CFGAG News and Views vol. 74 September 1, 2015

"Planning, Preparation, and Execution"


Going into the August 12 USDA Supply and Demand Reports, there seemed to be a bullish bias, especially in soybeans. The chatter was centered around how many acres would be lost to prevent planting, or how much USDA might reduce yields given the adverse summer weather. Unfortunately, USDA did not see it that way, delivering a very bearish report. For the first time in this marketing year, they reduced demand significantly, while basically holding crop size the same. Almost immediately the cries of foul emerged, and those protests may be valid later on, but as we have mentioned many times, taking on more risk (or not laying enough off) can be very painful on report day. This one was certainly painful to the bulls. Is the sky truly falling, or is this just a bump in the road? It is, in fact, only one day, one snapshot of what USDA sees at that given time. There are a host of other issues that are still not confirmed or rejected. Crop size may change and demand projections may also, depending on our harvest, and the next one ready to be planted in South America. This remains a futures market, and our collective impression of what the future looks like will determine price from here on.

For example, one thing that has changed dramatically from one month ago is the fund position. As of last Friday, the funds were short a small amount of wheat, nearly flat in soybeans, and long a relatively small amount of corn. There really is no big effect on price discovery at this time, as the threat of liquidating big long or short positions is not a factor. We essentially have producers and end users looking across the table at each other in a one on one poker game. How much needs to be sold verses how much needs to be bought? Big differences regionally, and the basis reflects it. Here in the Eastern Belt, where crops are the most damaged, it is still possible to find a  +40 basis on old crop corn. We expect farmers to be tight holders as supplies simply will not be close to last year. In the West, however, -50 or -60 is not uncommon. Make sure you are aware of all basis opportunities going forward. It is simply one of the most important marketing tasks you have, it can add (or subtract) a great deal from your bottom line this year. Consider this "road map" as part of your pre-harvest planning:

1) Estimate yields and storage capacity- can you store it all, or do some sales need to be made?

2) Analyze your cash flow needs-when do you have to have cash flow?

3) Look at basis opportunity, cash bids for each time period going forward- will they pay you to store the grain?

4) Make some incremental cash sales when basis is attractive, have a reownership plan if you are friendly the market

5) Do NOT incur storage charges unless there is absolutely no reasonable alternative-CALL US

6) Call your Crop Insurance Agent, go over yield potential, and see if you have a claim at this price level. You may want a limited risk long position in the market to hedge your potential payment. - CALL US for details and explanation.

Getting a handle on production is tough, but necessary to make a good decision. Double checking your coverage level and guaranteed revenue levels are also very important, as any marketing decision should be as fact based as possible. We all have opinions as to where prices are going, but we are not always right. Sometimes we get a curveball, such as the one on August 12th, and we do not need any negatives when it comes to net farm income this year. Keep it simple by getting a good estimate, planning your sales at a reasonable target level for both futures and basis, and using the right marketing tools for your task. For instance, a producer in central Indiana with an APH of 180 who is looking at maybe a 120 average this year, has 85% coverage in crop insurance. If today's price($3.75) is the average for the month of October,he would be expecting a payment of over $180 per acre. If the price goes up from here, that payment goes down. It increases if prices average less, so a protected long is needed to make sure we don't lose much on our hedge. Each individual case is different, so make sure you go over your coverage as well as the different options for being long the market. Remember, we are here to manage risk, not bury ourselves in it!

Our positions at this time are as follows:

1) We feel the market may becoming "range bound" buy puts at the upper end, buy calls at the lower end if needed

2) We are not bearish this price level at the "low end", as farmers are not likely to sell there, and end users still need some coverage

3) We have rolled down all puts at this time, and are looking to buy futures against them if yield projections warrant. (see above)

4) At the lower end of the range, call options can be bought to sell against at the upper end.

5) Plan the cash flow! Do not get caught having to sell at a bad time. Sell good basis and re-own futures instead of storage! 

6) Make sure you are prepared for the September 11 USDA Reports. Don't take on more risk than you need to.

7) We feel that producers will be tight holders of grain as long as possible, there is no need to sell "down here" yet, but each producer needs to look at what protection he needs, depending on insurance, storage, and cash flow

From  the technical side, we have the following numbers from our computer to consider:
           Dec Corn       Support                Resistance
                                 3.66                      3.86                                                                    
                                 3.51                      4.02
                                 3.28                      4.20

           May Beans         8.54                     9.27
                                   8.34                     9.52                                                                                                                                                                                             10.90                             

                                        8.00                        9.96

In conclusion, prices are certainly not where we would like, especially for areas that are hard hit with excess moisture this year. The "rain makes grain" saying is one that eastern corn belt farmers would like to stop hearing. Normally, every season has good areas and bad, even last year producers in the north west belt had some major issues. What we feel that it is important to know what the entire corn belt looks like, it is more important to assess your own risk, your own opportunities, and manage accordingly. Too often we get distracted from our mission of making a profit by spending too much time listening to what others are saying, when the "others" may be just talking their market position, and have no relevant information as to our decision making. Basis differences will be huge this year, and the producer that maximizes his opportunity to look at both flat price and deferred along with the cost of some well timed marketing tools will likely do very well. Everyone remembers what happened last year when prices started rallying on October 1 and never looked back. We may or may not get that same reaction, but if something adverse develops in South America, or we have harvest problems, it could offer a chance to have a decent income this year. Keep in touch as we prepare for the 2015 harvest, for better or worse!

Dates to Remember this month

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

Export Inspections every Monday at 10:00 central

Sept. 11th Supply/Demand and Crop Production

Sept. 18th  Cattle on Feed

Export Sales and Shipments every Thursday at 7:30 am

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