"Profit and Risk"

As we celebrate the Labor Day Holiday, in driving to the office it is easy to see the difference a year makes. Crops are coming along quickly to maturity, and harvest will be starting here in Northern Indiana at least 2 weeks earlier than last year. Corn yields are not going to match last years record, but beans may well exceed any years highs as overall appearance and soil conditions show few limitations to a great crop. Overall, our clients express much the same sentiment, the corn crop is good, in many places very good, but may not be quite as big as earlier thought with concerns of warmer than normal temperatures this summer possibly contributing to a slightly lower than expected yield. After last year, we will not underestimate corn potential, only recognize ranges to help us make good marketing decisions, and manage our risk going into early harvest and more government reports that may go against our bias as to what they MIGHT say. For soybeans, our people report excellent potential, and overall good moisture availability to finish the crop, and have high expectations. Lets just say when you have to fill the lawnmower tank with gas often in August, it usually means a very good bean crop!

Our challenge now is to maximize what we have in terms of being profitable. The final day of August gave us a rally to end the month and quarter, likely short covering and the end of forced selling as DP and basis contracts ran out of time. The last 2 years, late August marked a major low as big carryout years simply had to finish moving grain before new crop arrived. Beans are also in this mix this year, as widening basis levels and ample carry out kept prices under pressure and pushed out "hope" until there was no more. We have a serious situation in beans, and even though it is painful to look back, we need to understand how we got here to look for signs of recovery and the potential for better prices. The list of negatives is lengthy, but summarized by this list:

1) Tariffs and Trade issues have cut off China demand, a major blow to exports with no bid at the PNW

2) A large carry out from last year, over 400 million bushels

3) Record production in Brazil, they are very close to our total production at over 119 mmt.

4) Our crop prospects are huge, private estimates are now looking at 53 bpa average nationally


This list, along with some other minor factors are why we see beans in the $8 range, with cash bids in the $7's, basis levels at the worst levels in many years if not records. We cannot recover a bad basis by re-owning futures, so our first challenge is getting ready for harvest and what to do with grain we cannot store, or do not want to, and the first step is to consider if basis is as bad as it gets or can it get worse? If you must deliver soybeans, make the basis decision first, either lock it in or have a good idea it will get better before you have to deliver. Every location is different, so check around and make that call first. On the futures market, we see more downside risk IF USDA does in fact raise production numbers and does not increase demand, our carry out grows and prices likely fall, at least testing the old lows. There are simply too many beans available right now and the pain will be focused on the bushels that must be moved.  If you can store them,  basis bids look much more attractive as we move into winter,and it may be wise to lock in those levels in case trade disputes continue. While we are confident of some sort of rally if and when China comes back to buy beans, we also take a cue form the government payment announced where 50% of production will get a payment after harvest, and another 50% held in case the trade issues are not resolved. We just don't know when it will end, and with Brazil likely to go all our planting beans, we may not get the hoped for improvement. This means we need to manage that risk! Look ahead to when you need cash flow, and lock in basis for that time frame. This eliminates the risk of price we cannot recover, and gives us time to see if talks resume and demand returns either from China or a weather issue in Brazil. If the futures price does not improve by then, we can re own the cash sale on the board if we are friendly the future outlook. We have many ideas to set up for this possibility, but make sure you deal with basis first. Here are some ideas to re- own when cash sales are made:


1) Sell cash now, buy calls, call spreads, or futures with stops. (There are now some good technical points to use)

2) Buy puts now to protect the downside, using January or March, when cash is sold, buy futures against the puts

3) Buy November puts to get through the September report and early harvest, these can be rolled out to March if warranted and the same strategy used of buying futures against

4) Use futures spreads, possibly July/November to re-own, but call first to see if this is something that fits your criteria


