CFGAG News and Views vol. 79 February 1, 2016

"Its Time To Get Serious"

As we start February today, we also start the process of determining our revenue guarantee via crop insurance. Unless we can rally very quickly, we will be somewhat less than last years $4.16 on corn. We have ample if not surplus stocks in our USDA numbers, and the prevailing notion at this time is a rather bleak outlook with many predictions of gloom and doom  for our future net farm income this year and next. Bankers are nervous, and many producers are holding onto a large amount of cash grain inventory only increasing that discomfort. We need a rally soon, to ease that discomfort and get some selling opportunities. With few exceptions, this fairly well describes the feelings we get as we talk to farmers both in the office and out in the area at meetings and farm shows. We are facing the very real possibility of red ink on the balance sheet if prices do not improve, and in some cases, that would be very serious in terms of long term liquidity in their farming operation. We recognize that and hence the title of this article: it is time to get serious about planning a course to make sure we are ready to take definitive action if we do get the pricing opportunity to be profitable.

We have been patient up to now, watching a speculative short position taken on by the funds that reached a record level in corn two weeks ago. Since then, they have significantly reduced that position to about half what it was, still short, but not by the massive amount that they were. We have not managed to get December corn back above $4.00 yet, and our targets of $4.20-$4.30 seem a long way away. With the clock ticking, and our next major risk day of March 31, (Planting Intentions and Quarterly Grain Stocks Reports) getting closer, should we lower our expectations and jump into some price protection positions? A fair question, and for us, is tough as each individual is different, and blanket recommendations are good for some, but not as much for others. We will go through some thoughts and ideas that hopefully will help you as a producer examine your own situation, and make some decisions based on good information rather than market noise. 

Since the January 12th USDA Reports, we have rallied over 20 cents in corn. Was the report bullish? No, it just wasn't bearish, or as bearish as the trade anticipated. Instead of raising last years crops, they were trimmed a bit, but also trimmed were our export projections, leaving us with about the same level of carryout this year (2016) as last year in corn, but well above last year in beans. Our competitors in other countries are flush with grain, and their currency values are helping them get more business, and undercut  the US farmer in terms of price. If this scenario continues, it could lead to more cuts in our export projections, a higher carryout for this year and next, and more downward pressure on prices. This is the reality we face on the negative side, but are there any positives to look at? There always are 2 sides to any market, and we list some "positive possibilities" to watch for:

1) Funds are still short all the grains, and a short covering rally could get us up to those targeted prices

2) Weather in South America is still decent overall, but some areas have been stressed, and Argentina is now being watched closely

3) Foreign currency values have been very weak verses the US $. Could that change soon?

4) Crude oil prices have hit multi year lows, are the lows in? How much could we rally back?

5) Weather will become more important as the days go by as we look for planting weather outlooks and possible problems

6) Weather issues in India, Africa, and parts of Argentina are getting more coverage

The other "good news" as we look at our balance sheet and cash flow is what the drop in fertilizer and fuel has done! Here on our farm we are looking at over $30 per acre less costs at current prices. If we were to lock in our fertilizer and energy needs today, we would not need $4.30 to be profitable. This is the KEY MESSAGE this month: Make sure you know where your break evens are and be ready to cover yourself whenever YOU are profitable. It makes absolutely no sense worrying about what someone else will need, it is your cash flow that will need your balance of revenue and cost. As long as it is a reasonable price, we do think that we can be patient a while longer, but if conditions change, for instance if funds come out of their short positions, we may have a greater sense of urgency to get some price protection on.

We would definitely prefer that our targets get hit and we get complete coverage on before March 31st, but we would also not go without coverage by then if prices do not rally "enough". There is simply too much risk for our liking in that report, so we will be "getting serious" over the next 6 weeks, and generally speaking, the higher prices go, we would be more aggressive in terms of cash and futures sales, and more apt to use puts if prices do not get to our desired levels. For now, the following summary is where we are right now, there are some changes from last month given the shift in fund position:

1) We would be a seller of March corn above $3.75 and March beans around $8.85

2) Any move into this area, we would be buyers of 3.80 May corn puts and 8.80 May bean puts on remaining bushels

3) We would exit any long positions in futures, and replace with May calls if still bullish

4) Remaining patient on new crop sales, we are still targeting $4.30 corn, and $9.50 November beans

5) If #4 targets are reached, we would do a combination of HTA's, short dated puts, and if desired, selling out of the money new crop calls to create a price window

6) Call option premiums are relatively inexpensive, for those with an optimistic outlook, owning some to sell futures or cash against later may be a very good long term strategy. If we do rally 30 cents or more, they will make pulling the cash trigger much easier!

Specifically on the new crop, whenever your numbers show a profitable level, it is not "wrong" to start getting some price protection on. There are many choices, here are some ideas, but please call us for detailed reasons and advantages and disadvantages of all of them:

1) Sell cash through December HTA's

2) Buy May at the money put options

3) Buy the short dated, July expiration (December Futures) put options

4) If desired,and risk is acceptable, sell full length December call options at a price you would be happy to sell cash grain

5) Sell December futures and own a short dated, July expiration call option to defend the sale. (Also use these to defend HTA sales) 

6) Buy short dated puts, and sell a full December put at a price that corresponds with your crop insurance guarantee. (not known yet)


There is some risk associated with selling options, and you have to be prepared for margin exposure with any sale of options. Make sure you fully understand those issues BEFORE entering the trade. If weather suddenly starts looking like a repeat of 2012, we want an exit strategy in place in case we take out last year's high of $4.54. We all know how emotional it can get with weather rallies, last year it lasted 2 weeks and we rallied 90 cents. Will we repeat that? No one knows, but this is why we emphasize flexibility and planning. We cannot expect to get every penny of a rally, but as long as we start out profitable and build on it, how can we end up broke? This is our message this year, be reasonable in expectations, but prepared for whatever develops. It is plenty gloomy out there now, but it was last June. We never know when or if, we can only be ready and take action. Planning now will make that much easier and less stressful later!

In conclusion, we are not overly bullish or bearish at this time, the market has found enough grain to keep the pipeline running through some sales and some basis contracts. Funds have come out of some of their short positions, and prices have been chopping in a range for weeks. Its the breakout of this range that will be important, so stay tuned and stay in touch. Now is the time for number crunching and planning to make some good marketing decisions later. Last year we had two weeks to sell at profitable levels, we may or may not get that same chance soon. Will you be ready?


Dates to Remember this month

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

Export Inspections every Monday at 10:00 central

February 9th Supply/Demand and Crop Production

February 19th Cattle on Feed

Export Sales and Shipments every Thursday at 7:30 am

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