much as possible while giving us the opportunity to gain on any good rally. We feel it is very important to look at your inventory and cash flow needs carefully, and be ready to pull the trigger on good basis opportunities. We have received reports of some really good basis bids out there, reflecting the strong demand as noted above, but we also know that there is a lot of grain to sell. Depending on SA weather, there may be a lot more to sell in a few months, and with the currency spread between the $ and the Brazilian currency, we don’t want to wait too long. Consider the following:
- What is basis doing in your area? Spreads have tightened up some, but basis?
- Cash flow needs: when and how much?
- Will basis and futures rally enough to pay you to store grain? How long?
- What effect the threat of tariffs bring?
- Wars in Ukraine and the Middle East, the Chinese economy, and possible escalation- any effects ?
- South American weather forecasts- weather markets mean opportunity or sell offs?
We could write a book on any of the above, but are glad to discuss these on a daily basis. Rapidly changing weather and war news can change our outlook by the minute. Keep in touch or call with questions
Here is what we are doing here on our farm:
2024 Corn
We like to reward rallies in futures or basis or both and did so this past week. Our local basis was somewhere between -17 and -35, but the ethanol plant offered option price and when March futures hit 441, we rewarded the rally. We have heard of others with the same type of offers, a quick ship price that doesn’t last very long, so checking frequently with your area often can make you 10-15 cents. Because of our concern of accelerated sales as we approach the new year, we are anxious to move as much as possible when these types of chances come. We have purchased March $4.40 puts and sold December $5.00 calls at a credit of a few cents to first of all put a floor in place at 440, which gives us comfort, and by selling the $5 call, (which we would love to see) our cost is minimal or nothing. If we do sell grain on good basis or for whatever reason, we can re own March futures with little risk as our 440 puts can be exercised if the market falls apart, and the $5 calls will be losing value as well. Call us for details and risk analysis on this trade to make sure you understand the total idea and how it affects the bottom line. Bottom line is we have a floor, and the tools in place to be long if conditions warrant it.
2024 Soybeans
We sold some January beans at 10.80 on our hedged beans and will look to add to them on any decent rally. We are not as friendly beans longer term if weather in Brazil and Argentina stays ok. The carry out is just too big barring any new developments, and the Chinese economy is a concern as well as the BRICKS nations intentions. We want to move cash on a good basis and replace it with something with lower risk. Consider a $10 March put and selling a $11 November 2025 call to fund it at a credit, or a small cost to sell a $12 call. This gives you the flexibility to re own previous sales or prepare to sell on good basis or if cash flow Is needed and have the low-risk plan in place. Management is key here, so make sure we go over these ideas with you before putting these trades on. The same principle as corn applies here, sell good basis, re-own if you want but keep risk limited.
2025 Soybeans
Given all the factors facing beans, we felt like we needed to “start” by doing an HTA for next November at $11.00. We need to move some beans at harvest in a normal year, so having some on the books at this price seems like a good starting point. We will also look to sell far out of the money calls similar to last year on weather scares to add to our price if warranted. Again, these are only ideas, things we are doing on our farm, which may not be suitable for you, but it at least gives you an idea of what we are looking at, and we can talk about ways to manage these positions as market conditions change
2025 Corn
With the recent rains, early drought talk has eased, but certainly not completely gone. What we are hearing is the possibility of more corn acres at the expense of beans and the December 24/December 25 spread has narrowed significantly. We are still looking (maybe hoping) to start selling at $4.50 and would add incrementally to those sales. If we rally soon enough, we may look at short dated puts for protection as the South American weather plays out, but on any good rally would look to cover the downside at prices we can live with.
In conclusion, we remain on the “defensive” as long as carry outs remain comfortable. We hope for some weather scares to really boost prices, but also recognize the risk of SA producing a big crop and really taking prices to the basement. We are more likely to keep prices supported until more certainty is there with yields and production, but if the funds decide to sell in anticipation of needed cash flow sales early next year, well, it might not be pretty. That’s why we want to move cash early and keep our risk limited on BOTH futures and basis. Stay in touch with us as we work on plans for both old and new crop, as risk levels are higher than we would like with prices bordering on break even at best. Putting some floors in makes good sense to us right now, and hopefully we can get above this level at some point. The question is always when or how far, and we just don’t know. What we do know is how to lay off some or all risk is we want to. Let us know if you need some time to talk it over, and have a Merry and Blessed Christmas! We look forward to the new year with optimism and hope, all is possible with faith and effort!
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Dates to remember:
Every Monday – Export Inspections at 10:00 am CST
Every Thursday – Export Sales at 7:30 am CST
Every Friday – Commitment of Traders Report at 3:00 pm CST
December 10th – Supply/Demand and Crop Production Reports
December 20th- Cattle on Feed at 2:00 CST
December 27th- January options expire.
Mike Daube- 574-586-3784 or 574-910-3818 (cell)
Peter Schram- 317-910-1473
Allen Gard- 573-221-9234