CFGAG News and Views vol. 89   December 1, 2016

"Wrapping Up 2016"

The past month has provided some real opportunity in the soybean market, with prices rallying over $1.50 from the lows put in earlier this summer/fall. We get many calls wondering what is going on, and there are many reasons(or excuses) but we feel it is pretty simple looking at three numbers. Last year we had about half the projected carry out, and now the price is over $1.50 higher. Why? Look at the fund postion, the longs this year verses the short position they held last year. A big long now compared with a big short last year illustrates why we talk a lot about money flow and price action not always being about whether it rained or not last night in Brazil. This is very frustrating to producers who sell at what seems to be a good price only to see more rally in the face of bearish fundamentals leaving them wishing they had not sold "too soon". This is a battle we fight every day, trying to figure out what the funds will do next, and it is impossible to know. We can only go with what we do know, and that is a $10/bu price for old crop or new crop beans is a good price. Last year we were hoping for $9.50 new crop beans, and we sold some when that price was achieved only to watch them rally on to well over $11. Can it happen again? Sure, but will it? We simply don't know. The question is, do we want the risk on our back that it does not, and what are we willing to do now to reduce that risk.

We are agressive sellers of cash beans where basis is good, HTA contracts for both old and new crop where basis is not good. Here on our farm, we have gone to 100% covered on both old crop and new, using cash sales and futures sales at prices over $10.25. We intend to buy calls on any major break in price preceeding our growing season to keep the upside open in case weather becomes a bullish factor. Why are we so aggressive now?

!) Profit! 2016 yields and 2017 input costs make this price level very attractive

2) South American weather looks very good right now, while still early, it looks very favorable over all

3) With normal yields, we will have a record world carry out in beans

4) We expect bean acres in the US to increase next year, perhaps substantially

5) US carry out could be 500mb, and the US $ is extremely strong

For these reasons we are agressively sold on beans, but we also have call options available if we feel the tide changing. With this price in our pocket, and the call options at our disposal, we like this feeling of not having to worry about what might happen. Normally we are not this agressive this early, but with fund money offering us this level of return on investment, we do not want to look away. Today, the first day of a new month could be interesting in that many times new money flows into the market at the start of a new month. What if it does not? We are concerned that the market may have temporarily at least run its course on this rally, but will watch today's action for confirmation. If we see lower export sales, and if new money does not flow in, we could see further correction in bean prices. Basis levels and the cash market in general are not bullish, adding to our concern over price at this time. We know that funds can certainly keep the rally going, but going back to the simple comparison of last year and now, we do not want to own the price risk going forward.

If you want to reduce risk to the downside, consider March puts as they are cheaper than November, and March futures are trading higher than November. This inverse could disappear if funds do sell off some of their positions. While not a perfect hedge, it does reduce price risk for either old or new crop. For agressive traders, buying puts and selling calls at prices that would definitely get you to sell cash is another option. Selling cash or futures and putting in orders to buy calls at a lower price is also a good idea in our opinion. The less time value we have to buy saves us money, but there may come a time when we simply do not want to be short on the entire crop. Keep in touch with us for some ideas on what may change our thinking going forward.

Corn is a different story, as the funds are short and price action lately has been very disappointing. We were hoping for some basis strength to sell cash this month, but that has not developed yet to a level we want to use. We will stay patient on corn, with our puts in place to own futures against if cash sales are needed for space or cash flow. Weather in South America will now be the main focus and we keep our eyes on the forcast closely for the next 3 months. We are not sellers of corn yet, but if March futures approach $3.70 and December near $4.00 we will be very interested in getting started. With cash flow coming from bean sales early, we should be able to wait out the corn market for a while, looking for better basis and maybe some futures rally on any weather scare. Last year we had a nice rally over a short period of time, so make sure you are ready with orders. With a large carry out, we will have to have a major event to take out last years high, so keeping expectations reasonable is important. Some ideas you can look to use are:

1) Buy March "courage calls" if March futures drop down to $3.40, then sell a rally near $3.70 and hold calls if desired

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

3) Buy March at the money calls, and sell March calls at a price you want to sell cash. Execute sales if price hits, and liquidate options.

4) Buy Short Dated December (July expiration) $4.00 calls now or at cheaper levels, to hold and sell cash or futures against if we rally

Why buy "courage calls" for March or Short Dated calls now? We found out for ourselves last year as well as other clients that owning them makes the decision to sell  during a rally a LOT easier. When we put price targets to sell out based on our cash flow projections, it sounds like a good plan. Then, weather and emotions heat up and we fear selling too quick so we don't do it. We all know what happened last year, the rally was over in a week, and no sales = no profit. I know it has helped me make those selling decisions more automatic based on my business than emotional based on fear. You just have to decide if investing a few cents now is worth that feeling of security if we rally to your target and completing the sale. Last year it worked, it may not this year, but I know that I personally will have those bought on the next break in price.

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 hope these ideas will help in making a plan going forward, but we also do not want to limit our thinking. There are other methods of achieving price goals, but we first have to know what the goal is. With harvest complete, lets take a few moments to go over some of these to see if they will work for you. We are concerned that unless we see a major weather probem develop in Brazil or Argentina, our bean prices may be high enough for now, but we also do not have inside information on what the spec money is thinking. Our primary concern here on our farm is selling grain  at profitable prices, and beans are in that zone now. Corn is not, and we are willing to be patient for a while yet, and see if a better opportunity develops. Demand is very good to excellent for all grains, and that is encouraging, but the strength of the US $ is a concern. One advantage we have here is our overall quality of the corn, bean, and wheat crop was excellent in 2016, and may help to offset some of the dollar strength, but realistically we have to look at our competitors and what the big picture looks like. As we wrap up another year, we thank you for you business, and look forward to next year and working together to make good use of our blessings. May the Joy of Christmas fill your household and familys, and the New Year bring prosperity and good health!


Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • December 9th Supply/Demand
  • December 23 January options expire
  • December 23rd  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