CFGAG News and Views    vol. 38    September 1, 2012

"There is a risk of loss when trading futures and options. The thoughts and opinions in this article are those of the author, and while believed to be correct, are not guaranteed as to the accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading."

"Labor Day Reflections "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55

As this is written on September 1st, the markets are closed, the newswires quiet, and with some time to relax and reflect, a lot of thoughts and ideas come to mind. One of the most dominate themes coming through from clients is how "down" the feeling is where crops are bad. Some folks have had two bad crop years in a row, and when prices are this high, it is very frustrating to be short on production. No matter how much we spend on inputs, precision planting, or the latest and greatest new genetics, if it doesn't rain and temps rise over 100 degrees at pollination, we will not have good corn production. Irrigation helps, but cannot replace what nature can do with a timely and general rain. We can lower the temperature in our tractor cabs, but excessive heat in the corn field cannot be controlled. After thinking about these things for a while, there is a bright spot. Farmers represent what is truly great about this country. We are true producers, and when production falls short, we take it very personally. Most Americans are "producers" in that they take pride in their labor that produces something positive. Assembly line workers, teachers, computer technicians, and farmers all produce something and contribute to the overall betterment of this nation. We still rely on the market place to sort out what we want and need, therein comes the "price discovery". How badly do we need something, and how much are we willing to pay for it?

Right now, the grain markets are struggling with severe yield reductions, as well as signs of demand destruction in corn. Early yield reports are just plain horrible, with some corn acres actually "zero". The USDA report on August 10 pegged corn yields at 123, and some in the trade feel that this number could easily fall below 120. Are we high enough in price to ration demand for this production level? The soybean balance sheet looks even more difficult to work through, unless August rains and cooler temps bring out some more yield than currently estimated. Once again, has price increased enough to limit demand, or are we headed to that magical $20 mark in beans? As both yield and demand are still "moving targets" for both crops, we look at what we do know on both the positive and negative side:

Positives for corn

1) Yield results are still very disappointing

2) Ethanol production, after dropping hard for 6 weeks, has been relatively stable the last 3 weeks

3) Crude oil and gasoline prices remain very high

4) Weather damage from Hurricane Isaac and the Typhoons in China are still being assessed

Negatives for corn

1) Exports remain non existent, and we are importing corn from Brazil, and feed wheat from Canada

2) As yield reports move north, some are actually better than expected. The early harvested could/should be the worst?

3) Economic and debt issues in Europe still pose a threat to global economic stability

4) Money flow from the funds: in or out? Lately more out.

For soybeans, the positives are

1) Fears of lower yields

2) China demand is still active

3) Fewer substitutes for beans than corn

4) Harvested acres are still in question

Negatives for beans:

1) Eastern belt farmers are more optimistic on yield potential

2) South America seems to be gearing up for a huge increase in production

3) Funds are heavily long the front months of beans. When one owns, but does not consume, they eventually re-sell

4) Double crop beans in the east have good potential, so far no early frost threats

So what do we do? Lets look at price action. Since the last crop report, when we spiked up to a high in December corn at $8.49, the highest trade since has been $8.40, and we currently rest at $7.99 3/4. November beans have made new contract highs every week since the report, and currently rest at $17.56 1/2. Both December corn and November beans are trading at a premium to summer months, so the market is telling us to sell the crop now, and if bullish, re-own them in those months. On our home page, we have outlined strategies to protect prices through the month of October when Crop Insurance prices will be calculated. We can not see any logical reason not to protect $8.00 corn, a price $2.32 ABOVE the spring price. Put that price on your guaranteed bushels and see what happens to net farm income. The risk of lower price in October is real, as producers like myself are not willing to store a poor quality crop and take a chance without some real price incentive down the road. I would much rather have the elevator worry about aflotoxin, damage and insects, put my money in the bank, and maybe buy some July calls or call spreads "just in case". As harvest progresses, keep an eye on basis to see if that in fact is taking place. If we are going to "run out of corn", it wont be in December.

For soybeans, midwest harvest is still a few weeks out, so the uncertainty will likely keep the markets volatile. We need to see real evidence of less demand and more production to really trash the market, but money flow out from funds is always a threat. We cannot predict those events, just make sure we keep you aware of the possibilities. Is it possible to drop price a dollar and still make new highs? Sure, and it may happen in the same week. Keep in mind the daily limit is 70 cents, and if we settle with a limit move, then the next day has a limit of $1.05. We have already seen that happen in wheat a couple years ago, so it is not unreasonable. Look at your net farm income again with these price levels and consider what they mean to you. Will we maintain this price through October?

When we look at price and spread relationships out to next year, it appears there is a great expectation that South American crops will be plentiful, and available. Look at July beans, trading $2.00 cheaper than November. What will happen to July beans if a major weather issue develops in Brazil or Argentina, or BOTH? Watch the spreads as funds that are currently long the nearby contracts of both corn and beans may look to roll into those months as well.

We also look at 2013 prices for new crop, and find the ratio of beans to corn is just slightly above 2-1. Will this be a price that encourages more beans? If South America has a huge bean crop, we may not need any higher price, but what if they don't? Bottom line is pricing some of next years corn at $6.50 or better to start may not be a bad idea "just in case". Remember, last winter $6.50 was a high enough price to ration demand. Without the drought this year, it may only have been a dream price now. As always, look at your input costs for next year, and see if this price meets your profit goals. It is always better to know the Insurance price in February, and sell at a price above that, but with all the uncertainty, starting a sales program at a profitable level, especially bushels you cannot or don't want to store is usually prudent.

From  the technical side, we have the following numbers from our computer to consider:
Dec.  Corn                Support                 Resistance
                                 7.86                      8.73
                                 7.63                      8.87

                                 6.24                      9.11                        

Nov. Beans                 16.82                    18.40

                                 16.26                    18.91                               

                                 15.86                    19.75

In conclusion,  as we prepare to harvest what is probably the worst crop since 1988 in terms of yield to trend, it is easy to remember how bad it was back then. I remember harvesting a 60 acre field of corn and not even filling 4 tandem trucks. Final yield was 27 bushels per acre, and I wondered how we were going to pay the bills. Then, when we started cutting beans, 80 acres made 56 bpa, and there was some light. We did not use crop insurance back then, and there was no source of comfort until we binned those beans. Today, we have many tools to manage risk, and a plan to include them may never look as good as this year. As you look forward, keep in mind those price tools that may have a place in your plan, and call us to see if any will make you more comfortable as we head into the bulk of harvest this month. We have good prices now, but no guarantee they will be there in October, and my friends in the Insurance industry do not want a bunch of phone calls complaining about a price drop that lowers their payment. It is in our hands to take what is offered, or take the responsibility of turning it down. Call us if you want some price protection ideas, or some re-ownership plans if you want to sell at harvest. Have a safe harvest, and lets feel good about being a producer. A hungry world still needs us every day! 


Important dates to remember:

 September 12th Supply/Demand Report, and Crop Production

Weekly Export Sales every Thursday

Export Inspections every Monday

September 21th  Cattle on Feed

Crop Progress every Monday, 3:00 pm Central Time


Mike Daube      888-391-6330
Allen Gard       800-205-1700