CFGAG News and Views vol. 59 June 1, 2014

"A Good Start"

The 2014 planting season is almost wrapped up, and for the most part, off to a good start. Yes, there are still wet holes to plant, and a number of acres to be planted in the Northern tier of states, but compared to recent years of 2011 and 2013, we are in much better shape overall. Prices for corn and wheat have fallen sharply this past month, and the concern is mounting that we could fall much further. Considering the managed money positions that are still quite large to the long side, it is certainly warranted concern, and we now focus on this months weather, and the very important reports to come out on June 30. On that day we get the always important Quarterly Grain Stocks as well as Planted Acreage. These two reports along with the two week forecast for pollination will likely define our price ranges as we look toward harvest. We urge producers that have price risk in either direction to make sure they are comfortable with their positions ahead of these reports. There will likely be a wide range of guesses, there will likely be some big surprises!

When considering the Stocks Report, we look back to the past one on March 31 when USDA surprised us with a lower than expected stocks number in corn. Much discussion ensued as to the accuracy of feed use, export projections, and the resulting carryout. We expect that debate to go on well after the ink is dry on these reports, but the price action that follows is what we care about, as that is what our net farm income depends on. Not having enough price protection, or hedge defense, can be very costly both in terms of dollars and peace of mind. Consider how you feel about the following questions:

1) Will we "find" more grain in the Stocks Report?

2) Will the Planted Acreage reflect less prevented plant than a year ago? What does total production look like?

3) How will USDA handle the tight soybean stocks? Did we understate last years production?

4) Depending on the stocks and planted acreage, what is the implied carryout for corn, beans, and wheat?

5) Will end users have incentive to buy up, or wait for lower prices?

The possibilities are many, the risks are great. If we were to get a bearish stocks report, a bigger acre number, and a favorable forecast, the downside support levels could be quickly tested. If we get friendly numbers, or if the market has already priced in some neutral numbers, we may get a decent rally depending on weather. Depending on your individual plan and price goals, are you where you want to be given your crop prospects? Make sure to call and go over the different outlooks and ways to add some comfort to your position before June 30.  

For those of you who have short dated, July expiration puts on, or any July puts, those expire on June 20. For the short dated (Dec futures) July puts, we have some decisions to make. With the recent price break, all of these above 4.60 are now "in the money" and if nothing is done, will be exercised into short December futures as long as they remain, "in the money". There are some choices to be made, and all of them are good. Making the best choice is an individual decision based on your feeling of the market as to price direction, risk tolerance, insurance coverage,and of course net farm income projections. Here are a few choices that stand out to us:

1) If you are friendly the market, sell the puts and pocket the profit at a price level you think will be the low end of the range

2) If you want to extend coverage, but do not want the risk of a futures position, sell the July put, and buy a September put as September and December futures are about the same

3) Exercise the put into short December futures, and buy a September or December call to defend the position. Again, depending on your risk tolerance, you may want to own the call immediately, or you may want to wait to see if December futures can take out some overhead resistance before doing so. As long as weather is non-threatening, our choice here is to be patient and only buy calls if we think the risk is worth the money. If we sell off hard going into the last week of June, buying very cheap calls ahead of the reports is something we will do on this farm!

For those of you that sold some March $6.00 calls to pay for the puts, don't forget the risks associated with these as well. Right now they look completely harmless, but a major turn in the weather or world geo-political event could change that quickly. If the premium drops low enough, it may improve your comfort level to buy these back and remove the risk. For us, if they get down to less than a nickel, the risk/reward of keeping them, especially into a major report, is not worth it. Let us know if any of these options interest you, so we can watch prices and alert you if we get close to your targets.

From  the technical side, we have the following numbers from our computer to consider:
          July Corn       Support                Resistance
                                 4.61                      4.83                                                                    
                                 4.43                      4.95
                                 4.21                      5.10

           July Beans      14.42                    15.36
                                13.83                    15.90
                                13.47                    16.30                               

In conclusion, it looks right now like overall, we are off to a very promising start. I remember my Grandfathers sage advice over and over through the years, he said "its never as good as you think, and its never as bad as you think". How many times have we overestimated the good, and underestimated the bad? Markets are driven by emotion, and it is rather remarkable to think back, just 6 months ago, we were so bearish, only to have the winter come with fund buying, good demand, and even with good crops in South America, rally up over $5.00 in corn and $12.00 in beans, with folks so bullish that we were even talking $6.00 corn again!. Now we are back in bear mode, with those same market gurus talking sub $4.00 corn and beans below $10 at harvest. Who do you want to believe? We would suggest focusing back on the spread sheet, plug in YOUR numbers as to production expectations, and look at the price possibilities for the next 6 months. Are we still at levels that are profitable? Are we close?  If we are, then making some sales, either cash or futures and owning some call options to keep the upside open may be a very simple solution. It would take away the uncertainty of the end of the month reports, the weather, and the endless stream of market advice that seems to change direction with the wind. Here's hoping for good weather, good crops, and a marketing plan that makes you profitable!

Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • June 11th Supply/Demand and Crop Production
  • June 20th  Cattle on Feed
  • June 27th  Hogs and Pigs
  • June 30th  Quarterly Grain Stocks, and Planted Acreage

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