CFGAG News and Views vol. 96 July 3, 2017

"Crunch Time"


With the June USDA Reports behind us, now its time to crunch the numbers, and see what the latest weather forecast is promising. The market was surprised by the number of bean acres remaining even with the March intentions of 89.5 million, and also that corn acres went up to 90.9 million. Many of us were expecting more bean acres, and since the report was based on a June 1 survey, it would not surprise us to see a few more beans and a few less corn than expected June 1 given planting conditions on that date, and the amount of acres left to plant or replant after that. The Quarterly Grain Stocks Report held few surprises, a touch fewer beans and a touch more corn than expected, but nothing dramatic. What was dramatic was the late rally in corn to bring it up 12 cents on the day by the close, and beans holding onto a nice rally throughout the day. So what does all this mean to us going forward? Let's start with what we know:

1) Managed money (the Funds) hold a  record short position in beans, and nearly 100,000 in corn. Wheat shorts are almost all bought back
2) Eastern belt crops are very late, and especially in Indiana, are in very poor condition relative to a year ago
3) Some areas are flooded, and some areas are really in need of rain soon.
4) Vegetative health maps comparing this year to last show dramatic differences, this year being far worse at this time
5) Spring wheat areas in the northern plains and Canadian prairies are under drought and heat pressure causing a sharp rally in wheat of all classes
6) Pollination will begin soon, and due to planting delays and replanting will be taking place over a long period of time


We look at the rally in wheat, of course led by the Minneapolis contract (spring wheat) and our first point is something we have been talking about for quite some time now, the concept of "market complacency". For four years now, we as producers have ramped up acres and production in response to the high prices of 2012-2013, and built world stocks up to a very comfortable if not surplus situation. The market has not had to worry about bidding up prices or extending coverage because producers here and around the world kept planting more and with favorable weather, produced much more than used. Cheaper prices have built demand to a level many would not have dreamed of 25 years ago. We now need over 14 billion bushels of corn to meet demand. This past year South America followed our all time record production of 2016 with an all time record of their own. It is easy to see how the market, including funds, have slipped into a confident mindset that with all our new genetics and technology, a 170 bushel national yield is all but certain.


Except..........spring weather has not cooperated, and now we approach pollination with some very dry areas and possible heat moving in. Do we sound bullish? We would rather say cautiously optimistic, that there will be better prices at which to sell depending on the next 30-60 days weather. We can still have some very good crops, some decent national yield numbers IF we have a summer and fall comparable to last year. In our minds, what we had last year was an EXCEPTIONAL year, one that started good and stayed that way all year, and produced a corn yield of 174 and beans of 52, by far the best we have ever done. What we see this year is a more NORMAL year, one with a bad start in places, and now some good areas and some not so good, but certainly no exceptional year like the past one. So what is a "normal' year produce? We would suggest that a more normal corn yield may be in the 163-165 area, and beans at 46-48 would be a pretty good place to start. If we are close here, it would suggest to us that eventually we could see corn prices back above $4.20 and beans in the 9.60-9.80 range. While all this sounds good and positive, we would be remiss if we did not remind ourselves of the large stocks yet to be sold in South America, a big second corn crop is now being harvested in Brazil, and planting season there begins in about 60 days. We do not want to forget to protect our bottom line by using sales or put options to cover our cash flow needs in the fall, or a price that makes us profitable. Remember this if nothing else: EVERYONE has a different break even price, and area differences in cash price could be huge given poor crops in high demand areas verses big crops in lower demand areas. There is no "one size fits all". We are still concerned about fall bean basis if 89.5 million acres approaches a 50 bushel national yield, as we are now 6 million metric tons BEHIND our normal new crop sales pace.

Hot and dry August weather may reduce that concern, but a big crop on top of a big carryout could really impact fall basis. If you plan to sell beans off the combine, be aware of that risk.


Given all this, and while we remain cautiously optimistic, we want to also make sure we take advantage of every opportunity to make ourselves profitable. We would suggest the following list:

1) Start with your projected production and crop insurance guarantee.
2) With Friday's rally, we are getting back toward the Spring price, selling above that price reduces the deductible
3) Our first target up will be $4.05 and then $4.09 basis December futures, if we clear that, consider trailing sell stops, put options, or HTA contracts
4) Remembering your crop insurance is a "synthetic put" based on a price times APH, estimate yield potential to see if and when you need to "roll up" protection or add to it.
5) If you are in an area of good demand and poor production prospects, avoid basis contracts or flat price contracts, as basis may narrow or go positive after harvest. Keep your options flexible!


By staying flexible with actual sales, you may be able to participate in a rally if the weather this month is unfavorable. That does not mean unprotected! By using puts we can keep a floor under us while waiting to see just how much production will be lost, and what we may be able to expect later. When to buy them depends on where you are profitable, and again, everyone is different. NO ONE has the magic number of where the market will go up or down, and on this farm, we will not pass up that opportunity to make sure we have not worked all year for nothing. Yes, it costs money to buy insurance, but if there is a good reason to make sure I do not lose money and work all year, I will spend a few cents to make sure I can still try again next year. If we get to a price that makes you happy with the profit goal, take it and if still in doubt, own some calls to make sure you haven't missed an opportunity. An old saying comes to mind, "If the market passes out a tray of cookies, always take a few off." If markets continue to rally, a floor with puts and incremental sales every 5 or 10 cents will make a nice average, and you can always put in a sell stop at a price you do not want to go below just in case the rally doesn't last long. Call us for specific ideas on your operation, it will need to meet your situation and conditions!

In conclusion, we do not want to sound too bullish here, but with the funds short and weather uncertain, we have the possibility of a decent rally IF the weather is threatening. While we have commented on the market being complacent, we do not want to be that ourselves, and miss a good chance to be profitable. Many have old crop to sell, as well as most of the new crop. Our plan is to lay out prices that we want to get and put orders in. We want to put orders in for put options as well to protect what we want to sell but may not have, depending on the next few weeks. We will be getting a tremendous amount of information, and market noise, over what is out there and what is not. THE most important numbers are YOUR numbers, and making sales or buying puts to protect those values are what we need to do. With so much variability across the corn belt, no one will have all the answers, but the market will eventually figure it out and discover a price that brings a buyer and seller together. There is a lot to sell both here and in South America,  but there is also a big demand out there as well, and for the first time in a year, all is not "perfect". How far from that is yet to be seen, but making sure we are profitable is all that matters. With all the challenges of this planting season, hopefully you can take a few hours to celebrate our Nation's Birthday, and enjoy the freedom to do what we want as Americans, to work and play in a land of Liberty, and also be good stewards of what we have been given. May God Bless...............

 Dates to Remember this month

  • Crop Progress and Conditions every Monday at 3:00 central time
  • Export Inspections every Monday at 10:00 central
  • Export Sales and Shipments every Thursday at 7:30 am
  • July 12th  Supply/Demand and Crop Production
  • July 21    August  options expire
  • July 21   Cattle on Feed