While the bean picture looks awful right now, we want to look at the positive side as well. Markets tend to get in a bullish or bearish psychology, and often overlook some potential changes that could come about. Hypothetically, and this is only that, a possible change that could pop anytime is China agreeing to negotiate, as their economy is suffering right now. While we feel that if only beans are involved, China has every incentive to hold until November with our elections possibly changing the US policy, and Brazil having maximum incentive to plant more beans, which increases world supply (and lowers price) for a longer period of time. With Brazil beans $1.60 higher than ours (tariff impact) they certainly have that incentive given corn prices. Once the beans are planted and weather is the only issue, now China can come to the US and bargain. If such a bargain is reached, it would not be unreasonable to see our prices rise 80 cents and Brazil fall 80 cents to get back to equilibrium. That would put both July 19 and November 19 beans around $9.70, and if there were any weather issues in South America at all, maybe we could see $10 again? Maybe, but also consider what may happen to basis if we do rally 80 cents, will basis not widen out with increased sales? A good reason to lock in a good deferred basis now if it is available. This is a very simple, maybe over simplification, but still, is it that far fetched? To me, it just screams of making sure we are flexible, disciplined, and non emotional when approaching this marketing year, managing risk that we need to, but staying in the game as long as possible. That is why we want to set a floor with puts, and build whatever structure we can with what the market will give us, not expecting the moon, but also remembering that world carry outs can also fall quickly if weather is not good. We only have to look at how wheat supplies have dropped world wide when every major exporter has experienced adverse weather and low prices have kept acreage down as well. Low prices do in fact cure low prices!

For corn, demand remains extremely good, and we are still optimistic on corn prices from these levels. We still feel managing risk is important, and would still like to buy March puts on any rally, pouring the concrete for a floor, and building a base to work from. While we like demand, we also recognize the size of this years crop is not known, and USDA could give us a big number in the next Supply/Demand report on September 12th. If we can rally back some this week, we would like own those puts for that part, and give us a buying opportunity later on. You may be in an area that has a much better corn basis than beans, and may want to move some corn rather than take a bad basis on beans. If so, re-owning corn can be easier with the puts underneath you to manage downside risk and margin calls. Call us for specific ideas, and how they might work in your situation.

For wheat, we have some developments in Russia going on Monday, with domestic millers and exporters fighting it out in terms of how much is too much to export. Getting some idea on how much Russia is willing or able to export will definitely impact our markets. As mentioned earlier, every major wheat producer has experienced lower than expected production this year, and wheat markets tend to react quickly and forcefully until it ends, and then often back the other way. Make sure if you are planting more wheat this year to get some orders in at profitable levels. We are already aware of some seed companies sold out of wheat, and have every indication with earlier harvest that wheat acres could well increase. Getting some good sales or option protection around $6 is not a bad idea!

In conclusion, we know every year is different, and this one is no exception. We have been riding a good bean price for a long time, with a market signal to plant more beans. We have, along with everyone else, and we have gotten better and better at increasing yields, resulting in an oversupply, for now, and basis reflects that fact, too much production and not enough demand to keep up. Even so, you have to ask yourself, with prices like these, are we not increasing demand? Remember when ethanol production was growing rapidly, and stocks were dropping, and then the drought of 2012 came? Once demand is built, it takes a lot of price improvement to kill it off, and we are certainly not killing demand at these levels. Prices will get better when supply is threatened and we need to prepare ourselves for that time. Along the way, managing high risk times are what is important and that is what we are trying to do today. Look at the next USDA report on the 12th, are you positioned properly for your risk tolerance? Do you want to be long, short, or neutral going in? You have a $1.65 payment coming on half your soybean production this fall, at current prices, does that deserve protecting? Would some put options give you some peace of mind going in? Each one of us, by the grace of freedom has the ability to choose where we want to be at any given time, and can take action to lay off any and all risk we choose to. Celebrate that freedom, and do what you need to do to make sure you take advantage of profitable opportunities, and also realize that because you have that freedom, no one can do it for you!


Dates to remember this month:

Export Inspections every Monday at 10 am

Export Sales and Shipments every Thursday at 7:30 am

Crop Conditions every Monday at 3 pm

September 12th: Monthly Supply/Demand and Crop Production

September 21st: Cattle on Feed

September 21st: October Options Expire


Mike Daube  888-391-6330

Allen Gard     573-221-9234