CFGAG News and Views vol. 97, August 1, 2017

"Time to get Serious, and PLAN"

As August 1 is upon us, it would seem like little has changed. Corn is stuck in a 25 cent range, and beans, while still around $10, seem range bound as well. We await further information from USDA on August 10 and the monthly Supply/Demand Report, and their latest guidance on crop production. There are plenty of guesses out there from private analysts with most all below the 170.7 that the government used in their July estimate, with some as low as 158. Also in question is the percent of harvested acres, based on the June Planted Acres Report that showed almost a one million acre gain in corn acres. Our position here is we do believe the yield will drop, given the lower crop condition ratings and reports from the fields, and we believe we will lose some acres due to flooding in the east and drought in the northern plains, but how much and when will we get those numbers?

No one knows for sure, we could go clear into harvest before the real evidence is upon us, and we do have to respect the risk associated with any USDA Report for both the upside and downside surprises. There are so many different guesses, we know that someone will be caught leaning the wrong way, and what managed money will do is another question. We have seen bullish reports sold off and bearish ones put the bottom in the market over the years, so caution is always advised going into one. This article started with the word "plan" in the title, so what's ours? We list our thoughts and general assumptions below to get there:

1) Managed money (the Funds) are now moderately long in corn, beans, and wheat.
2) Crop conditions are much lower than last year, but last year was quite unusually good.
3) Some helpful rains have fallen recently, but no general soakers across the corn belt

4) USDA may NOT lower yield or harvested acres much in this report, at least as much as some of us think they should

5) August weather is critical for beans nationwide, but late planted and replanted corn in the eastern belt will also be highly dependent on good moisture and temperatures. Remember, as of June 1, 1/3 of Indiana's corn crop was either not planted or not emerged!

6) We have been trading a range of about 25 cents in corn, and 50 cents in beans for some time now.

With these in mind, and admittedly we are friendly the corn market, we also want to make sure we manage downside risk as well. Remember, every operation is different, and what we present is a basic outline that will need to be tweaked to form an individual plan and risk tolerance. For corn we start with the following:

1) Prior to August 10th, buy December or March $4.00 puts (this protects the downside in case of a bearish report)
2) If the report is bullish, we can add to sales, or roll puts up if feasible. If its bearish, we ride puts down to the "harvest low"
3) At any time you want to sell cash corn, either old or new crop, you have puts in place to limit the risk of re-ownership via futures. If basis is strong in your area, this may be the best choice, sell cash and buy futures backstopped with puts
4) You now have the flexibility to generate cash flow, reduce storage risk if quality is an issue, and stay with your bushels as long as you think necessary. We believe future USDA Reports may show fewer acres and possibly lower yields, and if so, markets could be quick to add risk premium for many reasons
5) If we continue to trade in a range, you could trade that range as many times as you want to, while keeping risk limited to the value of the put.

For beans, we are willing sellers between $10.00-$10.45, and would advise buying a short dated, September expiration $10.00 call and sell a November $11.00 call for a net of 10 cents cost to defend those sales or re-own previous sales. We should have a pretty good handle on the bean crop by the end of August, and with that window, we would be able to add some value to our hedges if we rally up to the old high, just under $10.50. We have to remember in all the grain markets we have ample world supplies, and competition from the huge South American crops will continue into our harvest season. In spite of record production here last year, and South American this year, world and US carry outs will be smaller for corn next year, a reflection of just how big demand is at these prices. We believe there will be increased attention paid to weather in the upcoming Brazil and Argentina growing seasons this fall and winter, as any hint of a major weather problem should generate some good buying. While supplies of grains are ample, and end users have had the upper hand for a while, there is still plenty of room for prices to rally before they become unprofitable. For these reasons among others , we remain optimistic that better corn prices will come. Managing cash flow and staying in a position to capitalize if these events do unfold while managing risk at the same time is what we are trying to accomplish here. We want you to be able to maintain ownership if you want, but not over extend either. This is why each individual needs to use this outline with their own needs in mind. One client from the flooded area that there is no way he wants to store corn past winter, but needs a way to stay in the game and not risk damaged grain going out of condition post harvest. This is an example of what may work for him. Do you have similar issues? Lack of storage, or cash flow needs may also put you into this area. Call us for specifics, and how to plan with all the what ifs that we can cover.

In conclusion, we do believe that better corn prices may develop down the road, but we want to make sure our downside risk is covered. Instead of puts, you may want to add to sales at $4.05 or so, or just store it and wait it out. What ever you decide, make sure you have examined your risk, and your tolerance of that risk. Basis risk, quality risk and futures risk are all items of our concern. Making the most of your storage and basis opportunities is important to us, as it goes right to your bottom line of profitability. Make sure you are ready for the reports on August 10th, we think these numbers along with weather will dictate price direction into harvest. Call for ideas, and have a great summer!

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
  • August 10th:  Supply/Demand and Crop Production
  • August 25th: September options expire
  • August 25th:    Cattle on Feed

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