CFGAG News and Views vol. 61 August 1, 2014

"Record Crops Ahead?"

It sure looks like it at this point, as crop condition reports are quite good for this time of year, but more importantly, the low level of "poor or very poor" is only 5 or 6 percent. It is fairly common to see at least 15-20% in this catagory in normal or average years. Combine these numbers with reports from the field of early yield checks and at this point in time we sure look like we have the chance for some record corn and bean yields. As I write this, listening to the weather forcast for next week, it sounds like most of the models agree on a good rain event covering a large area of the corn belt. Will we get that? I know I will be here early Sunday night to see if we have any indication of this one falling apart. August is the month to make soybean yields, and still important to finish the corn to that "record" level. It would appear that the trade is putting a lot of stock on this pattern developing. Crop ratings are quite high, a function of decent moisture and cool temperatures, but the month of July has been on the dry side in many areas and a good drink of rain or two in the next week is important to maintain those ratings.

Even if the rains fall short of expectations, we will still have to deal with a number of other issues that are not price friendly in the longer term. Some of them are listed below

1) China is moving out excess corn supplies, and continue to refuse corn and DDG's with MIR 162 genetic material

2) World supplies of grains are quite large, and Black Sea Wheat is still offered cheap compared to others

3) Excess rain in Europe has resulted in more feed quality wheat, so import duties on imported corn have been increased

4) Managed money is still net long the corn market

5) Basis levels for corn and beans are weakening as new crop harvest begins

Many have asked, "how low can we go"? We have no idea on the price number, there are lots of technical chart points to look at, but until we quantify actual acres and yield, it is all just a good educated guess. We like to look back for historical reference, and we find that in more than a few cases, lows have been put in in August or September, and then a few were matched in October. It is a futures market, and what this tells us is that the market digests bullish or bearish news, takes prices to a point of demand kicking in or supplies rationed sufficiently to get by to the next crop. Rmember 2012? We had just the opposite situation, as crops were shrinking under the worst drought conditions most of us had ever seen. When did prices peak? August. The market did its job, rationed the crop, reduced usage to the point that we could get by. There are a few good signals to watch for for as we try to put in fall lows. They are by no means rock solid, but over the years have combined to give us some clues. Watch for these events if they take place:

1) If we get "bearish" news, and the market does not fall apart

2) December 14 corn trading 50 cents below December 15 corn

3) Nearby spreads narrowing in both corn and beans

4) Basis levels narrowing instead of widening

These are some if the indicators to watch for, but in the meantime we have to get serious about planning for harvest now. We expect commercial storage charges to be quite large this year, and space could command a good premium. For us, there is simply no reason to pay 25 or 30 cents to store grain in the elevator until January 1, with 3-4 cents per month thereafter. If we sell the cash grain now, and re-own it by buying a  put and then a  long futures position, we have reduced our downside risk to the price of the put option plus transaction costs of the option and futures. For example, if we bought a December 3.50 put for 10 cents, and sold cash corn now, say the bushels you feel you dont have room for, and were able to buy December corn for $3.50 in the next few weeks, our total cost for the transaction would be about 13 cents. If this idea appeals to you, call us for specific prices that are up to the minute, as these prices change very quickly and the above example is just that, a possibility. We have a monthly Supply/Demand report on August 12, and we would expect option premium to increase as the report gets closer, so call soon to see if we can make something work for you. You can also simply by call options or call option spreads to possibly enhance the net price received, depending on your risk tolerance. Bottom line is we are eliminating further downside risk, while "staying in the game" for possible bullish developments.

For those with futures hedges on, you have the choice of lifting the futures, capturing the gain so far, and replacing the short futures with a put option. If the market falls a lot more, you will lose some of that by the amount of the premium paid, plus transaction costs, but if the market suddenly rallies, you still have the cash grain to sell. We are not predicting that event, but we always want to be prepared for unusual developments. Basis levels will be critical in making these marketing decisions. Make sure you are aware of what basis is doing in your area, and what your cash bids are in the months forward. Remember, everyone using corn is making money now, very good profits indeed in all sectors. Demand will reamain strong as long as this lasts. Being aware of local basis bids can put an extra 10 or 20 cents in your pocket!

From  the technical side, we have the following numbers from our computer to consider:
           Dec Corn       Support                Resistance
                                 3.51                      3.96                                                                    
                                 3.32                      4.05
                                 3.12                      4.30

           Nov Beans      10.29                    11.37
                                10.14                    11.62
                                  9.89                    12.25                               

In conclusion, while prices have really hit the skids, and there is much worry about them falling further, we have to look at positives in having a great crop to sell. Negative hindsight will only waste time that could be spent on looking at marketing opportunities. Capturing carry, using spreads and hitting a good basis bid on a lot of "extra" bushels will make the bottom line look a lot better. The only reason we look back is to remind ourselves how valuable having put options in our pocket "just in case it rains" is. As producers, we are in business to grow all we can on a given acre, and when the weather cooperates, it can be amazing as to what we can do. Everyone found out how bad it could get in 2012, and it looks like we might find out just how good it can be this year. We still have to have decent weather to finsih it off, and lots of things could still go wrong. Lots of acres in the Northern belt can still be hurt by an early frost, and next weeks rain event still has to come through for a lot of folks to maintain a record yield outlook. Take nothing for granted, no one knows exactly how good this crop is, but be prepared to take the actions on your farm to maximize what you have. It is just that simple, and we encourage you to call and go over some choices that may help. It sure is more fun to worry about needing extra storage space than wondering if its worth taking the combine to the field. That was only two years ago..............

Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • August 12th Supply/Demand and Crop Production
  • July 22nd  Cattle on Feed
  • Export Sales and Shipments every Thursday at 7:30 am

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