CFGAG News and Views vol. 98, September 1, 2017

"Time For A Rally?"

When yesterday morning broke, I was preparing to write a piece that would address the depressed mood we are all in and have been in since the August 12 USDA Reports, in which they caught most of us leaning to the friendly side expecting smaller yields and maybe fewer corn acres. Instead, we got only a slight reduction in yield, combined with no change in acres, and a carryout number that was decidedly bearish. The Pro Farmer Tour was looked upon as another possibility that would find less bushels and maybe stop the downslide in prices. While slightly lower, they came in a little better than we thought they might, and prices continued to slide. And then the morning of August 31 came, and after little change in price overnight, prices staged a good rally, staying strong all day and making the highs right into the close. It was impressive, finishing up 12 1/4 cents after days of slow bleeding, and making a new low overnight, we took out the previous days high convincingly. Technically very friendly, but now we need some more up to keep the momentum up.

The phones were full of calls demanding an explanation of what is driving this rally. We will list below some possibilities, but the simple answer is that we ran out of sellers. The end of August 2016 marked last years low, and perhaps we are repeating that? It is possible that all the "forced selling", (basis contracts and free DP time ran out) ended, and lots of buyers waiting for prices to stop going down before they pulled the trigger came to the table with few offers at these prices. The next few days will tell us if its for real, or just a head fake, but we do want to go over some factors that could keep some upward pressure on prices:

1) Managed money (the Funds) are now moderately short in all grains 
2) While recent rains have helped the Western Corn Belt, it has become quite dry in the East
3) Cooler than normal temperatures have helped confine the stress, but have also left us with a crop in the east that is 2-3 weeks behind normal, and possibly vulnerable to early frost.

4) Weather maps today do not predict frost, only very cool temps next week, continuing to delay development

5) Demand remains strong, with yesterdays export sales and shipments confirming we are doing very well as we approach the end of the marketing year. 

6) There are many reports from the field in all the major states that yields will not add up to the numbers projected, and the September Report will be lower in yield as well as harvested acres.

We have often spoken about "market psychology" and the impact on price. The month of August has been depressing and certainly contributing to that is ideas that maybe yields will come in surprisingly good. We cannot ignore that possibility, as much as we believe that early spring weather did more long term damage to yield potential and dryness in the western belt hurt potential there, we must keep the emotion out of good decision making and plan accordingly. There are bearish possibilities as well, and we remind ourselves of those here: 

1) Funds can still sell, their present short position is not near as big as they have been
2) South America is still selling part of their record crop produced this year, there is plenty to sell
3) With some good finishing weather and no early frost, some yields could be better than expected
4) USDA may not change any numbers in the September 12th Reports 
5) Trade issues could develop over geo political events

What we want to do now is make a plan depending on how you view these issues, and what your production potential is. What we do NOT want to do is pay for commercial storage if we can help it. As of today, a grain terminal in Missouri is charging 30 cents per bushel of corn to store until January 1, and 4 cents per bushel per month after that. To hold corn until July would cost you 54 cents per bushel, with no guarantee of any improvement in basis or futures price. To us, this is not an acceptable choice, as we have found that if futures prices rally, basis usually widens, and you end up getting only a portion of that rally while continuing to pay the storage. We have some other choices that are general in nature, and will certainly be glad to sit down and visit over specifics as they apply to your operation. These are as follows:

1) Sell grain at harvest and buy futures

     - Margin risk is unlimited, but instead of 30 cents storage, you could use that to margin the position

     - You will gain penny for penny any up move, and have no basis risk

2) Lock in basis and delivery time now, and buy calls.

     - Removes basis risk and storage costs, while keeping futures price open for any rally

     - Gives you the option of extending ownership past option expiration by exercising option into a futures contract

3) Buy calls now in anticipation of a rally later, (courage calls) to sell against later.

     - No downside protection, and still have basis risk if crop size grows

     - Offers flexibility to sell whenever basis improves and still maintain ownership

4) Buy put options now, when crop is sold, buy futures against them for margin protection, and sell a call at a "Target Price"

     -Limits downside futures risk, but not basis risk

     -Limits upside to the strike price call is sold at

     -Creates a selling "window" of put strike price and call strike price

5) If bullish, own futures and use protective sell stops just below the recent lows

     - Can be used to re own old crop grain instead of call options

     - Risk is limited to the sell stop in normal conditions

     - Can be rolled into the next month if market conditions warrant and profits can be protected by moving stops up if rally continues

As each area is different, we encourage you to check storage rates, estimate yields, and discuss each option specifically as it applies to you. Cash flow needs, tax planning, local basis, and delivery restrictions all come into play and we want to make sure we look at all the factors before recommending any of the choices above, as each carries some risk and managing risk is what we try to focus on. While yesterday's rally was impressive and encouraging, we do not want to forget we have a crop to sell, not buy, and getting a profitable price is number one. Whether we do that by any combination of the above ideas is our challenge, but eliminating 30+ cents in storage costs would be where we want to start. We do NOT want you to eat up 54 cents per bushel waiting to see if we have a drought some where, or a flood somewhere else by next July. There are simply many other good options to use instead and we hope you will give us a chance to explain them in more detail.

For beans, we are still looking to sell rallies, and most of the bullish factors listed above apply with one exception, that being our concern that we may eventually "find" more bean acres and less corn. After the USDA Report on September 12 and the close of trading we will get updated information from FSA on certified acres as well as prevented plant and failed acres that could impact the markets perception of supply. With the late planting of many bean acres, September may be almost as important as August in making final yield, as lack of rain or cold temperatures can trim yield quickly. We recognize resistance at $9.50 basis November, with stiffer resistance at $9.80. Any move to the old lows around $9.00 may be a good place to own calls against hedges or for courage to sell later. We are fairly neutral on beans at this price.

In conclusion, we were happy to see the rally and end the month on a positive note, and certainly hope for it to continue. For those with serious yield reduction potential, we encourage you to consult with your crop insurance agent and make sure you are not losing money with any rally. Call if you have questions your agent cannot answer and we will try to find the answer. Estimating yield and total production can be very difficult in any year let alone one with so many challenges in so many areas, but we need to get as close as  we can to plan for sales and storage. We still have over 2 billion bushels of old crop corn around the country, and depending on the size and time of harvest can still see some major storage and basis issues develop depending on your area. Have a great Labor Day Holiday, and celebrate the right and freedom to work as we wish and choose according to our beliefs and values. Call for some advance planning and see if any ideas work for you!

Dates to Remember this month

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

Export Inspections every Monday at 10:00 central

Export Sales and Shipments every Thursday at 7:30 am

September 12th:  Supply/Demand and Crop Production

September 22nd:   October options expire
September 22nd:    Cattle on Feed

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



This material has been prepared by a sales or trading employee or agent of Gard Trading Services and is, or is in the nature of, a solicitation. This material is not a research report prepared by Gard Trading Services Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Gard Trading Services believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.