CFGAG News and Views  vol. 45  April 1, 2013 

"This COULD Get Ugly"

The March 28 Reports have come and gone, and the first reaction after viewing the numbers inspired the title of this months issue. As has been said many times, the risk associated with these reports can be huge. Up or down limit moves have become the case more times than not. This risk can be managed, but perhaps this time, complacency replaced urgency in covering those risks. While it is up to each individual to assess and manage their situation, it does hurt that options were available to prevent this type of disaster, and we want to help put together those plans to do just that. So, the facts are that the USDA Quarterly Grain Stocks showed corn stocks at 5.40 billion bushels, about 400 million MORE than anticipated, and bean stocks of 1 billion, when analysts were looking for 940 million or so. Needless to say,  corn closed down limit in the first 3 months, and December down 32 1/2 cents. May soybeans finished 49 cents lower, and November down 26 3/4. Planting intentions were right the average guess for corn at 97.3 million acres, but beans acres came in well short of expectations at 77.12 million. There are many who question the numbers, as is always the case after these reports, but there are some logical reasons why the trade was caught this far wrong:

1) Maybe $7.50 corn did a better rationing job than we thought?

2) Did we import more corn than we thought?

3) Was the 2012 crop understated?

4) Have livestock producers become more efficient in blending rations with other ingredients?

5) Have we always had more corn due to inaccurate reporting from the producers bins?

These are all possible, but at this point not very important, as it is the future that we are most concerned about now. At this writing on the evening of March 31, we are looking at a market opening Sunday night with expanded limits and the knowledge that synthetically, May corn was trading at least 15 cents lower via the options at the close on Thursday. The "ugly" concern is that there is much more downside to go. We will be watching closely the range of trade, whether we can hold the most recent lows of $6.78 in May corn, or if we close below that level. If we do, technically, the picture is not pretty. It will take some weather threats or unexpected demand increase to go back to recent highs. Another thing to watch is the basis, and see how it responds after the smoke clears on Monday afternoon. Locally, bean basis for old crop got a lot better, and the 49 cent down move in futures only resulted in 15 cents less in flat price.

While these immediate concerns are alive and well, and the downside certainly needs to be protected, we also need to look at a few positives as well. (No one will talk about these while the market is falling, but if it rallies, you will probably hear more of these).

1) China has bought a small amount of old corn, and about 2 mmt of new crop are already on the books

2) The down move on Thursday pretty well eliminated the price advantage of Argentine corn

3) Ethanol margins are good, and a few idled plants have re-opened

4) While stocks were more than expected, they remain over 600 million bushels than last year at this time

 Going forward, it is obviously weather and planting conditions that will be the major focus and price driver. While moisture has reduced the severe drought areas, there are still many areas of concern with low subsoil moisture. We still need to plant in a timely manner, and no one needs to be reminded what a forecast of extremes, either wet or dry, can do to the price in a very short time. We will also look forward to the April 10 Supply/Demand Report to see how the Grain Stocks Report shakes out in terms of carryout and price outlook. Even though we traded down limit in September futures, prices settled just a couple cents below the spring price of $5.65 in December futures, and the inverse of Sept/Dec is still worthy of consideration in our view. Unless planting is greatly delayed, that inverse should continue to come together as with an extra 400 million bushels in stocks, the fear of "running out" before harvest is reduced.

For beans, the lower than expected acre number could find some interested buyers on this break, and should keep beans from falling apart right away. South America still has major shipping problems, even though their crops are big this year, reliable supplies provided in a timely manner is still a problem. Bean demand seems never ending, so far willing buyers have been found whenever we get near $14 in the front month, and sellers more than happy to come forward on moves near $15. We will be watching this week for the market to hold that lower end, and the reaction to the lower acre number if there is any. Make sure you check in and have orders ready if you find a price that works for you.

From  the technical side, we have the following numbers from our computer to consider:
July  Corn                Support                 Resistance

                                 6.64                      7.18
                                 6.41                      7.35

                                 6.29                      7.56

July Beans                13.37                   14.87

                               13.02                   15.22                               

                               12.80                   15.99               

In conclusion, while the USDA did not hand us any favors last Thursday, we still have profitable prices in front of us, and we can still put together some options that prevent further decline in net farm income. We have to look forward and make sure that a worst case scenario does not play out at your expense. That is why we come to work every day! 
We are all aware that the bears are projecting new crop corn prices to fall to $4.00 or even below. We all know that could happen, and if it doesn't rain, or rains way too much, we could be rallying back to the highs. Our purpose, as we see it, is to help protect net farm income, and even with the price break, we can still get some protection on and be flexible if the weather repeats last year. If you have purchased crop insurance, you have a great put option in place on a portion of your bushels now. The challenge before us now is to look at some positions that protect or enhance that coverage. Even if we do produce a record crop this year, there should be great opportunities to take advantage of in terms of capturing carry in the market that for the last few years simply did not exist. By using storage and capturing carry, you can add significant value to your hedges. Make sure to take a minute and call in to get some of these ideas so a plan can be considered as the growing season progresses. The odds are we will have some event somewhere, be it weather here or elsewhere to shake the bushes and rattle the bears. Just be sure to look at your bottom line, consider the price risk from here on, and adjust your plan. Have a safe and productive start to planting!

Important dates to remember:


  • April 10th Monthly Supply/Demand Report  
  • Weekly Export Sales every Thursday
  • Export Inspections every Monday
  • April 19th  Cattle on Feed
  • Crop Progress every Monday, 3:00 pm Central Time

Mike   Daube      888-391-6330

Allen   Gard       800-205-1700


Disclaimer: This material has been prepared by a sales or trading employee or agent of Clear Focus Hedging, and is, or is in the nature of, a solicitation. By accepting this communication you agree that you are an experianced user of the futures markets, capable of making independant trading decisions, and you agree that you are not, and will not. rely solely on this communication in making trading decisions.

There is a substantial 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 the the accuracy or timing of the content. Past performance is not indicativeof future results, and each individual should examine their own risk capital carefully before trading.