CFGAG News and Views vol. 80  March 1, 2016

"Crop Insurance Price, $3.86 Corn, $8.85 Beans"

Its not a headline we like to report, but the February average price of new crop grain is now set. Compared to $4.15 and $9.73 last year, our revenue guarantee is considerably less. Not only do we face the challenge of growing a good crop, our marketing skills will be tested unless a major weather development changes the picture. This is not something new, we have been stuck in a narrow range for corn and bean prices since last November, and with ample supplies both here and abroad, a strong dollar and relatively  weak foreign currencies, we have the formula for stagnate markets and little if any day to day price movement.

While all this sounds negative, (and it is) there are always friendly (or potentially friendly) items that go "underreported" when the prevailing attitude is so bearish. Weather patterns can change, outside markets relative to grain can change direction very quickly, and fund positions can be reversed almost overnight. Remember last year when everything was bearish, funds had big shorts on, and flooding rains started hammering the central midwest? Two weeks, and corn had rallied 90 cents. We have no idea if history can repeat itself, and we certainly would not predict such a move, but we do not want to be unprepared! Being proactive as opposed to reactive has served us well over the years. and we feel this year it is extremely important to do just that, be proactive and positive in approaching these markets.

With the major USDA Reports coming out on March 31, the Quarterly Grain Stocks Report and the Prospective Plantings Report, we need to examine our game plan in terms of risk management. Producers with old crop grain in the bin, and a new crop to plant are very "long" the market. One question we always ask our clients is "where do you want to be on report day? Long, short, or neutral?" If we are long in the bin, and long in the field, our obvious risk is to the downside. If we are a consumer of corn, a feedlot or ethanol plant, and we have limited inventory bought ahead, our risk is to the upside. The question for either  party is, "how much risk do you want to take on yourself, and how much do you want to lay off? It really is that simple, decide ahead of time what level of risk you are comfortable with, and what price will be sufficient to remove some, be it grain price to sell, or option premium to buy? There are many ways to reduce risk, and we will lay out some of them below:

1) Sell old crop grain on good basis, and re-own it with a limited risk futures/options strategy

By selling the grain, you generate cash flow, and LIMIT your risk to what the option premium costs. For instance, if you buy a May $3.60 put for 9 cents, and buy May futures at $3.60 or less, your maximum risk is now 9 cents plus transaction costs. You could also buy May calls, but they will not gain penny for penny like the futures will, but it is a choice

2) Buy May or July puts to remove downside futures price risk. 

You still have basis risk going forward, but at least we have a floor under us. If you do sell the grain later, you have a put option in place to buy futures against if you are friendly to price.

3) For new crop, buy short dated December puts, or May puts

With prices at the bottom of the range, we are reluctant to buy new crop puts for a long time period. If we were to rally back up to the top of the range prior to the 31st of March, we would definitely be involved in these options

We are also looking at buying some short dated, July expiration $4.00 calls for 9 cents or less. These calls would expire on June 24th, and would be a good thing to have if we have a weather event before then that rallies prices over $4.00, keeping the upside open if we choose to sell cash or futures for new crop.

Repeating the same message as last month, make sure you have a number, or price, that makes you profitable. If we can sell grain at a price ABOVE our crop insurance guarantee, we reduce our deductable, so make sure you have that factored in as well. If you need help with a spread sheet to analyze these numbers, we have some choices available to do that. AND, make sure, if you do not have enough storage, make SURE that you cover those bushels first. That is where you have the most risk, we do not want to get to harvest with a bad futures price AND a bad basis. We need to remove that risk first, with either a basis contract, HTA, or flat price contract. We can always re-own bushels, but we cannot recover a bad basis! 

We would definitely prefer that our targets get hit and we get complete coverage on before March 31st, but we would also not go without coverage by then if prices do not rally "enough". There is simply too much risk for our liking in that report, so we will be "getting serious" over the next 4 weeks, and generally speaking, the higher prices go, we would be more aggressive in terms of cash and futures sales, and more apt to use puts if prices do not get to our desired levels. For now, the following summary is where we are right now, there are some changes from last month given the shift in fund position:

1) We would be a seller of May corn above $3.75 and May beans around $8.85

2) Any move into this area, we would be buyers of 3.80 May corn puts and 8.80 May bean puts on remaining bushels

3) We would exit any long positions in futures, and replace with May calls if still bullish

4) Remaining patient on new crop sales, we are still targeting $4.30 corn, and $9.50 November beans

5) If #4 targets are reached, we would do a combination of HTA's, short dated puts, and if desired, selling out of the money new crop calls to create a price window

6) Call option premiums are relatively inexpensive, for those with an optimistic outlook, owning some to sell futures or cash against later may be a very good long term strategy. If we do rally 30 cents or more, they will make pulling the cash trigger much easier!

Specifically on the new crop, whenever your numbers show a profitable level, it is not "wrong" to start getting some price protection on. There are many choices, here are some ideas, but please call us for detailed reasons and advantages and disadvantages of all of them:

1) Sell cash through December HTA's

2) Buy May at the money put options

3) Buy the short dated, July expiration (December Futures) put options

4) If desired,and risk is acceptable, sell full length December call options at a price you would be happy to sell cash grain

5) Sell December futures and own a short dated, July expiration call option to defend the sale. (Also use these to defend HTA sales) 

6) Buy short dated puts, and sell a full December put at a price that corresponds with your crop insurance guarantee. (not known yet)

We would not be a seller of calls at this price level, at this time,the premium is just not high enough at this time to justify the risk, but on a rally up to last years high would definitely interest us depending on the time of year and reason for the  rally. Keep in touch for those recommendations.

In conclusion, we recognize the doom and gloom out there, the very bearish attitudes that seem to prevail in the marketplace. Experience has taught us not to get overly emotional either bullish or bearish, and we won't let ourselves get there now. Its a long time to harvest, and it is extremely rare that we do not get some sort of development that provides the opportunity to make a profitable sale. Making a good plan now to take advantage of a potential game changer will bring back a few smiles by year end. Call us with specific ideas and lets get rolling!

Dates to Remember this month

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

Export Inspections every Monday at 10:00 central

March 9th Supply/Demand and Crop Production

March 18th Cattle on Feed

Export Sales and Shipments every Thursday at 7:30 am

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