"The Dog Days: Depression or Opportunity?"

A few months ago, when the planting window finally opened up in May, we planted over half the nations crop in a week. Everyone looked ahead to the end of July, and wondered what kind of pollination weather we would have, and if we would be setting ourselves up for a repeat of last year. We can look back now and see just how much "weather premiuim" was in the price, and now wonder how much is still there because of the late planted crops and cool temperatures we are having. With corn and bean prices plunging, basis collapsing on old crop bids, it is not a good time for those who have grain in inventory, and little or no new crop sold. Trend following funds are now short corn and wheat, and have reduced their long bean position substantially. In short, it does not look good at this point for prices to recover substantially unless something changes. In last months newsletter, we listed some of the factors that could pressure price, and some of them are still in play:

1) Lack of demand

2) A non threatening weather forecast

3) Strength in the U.S. Dollar in relation to other currencies

4) Good weather (so far) in other major grain producing countries

 As always, there will be a lot of discussion and disagreement on what this crop will actually produce. Eastern corn belt producers are looking at the potential for a very good if not record crop in many areas. Yes, there are problems here and there, but overall, it looks very good as we go into August. The Delta as a whole looks good as well. It is possible, as we take calls in from clients from Ohio to Wyoming, to believe that the potential is there for a 160 national average yield. We will need some more rain and no early frost, but it is a possibility. Does the market have that priced in? No one knows, and we dont spend a lot of time worrying about that, we want to focus on our balence sheet, and what we need to do to prepare and position ourselves. In short, spend little time kicking ourselves on what might have been, and focus on our opportunity going forward. We will lay out some ideas to prepare for dealing with a big crop and increasing carryout if it develops, and how to put more money in your pocket.

First of all, many of you have hedges in September futures. We sold September futures to capture the large inverse between September and December. That inverse has now narrowed to as low as 14 cents this past week. Looking at the charts, anytime that spread narrows to 10 cents or less, we would like to take profit on the futures, and replace them with December put options. We are NOT advocating lifting hedges as in our view there is still considerable downside risk. We simply want to put the money in the bank on the futures, and let the put options carry the load. The main reason to do this is again, what we dont know about weather, (early frost) demand upticks, fund short covering, etc. We choose not to worry about those, just postion ourselves so we dont have to.

For those producers who do not have enough storage, or do not want to store it all, we also like the idea of buying puts now, say the Dec. 4.50 puts for 14 cents or less. If you own these, and are faced with the decision to pay 25-30 cents a bushel to store it at the elevator, it is a no-brainer to sell the corn and reown it on the board. The put options protect the downside, so your only risk is the value paid for the puts plus transaction costs.  For example, you buy 4.50 December puts today for 14 cents. On October 2 you are harvesting corn and the December futures are trading at $4.50. Commercial storage is 30 cents per bushel until January 1, and 3 cents a bushel per month after that. Instead of paying that bill, just sell the grain, and buy December futures. Your total risk is about 15 1/2 cents, and you dont have to worry about January 1, just set a target to take profit on the futures position. The key to this decision is basis, as a bad basis is something we cannot recover by reownership. If you are able to sell a good basis, then it works well. If basis is not acceptable, then this may not work as well. Each individual should do their homework on local basis and weigh the chances of that either improving or not. As prices fall, basis should improve, but not always. Conversely, if prices rally, basis tends to slip as more grain becomes available. Make sure you talk this over with us to make sure you are comfortable with those ideas.

We like owning puts for other reasons as well, as producers they put a floor in price, but also give us the opportunity to reown previous sales with more flexiblity than call options. If you are unsure of total production, but feel it may be larger than you might have thought, owning puts for those bushels and then being able to own futures against them gives you the ability to adjust your plan accordingly if production does exceed expectations. Making cash sales at these prices are not satisfying compared with the past few years, but those prices might be with us for a while. To be able to make those sales and still be "in the game" with limited risk is a much better option to us than simply filling the bin and hoping prices improve. From a risk management perspective, I like this approach, because if those puts expire worthless, that means that prices have not fallen, and 2014 prices have not likely fallen either. Those positives to me are worth the cost of the put, as net farm income will be better if my puts are not gaining in value. It is more about being able to deal with potential negative market reactions coming than positive surprises.

Another reason to own puts and be able to buy futures is if you are in an area of production problems. Lets say your yield potential is much lower than normal, and it is likely you will recieve an insurance payment. As prices fall, your potential payment grows, but what if it rallys? The value of that payment drops as price rallys, and it is the October average of December futures that determines that price to compare with the spring price of $5.65. It may be a good idea to own futures against your put to make sure you get that payment. Again, each individual case is different in relation to APH, policy coverage percent, and local conditions. Make sure you talk this over with your agent and us before using this idea. You need to be able to accurately assess production potential and do the math to see if it works. One point of emphasis needs to be made here, as there still seems to be a lot of confusion on coverage. If you have a revenue policy that covers you at the 80% level, you are guaranteed 80% of your APH mulitplied by $5.65, not every bushel you produce at $5.65. The revenue guarantee in the spring is then compared to your actual yield multiplied by the October average of the Decembers futures price. If that number is lower than the spring guarantee, that is your payment. Make sure you are clear on that and call your agent or us to verify those numbers.  

From  the technical side, we have the following numbers from our computer to consider:

Sept.  Corn                Support                 Resistance

                                 4.72                       5.18
                                 4.29                       5.37

                                 4.10                       5.61

Sept. Beans               12.33                     13.22

                                11.65                     13.95                              

                                10.96                     14.72

In conclusion, while prices have fallen, all is not lost or even close. Most producers will have more to sell than last year, and growing good crops is always satisfying even though the memory of $8.00 corn still lingers. We are in a world market, and high prices have encouraged more production. Thats how it works, and more people and livestock are able to be fed because we do the best we can to produce more. There are those who think we are heading into a protracted down time in ag markets, and they may be right, but one major weather problem can change the entire landscape. Our point is if we are doing the job of managing our risk to lock in profits when available, then worrying about those issues, USDA reports, or other things we cannot control becomes less of a reduction to our quality of life. Not only do we have the opportunity to work, play, and worship freely, we can make a living doing what we love to do and lay off the risks that would subtract from our  quality of life. Call us if we can help explain any of the ideas listed, or those that may come up, and thanks for letting us be a part of your team.

Important dates to remember:

  • August 12th Monthly Supply/Demand Report and Crop Production 
  • Weekly Export Sales every Thursday at 7:30 am
  • Export Inspections every Monday at 10:00 am
  • August 23rd  Cattle on Feed
  • Crop Progress and Conditions 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.