CFGAG News and Views vol. 63 October 1, 2014

"Proactive or Reactive?"

While the evidence is still coming in, yields indicate what we have been predicting, a record, and by a wide margin record crop is out there. Our friends in Missouri who have really had some weather challenges the last few years are reporting crop yields that they have never seen on their farms. It is one that will be hard to beat for a long time. I cannot remember a year when we did not have a major weather problem somewhere in the major grain producing areas of the USA, or anywhere else in the world for that matter. This is a major point to remember: years like this do not come along often, years that provide ample moisture and cooler than normal summer temperatures. Grain producing nations around the world have enjoyed much of the same with timely rain and reasonable temperatures. We have wondered for years just how much we could produce with that "magic combination", and this year we should find out. What do we do in the meantime? The title above addresses that.

Farming can be a very emotional occupation. We have to make choices and decisions every day based on weather, field conditions, and equipment issues. Harvest time can be a real joy, or a real pain, depending on your approach and attitude. Some days it is very hard to get things to work right, the "mesh" just isn't there. We have all been there, and generally do all we can to plan and prevent time wasting break-downs and other issues that cause us grief and expense. Marketing plans are no different. They need to be in place to guarantee a revenue flow that generates a profit. They need to be in place to make sure we are not "spinning our wheels" somewhere, trying to make an emotional decision in a place that calls for calm. Are we proactive or reactive?

With the release of the Quarterly Grain Stocks report yesterday, the USDA reported more corn and less beans in ending stocks than the trade expected. The end result of the day was corn down about a nickel, and beans a dime, in other words, the yield reports coming in on beans meant more than the look back at what we had. Wild basis swings in September told us the beans were tight, but that became old news, and once again the market did its job, found a price that would get the job done, and we did not run out of anything. Looking ahead, we WILL find a price that discovers more buyers than sellers, in other words, a LOW. Everyone is looking and trying to guess when and at what price that will be, and the simple answer is we don't know. We do look for a number of things that are clues, and list them as follows:

1) Negative news does not cause a sell off

2) Spreads go to full carry, earning maximum storage revenue

3) December 15 corn is trading 50 cents over the December 14 price

4) We start making higher highs and higher lows in daily trade

5) Basis levels start to improve

6) The corn/bean ratio goes back to 2.5 to 1

We still have some concerns to the downside, and are not ready yet to jump to the bulls bandwagon. In the short term, we have some of the following to get through:

1) China is raising issues with some GMO beans. Sound familiar? Look what happened to the corn market with MIR 162

2) Yield estimates and crop sizes are still going up

3) Argentina is still "hording " about half of last years bean crop due to currency issues, and Brazil is behind their normal sales pace for the 2015 crop.

4) Transportation issues are adding to the cost of our grain for export. We are still not as competitive on price.

So what is the plan now? While we are still bearish, there will come a time to put a bottom in this market. Demand for corn here is very strong, as everyone using it is making money, a big difference than two years ago. We will not use less corn this year than last, and looking at the balance sheets, we need to produce 13 billion bushels+ to meet usage next year. Do market prices now inspire that level of production? Our plan is to be proactive, buying puts and preparing to re-own grain that was sold, or needs to be sold in the next few months. If we have puts to protect long positions, we can limit our risk to the value of the put premium paid plus transaction costs. Right now, you could buy a December 3.20 put for a dime. For unsold bushels, it puts a floor in, just in case the October 10 report is very bearish and we head south of $3.00. If we see the above mentioned items come together and feel a low is in, we can buy futures against those puts, with limited risk. We see that as a much better choice than just putting the grain in commercial storage, paying up 25 cents or more and still having all the downside risk. With cash only marketing, you are depending on the flat price to rally, when it may be futures only, with basis widening out. In other words, if futures rally 20 cents, but basis does not stay constant, you may not get that. Your local basis is again the driver to what you should do, and we need to visit on that before you put a plan into action. For beans, a $9.00 put may work the same way, although limited time left to trade November options may push us to January or March. The following paragraph is from last months newsletter, but still applies in our thinking:

As stated earlier, we still have the most concern for soybeans, in terms of downside potential. If our yield results continue at lofty levels, weather is cooperative, and there is no early frost, we could see another $1.00 or $1.50 lower. Double crop beans in this area look like they may even add to the problem. We are not used to prices being that low, but increased production both last year and prospective planting for the 2015 crop in South America may add to already record carryout's of soybeans in the world. We do not see soybean acres declining, rather growing, and with producers holding more, the supply situation continues to grow. We would make more sales with a low risk re-ownership plan similar to corn, or buying more puts with a target of $8.80-$9.00. Keep in mind your insurance coverage as well, a call to your agent as well as a good yield estimate will make planning easier. By using the "Tracker" you can play "what if" with many yield and price combinations ahead of harvest to make instant decision making when you get in the field. Its all about being prepared, and hopefully we can help you be more comfortable by having a strategy ahead of time to go to. Call this week to go over some ideas!

Right now, the bottom line is to get the crop out of the field, to the bin or elevator, and maximize the benefits of a great crop. As you get into your fields and have a better handle on production, and what the outlook is for your area in terms of storage and basis, lets be proactive with plan to capitalize. You can own corn or beans on paper or in a bin, but managing the risk on both is the key. That is why we are here, to help manage that risk, and give you choices. Make sure you are ready for the October 10th supply/demand report, there is much discussion over planted acres, yields, etc. It could be a game changer, or price buster, and getting a plan to deal with whatever comes out will make it easier to sleep the night before!

From  the technical side, we have the following numbers from our computer to consider:
           Dec Corn       Support                Resistance
                                 3.14                      3.40                                                                    
                                 3.03                      3.52
                                 2.90                      3.68

           Nov Beans        8.97                     9.39
                                  8.53                     9.55
                                  8.34                     9.80                              

In conclusion, there is much concern, and rightly so about grain prices now and into the future. We are below cost of production for most farms in corn. The joy of growing a record crop is muted by bearish factors. "If I had just sold more" is repeated so often, but does little good. We want to focus on the future, as just as no one thought we could go to $8.00 for corn, no one thought we could see a "2" in front of the cash price, and now we are there. But how long will we stay there? Right now it is a buyers market, but once the crop is in, and stored away, demand of over 13 billion bushels of corn should start to improve basis and concern over next years production plans begin. End users are very profitable at these price levels, and are more likely to lock in more once a low has been confirmed. We do not believe selling corn for next year at these price levels is a good idea, as the worst time to sell next year is during a big harvest this year. Remember what happend just a year ago? December 2013 futures bottomed at 4.06, and rallied through the winter and we had a chance to sell $5.00 old crop corn. While we don't advise holding for $5.00 this year, the message is clear: Do not get overly emotional to the bear side, but rather put a plan together to limit risk, maximize your storage ability, and manage your crop insurance coverage. Today we start calculating the fall average price, which will be compared to the $4.62 spring price. Call your insurance agent and us on a rainy day or evening and we can look at some numbers and ideas to get the most out of a great production year. Safe harvest to all!

Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • October 10th Supply/Demand and Crop Production
  • October 24th  Cattle on Feed
  • Export Sales and Shipments every Thursday at 7:30 am

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