CFGAG News and Views June 1, 2019
"Weather Market, History Being Made"
July corn has rallied over a dollar per bushel in less than a month...Let that sink in a moment. A few weeks ago, we were lamenting the failure to reach a trade agreement and a very bearish USDA S/D Report, but then the reality of adverse weather became the lead issue. What we have witnessed has never happened before, the slowest planting progress on record, and millions of intended corn acres not planted by June 1st. This has now set us up for a very volatile summer, and we summarize the Bull/Bear items below that we will be watching:
Bullish
1) Potential Prevent Plant acres reaching record levels
2) Slow emergence and development of what is planted, some acres planted lost to flooding and ponding
3) Fertility and weed control programs far less than ideal
4) Crop conditions should reflect relatively poor prospects when first reports released
5) Fund traders have exited shorts in corn, but have not gone seriously long yet, bean and wheat shorts have been reduced
Bearish
1) Farmers are still trying to plant, and will probably push the time envelope more now that prices have rallied
2) Exports demand will slow, Brazilian corn is now substantially cheaper than ours
3) Both Brazil and Argentina had excellent corn and bean crops, and with currency ratios favorable, will be good sellers
4) Ethanol margins are poor, at some point corn price will produce cut backs in production
5) There is more than ample wheat supplies to off set corn use in ethanol and feed use
In short, while some are comparing the crop loss to 2012, we caution that while we fully recognize how serious this years spring may be, we have a lot more cushion in supply than we did in 2012 where there was no surplus of anything. Projections on carry out as of September 1 2020 are very dependent on demand as well as supply cut. The markets job now will be to ration out what it perceives to be available supply and find out what end users are willing to pay before throwing in the towel. What is very critical right now is what does managed money, (funds) do? Will they repeat past behavior by going long in a big way? Or will they stay on the sidelines concerned how the past few years have seen big rallies only to crash and burn quickly? No one knows for sure, but what we can do is construct a PLAN to prepare for all opportunities that they give us. Having a grasp of what we do know combined with a plan of action designed to capitalize on what may happen is VERY important now. We have not had a major threat to supply since 2012, and price opportunities reflect that. Now we do, and the scope of the loss is far from being known. We will walk through some of what we have done and what we plan to do in the future as more is known.
For months now we have advocated the purchase of "courage calls", cheap calls to make it easier to make sales against if a rally occurs. That has proven very useful now, and we have a lot of profit in them. Now we have to look ahead and see what we need to do. We have a major report coming June 11, a monthly S/D report and the first look at what USDA projects for crop production. This will be huge, as guesses will be all over the board and the final number is bound to surprise someone. Do we rally into it or sell off? More importantly will be the June 29 reports that include Planted Acreage and Quarterly Grain Stocks. Remember last March when USDA "found" 270 million bushels? They also said that any grain lost in the flooding events would be accounted for in the June Stocks Report. This sets us up for a very dynamic possibility of big surprises and price swings. In short, the spring weather has now set the table for wild price swings and huge risks for all. Producers and end users will face tremendous anxiety as these report dates become near. Our job is to keep emotion out of these events and focus on opportunities and most of all, reduce risk. As we have said often, no two operations are the same, so each of us needs to focus on what we need to do on OUR farm and not get caught up in the latest twitter feed or face book post. Here are some of our thoughts as of June 1, (always subject to change daily as more is known)
1) The market will rally until rationing is complete and some comfortable supply/demand numbers are priced in
2) We are doubtful that December corn can get through $5 without further bullish news. (see bearish items above)
3) With nearly a billion bushel bean carryout, and the possibility of more bean acres, we like putting floors in old and new crop above $9
4) Old crop corn and wheat should be incrementally sold on rallies, and good basis, and if desired, renowned with calls or call spreads
5) We need to protect EQUITY! A rally like this should not go unrewarded. Take profits on futures and long calls that will expire soon and replace with lower risk calls or call spreads. TAKE SOME MONEY OFF THE TABLE.
Planning is all important. Execution is next. Here is what we are doing on our farm.
1) Taking profit on long futures (that replaced earlier cash sales) and also short dated calls that expire on June 21
2) Buying short dated August expiration $4.50 calls and also selling December $5.00 calls for 5-6 cents
3) Sell old crop beans on any decent rally, and new crop above $9.10
4) OR, protect old or new crop beans by buying short dated August expiration November $9 puts and selling November $10.00 calls
5) Make sales via HTA contracts as comfortable, rewarding rallies in increments. (4.50 is not a bad starting point)
6) Protect equity in long positions by buying puts, also if sales are not made, protect what the rally has done for stored or planted grain
7) ALWAYS ASK YOURSELF, DO I WANT TO BE LONG, SHORT, OR NEUTRAL AT THIS PRICE (every day!)
Finally, our planning goes on for next year, asking ourselves "how do I get next years crop sold"? We are watching the December 2019/December 2020 corn spread with interest. Amazingly, only a few weeks ago, it was trading at a 35 cent carry, and last week, traded at a 35 cent INVERSE. At some point, we will want to sell the 2019 and buy the 2020 December anticipating a move back to a carry market at some point, and converting the spread to a sale either in futures or cash sales. We cannot fault anyone for getting started on next years sales with 2020 over $4, but would like to use the spreads to capitalize on the inverse similar to what the 2012 season offered. This is one that can be more involved with option protection and is margin sensitive, so make sure you call and spend some time going over the risk/reward possibilities. A good plan is worthless without a good understanding of the risks, exit strategy, and execution. Keep in touch to first plan out a strategy, monitor it for new developments, and change it if necessary. Adversity brings opportunity, but only the well thought out plan can capitalize as it is a futures market and what happened last week is old news. We know now a supply threat is real, how far it goes is only a guess, and how we approach it is now in our hands. Does anyone even remember the trade negotiations with China now?
In conclusion, we now have a real threat to production, and the ramifications of a cool wet spring can go on completely through summer and fall. We will have to worry about pollination more with less acres, and maybe an early frost combined with so many other issues like weather in China, Russia, the Ukraine, and others. With supply cuts now assured, any more will have more price impact. Money flow will still dominate the scene, and each USDA report will take on more and more importance with volatility high. We will have big price swings, and we want to avoid getting hit in the face with one going the wrong way. Emotions will be high, and probably detrimental to good business planning. Remember those report dates, and ask yourself how you want to be positioned ahead of them, not jumping into something at 10;58 am before a 11:00 report. We really need to look at this year as well as next year for profitable opportunities, these types of supply threats don't come that often. Seven years to be exact, and we don't want to look back and wish we had been more proactive. Call when you can to start that process, and don't forget June 14th to honor the flag that represents our freedom to live and work in freedom!
Dates to Remember:
Every Monday: Export Inspections, Crop Progress
Every Thursday: Export Sales and shipments
June 11th : Monthly Supply/Demand Report, Crop Production
June 21st: Cattle on Feed, and July Options Expire
June 28th: Quarterly Grain Stocks and Planted Acreage Reports
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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