CFGAG News and Views vol. 88   November 1, 2016


"Looking Ahead"

With harvest all but wrapped up in many areas, we have more certainty on the size of this year's crop, and unless the remaining acres to harvest are somehow destroyed, it will be a record production year for corn and beans. This is not new news, the only remaining details are by how much it is a record, and the November 9th Supply/Demand and Crop Production Report will shed more light on that number. The latest chatter indicates bean yields may go up a bit more, and corn may stay steady or down a bit from last months report. We have known the crop was big, but export demand has been big as well, and the market has rallied off its lows quite nicely. This presents us as producers with some opportunities to take advantage of this rally, and also look ahead with preparations to avoid the potential problems ahead if the weather in South America is favorable. Yes, demand right now is exellent, export sales and shipments have been stellar. The other factor is supply, and we have ample supplies if not surplus at this point, the question going forward is how long will this demand last, and how soon will farmer selling kick in?

As we stated last month, price discovery on its own must find willing buyers and willing sellers at a given price. Producers want all they can get, and end users want to pay no more than necessary to secure what they need. Both want to make a profit. A producer that just harvested 250 bushel corn may be willing to take less than one that just made 125. Both are willing sellers at some point, but the spread between what is acceptable may be quite different. The question for us is where is that "sweet spot"?

For old crop corn, we have not been able to break through $3.60 in December corn after multiple tries. This tells us that unless we get some bullish news on November 9th, we need to either sell some or buy some March put options. March puts put a floor under us until the end of February, and also offer a re-ownership possibility for those with good basis. You can sell the cash grain if the basis is strong, (and we feel like this is very possible post harvest) and buy futures against those puts keeping your risk limited. The same basic strategy can be used for beans, using March puts to cover downside from here, which we think is also very possible, and can also be used to backstop a futures postion if weather problems develop in South America. The main thing here is to keep risk LIMITED!

For new crop, we like starting our selling program with $10 beans and $4.00 corn, or something close to it. In fact, here on our farm our first increment of new crop beans were sold at $10 last week. With imput costs down, a likely increase in acres next year at the expense of less wheat acres, and trend yields going up, we just felt like we could not pass that price up and hope it is our worst sale. We also plan to buy some call options on a big break in price to make sure we are leaving our upside open just in case.

We are repeating the following from last month as it is still valid in our minds, and important to remember:

This is the key, where are you willing to sell? As producers, we have 3 areas of major risk, futures price, basis, and quality in storage. These are important in constructing a marketing plan, as not addressing each one can have severe consequences going forward. We are aware of many reports of disease in corn, and some indication of excessive damage in some areas due to ear rot, diplodia, etc. The first thing we need to do is assess our grain quality and make a decision on when we want it in someone else's hands. The next step is look at basis opportunity, and when it might be the best time to take advantage of it. Quality issues and basis are risks we cannot cover on the CBOT, so we have to make sure we cover them first. Our feeling at this time for our local basis is it should get stronger for corn as harvest winds down for corn, and beans will depend on just how big this crop is and how many need to be moved. If storage space is available, and cash flow needs met, we could see some pop in bean basis as well if producers are able to hold off. If not, we could see a weaker tone into the winter if sales or crush slow down. China is always the major player to watch, and their crush margins are very good at this time reflecting in excellent sales. If that changes, we may have to lower our expectations on basis. Many producers already have a good portion of beans sold in forward contracts, but corn sales are well behind average according to our commercial contacts, so this will have to play out as well as harvest progresses, but keep looking at those basis bids to see if the pattern is changing.

Our strategy going forward is very simple, we want to sell cash grain on strong basis, and maintain ownership in a limited risk position.To accomplish that, we go back to our 3 risk areas above. Will you have grain that must be moved by winter? If so, we need to aggressively sell cash or set a basis contract for when you want to deliver the grain. If basis pops post harvest, get it done and use any of the following you are comfortable with to re-own the cash grain:

1) Buy March call options at the money

2) Buy March put options at the money, and own March futures at that strike price of below

3) Buy March futures at a price you like, and use a protective sell stop to limit risk

4) Buy March calls at the money, and sell out of the money calls at a price you would be happy with in terms of sales

There are advantages and disadvantages to all these, please call to go over them in detail.We want to make sure you fully understand each one and what they will or will not do for you. The most important thing to remember is everything we are trying to do is LIMITING risk. By setting basis or selling cash we are ending basis risk, and quality risk if the grain is delivered. Our re-ownerhip plans also limit risk to either the premium paid for options, or the stop loss orders we choose to use. The transaction costs should also be included in any calculation, but the bottom line is, if we can move grain and limit risk we are in a better position than just throwing grain in the bin and worrying about it in a few months. Our opportunity may come early for basis, and later on for futures, we do not know, but what we do know if by using March futures and options, we have until the end of February to see if a problem developes in South American growing regions, and that is a time frame that encompases a large part of their growing season. We like those odds, and also the fact that we are at least moving some of our inventory as the time clock starts ticking on the old crop as soon as harvest is over. We have to also remember that while we have few willing sellers now at these prices, there will be fewer willing buyers as prices rise as long as supply is not severly threatened. Making sales in increments on a rally keeps our selling average moving north, and our inventory risk going south, and as the clock ticks forward, that is a good place to be!

In conclusion, we are please with harvest so far, for many it was the best year ever for beans, and corn has for the most part been good. It is a testament to the hard work and attention to detail that producers give to make these kinds of yields. The job now is to maximize the profit that can be generated with this kind of yield, and being pro-active is our choice. If we simply put it in the bin and hope for a weather problem to develop,that may happen. If it does not, then we have a major problem. With carry out growing in both corn and beans, the chances of a major rally is slim at best unless a major weather issue arises. Make sure you have looked at your balence sheet to know what price level gets you what you need and call us for some ideas to make that happen. Have a great Thanksgiving, enjoy the fact that we are the best in the world at what we do, and share the blessings with all the world. Its as good as it gets!

Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • November 9th Supply/Demand and Crop Production
  • November 25th December options expire
  • November 18th  Cattle on Feed and Cold Storage
  • Export Sales and Shipments every Thursday at 7:30 am


Mike Daube      888-391-6330

Allen Gard       800-205-1700