CFGAG News and Views vol. 60 July 1, 2014

"Bearish, Period"

There is no way to paint this any other way. The USDA Quarterly Grain Stocks were bearish, and so were the Planted Acres, with soybeans hit the hardest with old crop stocks above expectations, and new crop acres coming in at whopping 84.8 million acres. Corn acres were about as expected, but the feared feed use number came in lower and stocks higher than expected. Last month we listed the following questions as concerns for this report:

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 answers? 1) Yes, lower prevented planting than last year. 2 and 4) Yes, and early projections have our carryout on corn for next year in the 1.9 billion range, and beans around 480 million. 3) USDA says we have more stocks, it will be up to the July S/D report on 7/11 to sort it out, but it looks like past crop year(s) were understated. 5) There is no hurry now for end users to cover needs, as long as the weather holds.  

There is no way to know how low we can go, the quick answer is when we run out of sellers. Old crop premiums will be on borrowed time, so we would expect any rally to be sold. Managed money funds were still holding long positions in corn and beans, so the market may have to absorb some more selling from that sector as well, as long as good weather prevails. There will continue to be arguments over acres, as these reports were based on June 1, and some acres may not have been planted that were in the survey as intended, but for now, we have these numbers to trade, and with supplies in the world adequate, and no real weather threats anywhere except maybe India and the slow onset of the monsoon season, end users may continue hand to mouth, and wait and see. Is there any good news out there? We think so, as there is opportunity in every day. Demand for corn is good. Every one who is using it is making money, and lots of it. Livestock expansion and ethanol production should enjoy good margins for the foreseeable future. While hog numbers are down, heavier slaughter weights are making up a lot of the difference. We will find a price that inspires some coverage, it just may take a while.

We have been asked about rolling down put options, so here are some ideas. Rolling puts down is something that we feel is over done. We prefer to look at remaining time value, possible technical points of support, and overall profitability when making that call. Some questions we would ask each individual:

1) Given your yield potential, at what price does your crop insurance kick in?

2) Do you wish to remain "short" via the put for more than a month or so?

3) Would you be better off exercising the put at the futures strike price and owning a call option to defend it?

4) How much of the price are you willing  to give up to capture some of the gain to date? How bullish or bearish are you now?

The reason we ask these are simple. Every situation is different, and each INDIVIDUAL has their own goals, objectives, and circumstances.  Rolling puts down every 10 or 20 cents gains you little but brokers get paid every time you do. Unnecessary costs as we see it. Hypothetically now, we would target the $4.06 area in December corn (last years low), as a possible place to roll down puts at this time. Other advisors are targeting $3.75 and even $3.50 given the numbers yesterday, and the continued good crop condition rating. You need to make that call, after you consider where your insurance coverage begins, and how you feel about the market going forward. Are conditions too good to be true? Are we ready for a big weather shift? Consider what you are adding and what you may be giving up in light of net farm income for the year. One report and one week of weather does not make the crop year. Call us to compare some ideas that may work for you. Just because it hailed out a friend in Nebraska does not mean the market will care. Its the big picture, and for the near term at least, conditions are overall as good as they have been in a long time.

From  the technical side, we have the following numbers from our computer to consider:
           Dec Corn       Support                Resistance
                                 4.05                      4.36                                                                    
                                 3.87                      4.53
                                 3.55                      4.66

           Nov Beans      11.23                    11.83
                                11.06                    12.00
                                10.74                    12.38                               

In conclusion, today took a lot of the wind out of the bullish traders sails, and it may take some time to rebuild a case for higher prices. That does not mean we should throw in the towel and pretend it didnt happen. Every day is an opportunity for something good to happen, and tomorrow will be no different. If you feel that the market has a lot more downside, we can still get some coverage on. It may take selling some calls to accomplish the price goal, and that adds to your risk, but we now have to look for prices that we would be willing to sell at above us. Remember last January? How bearish were we then? A lot can still happen, but if we dont plan for it and have a mode of action to achieve what we need, there will be no action. Looking ahead, we need to plan on storage plans, cash flow needs, and possibly a re-ownership plan if grain needs to be moved in the fall. Thats why we come to work every day, to share some of these ideas and construct some plans. Have a great holiday this weekend, and celebrate the independance that is truly what farming is, a celebration of independance and freedom to do what we love to do. Also, remember the markets will close on Thursday, July 3 at noon, and reopen on Monday morning, July 7th at 8:30 am central time. Have great 4th!

Dates to Remember this month

Crop Progress and Conditions every Monday at 3:00 central time

Export Inspections every Monday at 10:00 central

July 11th Supply/Demand and Crop Production

July 25th  Cattle on Feed

Export Sales and Shipments every Thursday at 7:30 am

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