August 1, 2016: " Good Crops, Make The Most Of Them!"


Yes. for most producers crops look good, and weather threats are diminishing. We still have the month of August to make the beans, but crop condition ratings remain quite high for this time of year, and normally these conditions slip lower as we go through July and August. So far, we have maintained very steady high ratings, and in visits with our clients, these numbers appear reasonably accurate. There are relatively small pockets of problems, but overall the midwest corn belt looks very good. That being said, market prices appear to have the corn crop size priced in at trend line yields or better now. Funds have now gone from a big long position to a short position, and hold a record short in wheat. Soybeans are another story as they remain over 100,000 long with August weather the only remaining wild card. With this in mind, we will be looking toward August 12th for the next USDA Supply/Demand Report and also an update on Crop Production for direction along with weather forcasts. We know we have a monster wheat crop, the corn crop looks very good but not quite home just yet, and the beans are still in process. With the fund positions as they are, it would seem that beans still hold the most down side risk if weather is favorable. We still believe corn has some room to go down if the crop gets bigger and the funds want to push it and pile on, as history says they could add a lot more shorts if they feel it is worth it. We need to remember that managed money tries to follow trends and make money, not lose it, but they are not always right and they don't always make money. The market carrys risk for all who use it, and those who sell but do not produce must eventually buy their positions back. Given this set up, our challenge now is to look at our individual profit and loss sheets and plan to maximize net farm income. Hopefully we will have some ideas that you can use to do just that.

Our first concern with a big crop is cash flow and storage. If you have sold enough ahead for cash flow needs, great, we can move to step 2. For those that have not, we need to look first at basis risk and storage costs. Right now, our informal survey is that basis is not that bad in many areas, and may need to be looked at soon. You may not like the flat price, but if basis is decent, locking that in or making a cash sale for cash flow needs may be a good idea. The key here is to have a solid, low risk re-ownership strategy ready to go. We will go over one in detail now, purely hypothetical, and only to be used AFTER we go over specific details with you:

1) Sell cash corn on any rally over $3.50 December futures

2) Buy March puts at a strike price and premium cost you are comfortable with

3) If/when futures reach that strike price, buy March futures

4) Take profits on rallies, and buy back on breaks as available (make sure we plan this out before execution)

We like this option because of flexibility and risk. It will allow us to eliminate a lot of risk, both basis and futures. The worst case scenario is that futures prices continue to fall, far below where we bought the put and futures. If this happens, and there is no hope of a rally, we exercise the put and limit our loss to the cost of the option plus transaction costs. This would not be good, but compared to storing the grain and holding the basis and futures risk besides storage costs, it may still be a better option.The best case is what happened in 2014, where we started rallying October 1 and never looked back. This was also a very big crop year, and we could not figure out why funds would be so aggressive in buying a monster crop. But they did just that. We do not predict these events,  we only look for opportunities and try to position ourselves to take advantage of them. We do not know where the highs and lows are, and probably won't until long after the fact. What we do know if we have a lot of risk going into harvest and right now everyone seems bearish. Here are some reasons down the road we could rally:

1) August weather could still trim yields,we feel right now the trade is already factoring in a 170 bpa national yield

2) South American planting season starts soon, and weather there will have a big impact on prices. Their November-January is our June-August.

3) Political unrest and labor issues are common in both Brazil and Argentina, making timely delivery a plus for us

4) Currency values and fluctuations can easily drive grain market rallies ( or set backs)

5) With so many countries offering zero or even negative interest rates, there is potentially a huge amount of money that could go into commodities if any bullish issue appears

For soybeans, we are still sellers of new crop above $10.00,(respecting resistance of $10.21) or at least buying puts to protect them. If you are looking to re-own them, owning March puts now may be advisable both to limit downside risk, or be set up to own futures against if desired. We feel as producers, it is almost never a bad idea to own puts, as we probably have more risk to the downside that up because we probably plan on growing crops next year. If we lose money on puts, as least we have not gone lower. In owning them, make sure you are covering the time frame you need. In our example, we are going with March because that reflects the key weather time for South American production. It may not be enough, or may be more than we need, it is just our best guess at this time. We like being in a position to sell cash on good basis, and if we have this position in place before harvest, it does not really matter why if the market rallies, we will be ready. If history here repeats itself, the last two years we have had good basis from last half November through mid December. We could then move cash grain and have it re-owned on paper, again, with limited risk, and not worry about how much grain is sold for January delivery by others. It is just being pro-active instead of reactive and for us, has been very profitable. Make sure you are "pro-active" on bushels you need to move for cash flow needs. Make sure you call us to go over specifics as to these trades, they are NOT a one size fits all, we use one example to illustrate an idea. There are many more that may fit you better. Calls or call spreads are also an option, and using straight futures with stops instead of puts can also be used. It really boils down to your comfort level and risk aversion or acceptance. No one should make that call other than you, and we are here to help look at each option with experiance to "trouble shoot" or play "what if"?

In conclusion, while we have a lot of disappointed bulls out there who were looking for a major weather problem to develop this year, we also know that markets will not stay down forever. Just last March it was so dark and gloomy that no one believed we could go anywhere. We got a very small chance to sell corn over $4.40 and beans over $11.00, but it did not last long. We do not mention this to dwell on what could have been, only to point out that there will be more to come. World and domestic demand for grain is not shrinking, and right now we have the cheapest corn in the world. There will be good selling opportunities someday, our task is to be in position to take advantage of them. If we can use some of the ideas above to add just 20-30 cents to our price, thats $40-$60 per acre on 200 bushel corn ground. Being in position to get that while reducing risk in the cash market is our goal now, making the most of what we have and extending our time frame to sell by using futures and options is adding flexability. Make sure you  are using these tools to lower risk and increase opportunity and not adding to your stress load. Do that by taking a few minutes to try one of these options on for size and comfort. As we travel this summer, there is a lot of good crops out there to be proud of, we want to help extend that pride with more profit from it!


Dates to Remember this month

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

Export Inspections every Monday at 10:00 central

August 12th Supply/Demand and Crop Production

August 26th September  options expire

August 19th Cattle on Feed

Export Sales and Shipments every Thursday at 7:30 am


Mike Daube      888-391-6330

Allen Gard       800-205-1700