CFGAG News and Views May 1, 2020
"A Glimmer of Hope, or Wishful Thinking?"
While today's (April 30) rally was a welcome sight to see, we wonder how the title above will be answered. Have we FINALLY priced in all the negatives? Have the funds exhausted all their selling dollars? Will cool and wet weather in the eastern belt be enough of a concern to off set above average planting progress in the west? Will the country start "getting back to normal" with gasoline consumption high enough to bring back some ethanol production? Many questions, few answers, but maybe a look at both sides will put us in the right perspective:
Positive to Price:
1) South American crops should be shaved back some in the next Supply/Demand Report on May12th
2) Crude oil prices have rallied 2 days in a row after the shocking sell off last week, our local gasoline price has increased 40 cents/gallon this week alone
3) We still await last years crop size re survey in the north west states, there are still acres to harvest from last years crop
4) We expect some shifting of acres from corn to beans given information from our seed company contacts
5) Funds are now short corn about 180,000 contracts
6) Export sales have been very strong for many weeks
Negative to Price
1) Old crop demand has been reduced dramatically due to ethanol plant closures and shut downs
2) Exports of corn and beans are both still running behind last year
3) Feed demand may suffer as well longer term with slaughter facilities closed or slowed down
4) Questions on export demand going forward once Brazil Safrina corn crop harvest starts, currency relationships heavily favor Brazil and Argentina
5) Planting progress so far is above average with overall good moisture reserves. History tells us trend yields have good odds
6) There is plenty of grain around to meet demand at this time, no reason other than cheap prices for end users to get excited
We are looking for some sort of indication that the market has "bottomed" to reconfigure our marketing plans for old and new crop. It is important to look at your crop insurance coverage now that we are close to a price level that a normal yield would kick in a payment. As we are this close, there is no reason to consider selling anything at this price. A look back to the last five years shows a strong tendency for both corn and beans to rally at least 30-50 cents sometime during the growing season. We have no idea if or when that will happen, but being prepared with a plan to capitalize seems more important than ever this year. The last trading day of April may be the start, or maybe just some profit taking at months end, but we will be watching the next two days closely to see if the bounce was just a "dead cat" one, or perhaps some real short covering. We have some ideas for both sides to consider as we enter the month of May:
IF you are friendly the market and expect a rally:
1) Hold off on sales, and buy calls or call spreads to sell aggressively against on any decent rally, maybe targeting 3.70 December corn and 9.00 November beans
2) Old crop calls are very reasonable right now, consider owning July or August calls to sell against later. July corn at 3.50 and July beans at 9.00 may be good targets
3) Make sure you are watching basis for any good opportunity soon to lock that in. The longer we go without major selling makes basis risk very real unless a major crop issue develops this year. We want to be well covered by the end of June.
4) IF ethanol plants reopen, and soon, there may be a short term demand spike for coverage. This will be entirely a local issue, be prepared to act
5) Make sure you have orders in at price levels that are acceptable for either cash sales, HTA's, put options, or futures sales.
IF you are negative price and expect steady to lower:
1) Buy puts, and consider selling calls at price levels you would be happy to sell grain for this year
2) Make sales as you see fit, you can always buy calls if your mindset changes. Selling cash on a good basis is usually a good idea and replace those sales with low risk re ownership positions removes a lot of risk
3) Keep cash flow in mind, match sales months to cash flow needs and be flexible with option tools to keep upside open through high risk reports and weather
4) If you own puts, you can always buy futures against them to re own. Your risk is limited on the futures by the strike price of the puts you own.
5) If you buy puts, and the market rallies, they can be rolled up to raise price floor if enough time is left before expiration to justify the move.
On our farm, where we have not planted anything yet due to wet and cold soil conditions, we are cautiously optimistic, and as stated above, will be watching price action closely the next day or two for a good indication of whether the lows are in yet on this move. A good sign today (May 1) would be a lower start and strong close. If we get that, we will likely do a call spread using short dated calls on the buy side, and selling full December calls at a price we would be happy to start our sales. For instance, we may consider buying short dated December 3.50 calls that expire at the end of July, and sell full December 3.80 calls for a net cost of 2 cents or so. This position has some margin risk, but not as much as futures as long as you own the lower strike call. It does require a management plan that we encourage you to call us to explain in detail, but for our farm, we look at the possibility of a decent 30-40 cent rally to make sales in the 3.70-3.80 area basis December futures. Once made, we have choices, either liquidate the option position completely, or leg out of it when we feel the time is right. Depending on what is sparking the rally will tell us what choice to make, but we may want to leave the short call on if we have more grain to sell than we have covered. Each individual situation is different, so make sure we get on the same page to manage this position completely through cash sales. For soybeans, much the same strategy can be used using strike prices that offer reasonable targets and call sales that make you comfortable with the possibility of selling cash at those levels. Again, call or stop by for specific planning.
On old crop we are simply going to wait a bit, we want to see how much rally we can get as it seems to us just about everything negative has been thrown at the markets, and we may just simply exhaust the selling. We have moved enough old crop for cash flow so waiting to see if we rally or make new lows seems like our plan for now. If we do make new lows, we will probably cover remaining bushels with puts that we can buy against later if conditions change or actual cash sales are made. Right now, the markets are psychologically negative to just about everything, so any change of mindset may give us some better opportunities. We are watching basis closely for any good indication that demand is picking up.
In conclusion, we hope that the small rally yesterday continues, there are rumors of big export business that may show up in the morning. Sometimes a new month will bring in new money, but until we see some better market psychology, we will remain skeptical. Markets go through these times when nothing in the news is positive, last year was a perfect example until May 15th. Then everything changed and nothing was negative until funds had gone from 350,000 short contracts of corn to over 200,000 long! We don't know if history can repeat itself or even needs to. We just know that being prepared with real orders at real targets is vital to getting a plan to work. Use a rainy day to call and visit about what it will take to make your balance sheet balance. It can happen so quickly and be gone even quicker that has taught us to get ready even when it seems so unlikely. Ask the folks that had May crude oil a week ago if they thought the price could go below zero. The market does not care if we are ready or not, it will punish those who sit back and ask "how high will it go" and reward those with a plan of action that makes their business profitable. Lets get ready and also remember this month to be safe and careful and also remember those who gave their all this Memorial Day. We owe them everything, and a day to remember all those who served will help us keep up the tradition of good stewardship and a life or freedom and liberty!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- May 12th: Monthly Supply/Demand Report
- May 22nd: Cattle on Feed
- May 22nd; June Options expire
Mike Daube: 888-391-6330 or 574-586-3784
Allen Gard: 573-7694193
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