CFG News and Views Volume 65 December 1, 2014

“Approaching Year End, What to Do?”

This issue of the newsletter will be a little different, as we focus on ideas of specifically “what to do”, based on what we are doing ourselves to market 2014 grain, and start planning on 2015. We have enjoyed a nice rally, earlier than expected for most, and we can now give a lot of reasons, (or excuses) why. Empty pipelines, transportation issues, fund money flow and weather concerns in South America are all the talk. The bottom line to us is what does it mean to our bottom line? Most producers in the US have enjoyed good yields and production, and still have a lot of stored grain to sell. For old crop sales, our steps start with the following list:

  • Basis, both now and expected in the next 6 months
  • Market carry between March, May and July
  • Cash flow needs, when do you want or need to deliver
  • Personal feelings on re-ownership via options or futures
  • Individual expectations on market moving factors

When making sales of any grain, our first concern is basis, and that is a local issue. Right now, our local basis in Northern Indiana is -38 cents on corn, not very attractive compared to other markets to our South.   You have to make a call as to whether or not you think basis may improve, stay flat, or get worse. Generally speaking, if futures are strong and basis is wide, a selloff in futures will result in improving or narrowing of basis, not always, but generally speaking. Realistically look at your historical basis patterns and also available supplies. When will everyone want to move grain? Last year, holding grain past July 1st was a big mistake as crop prospects looked very good, and supplies of corn were ample. We look at 2015 in a very similar context. There are lots of bushels stored, many ground piles that will have to be moved by spring, and cash flow needs will have to be met. While we don’t know if or when the flood gates will open, we do respect the risk of holding too long, waiting for a good basis that may not come into being.

Market carry is good right now, and may get better if more grain is sold in January, putting pressure on the March futures contract. If you are still hedged in December and are considering rolling the hedges, we recommend only rolling out to the month that corresponds with your desired delivery month, based on your cash flow needs. If basis is good, and futures are not, we also like to move the cash and re-own the grain on paper using either simple call options, or a long futures contract defended with a put option or using sell stops to get out if the market falls apart for any reason. Either of these ideas limits your risk to a level you choose before entering the position.

Planning ahead to move increments of total bushels is another strategy we like to use with the focus on being “sold out” by July 1 of cash inventory, and using limited risk on long positions if weather is an issue. By being proactive in getting inventory moved, you eliminate more basis risk which can be substantial if the new crop looks as good as this past year. No one is going to bid up for your grain in August if another good crop is in the offering! For soybeans, the window may close in March or
April if South American crops look good and they become active sellers. Moving cash before then and using the same limited risk ideas outlined above can be very useful, especially if basis is good. Call us for specific ideas and assistance in constructing a good plan!

For new crop, our outlook has not changed much, we still feel the corn market will move up to more profitable levels when the “too” season gets closer, when it’s too hot, too dry, too wet, too cold to grow a crop. While a 2 billion bushel carry out is large by the last few years perspective, we have to remember that weather was nearly ideal in the US as well as around the world. With demand over 13 billion bushels, we still need to produce a good crop just to “break-even” on next year’s carry out. More importantly, anyone who is using corn right now is profitable, and there is “room” for more upside before that is a concern. Our livestock industry is growing again, instead of contracting, and without major disease outbreaks or weather disasters, will likely continue to grow with more units to feed out. Yes we have concerns over the drop in crude oil prices and the potential to impact the ethanol industry, but lower energy prices will likely spur more usage. The world is not reducing the number of energy users, and low prices will eventually lead to cuts in production, so we view this sell off as an opportunity to lock up our inventory for next year, and I would bet other users of fuel will as well. A 40% drop in energy cost in just a few months allows all us to use the savings for other things!

Specifically, our 2015 plan for this farm looks something like this:

  • Our target for corn is $4.50 and beans is $10.00 or better
  • If/when target prices are reached, we will use short dated puts with July expiration
  • We will buy those puts and then help pay for them by selling November calls for beans and December or March calls for corn for say, $11.50 or $12.00 beans and $5.50 or $6.00 corn
  • We manage the position and margin risk by making cash sales or buying a front month call option to offset the short call if prices take off above resistance levels. Having this planned out ahead takes the emotion out of the equation.

By using this framework, we are keeping things simple. None of us wants to oversell our production, or excessively speculate. Our goal is to put a floor price under us that is profitable, and give the market “room” to the upside with a realistic price objective. The July expiration puts will expire the end of June, and we should be a lot more confident of our production potential by then, allowing more cash sales or a conversion of the puts to a futures position. Whatever the market does in the meantime is really no big deal. We know that we have covered what we need, and it is up to the other to see if we can get more. USDA reports will come and go and will not make us crazy trying to out-guess them, as our risk is covered already. Market conditions change every day, and the market analyst chatter blows early and often, charging up emotions and leading to poor decision making. We choose not to participate in that, as to us, it is a big waste of time and quality of life.

In conclusion, it is your choice on how to approach marketing. Some love the challenge, and others hate it. We offer these ideas as those that have worked for us on our farms and with years of mistakes and missed opportunity in our files to draw from, can confidently say that they have made us feel a lot better about the task of marketing. They are only ideas, and can be altered in many ways to each individual as each of us has different storage capacity, different basis opportunity, and different cash flow needs. What is most important is applying these ideas to you, and not doing what someone else says you should do when they do not pay your bills or are not responsible to your lender. Make sure you look at our profitability tracker to see if it is a tool you can use, or at least know the price it is profitable for you. After that, let’s spend some time this winter outlining a plan that addresses your goals and objectives. Have a great Christmas and Happy New Year!


RJO'Brien & Associates, LLC Disclaimer:
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.