"A Change in the Air?"


We ask that question because since the USDA Reports of January 12th, corn has rallied about 15 cents off the lows, beans about 45, and wheat about 50 cents. What changed? A number of small items in a big picture add up to bring some buying, (or short covering) into play. Funds were short a record amount of all grains combined for this time of year, and the following list suggests why they may be a bit nervous:

1) Demand remains quite strong, both domestically and world wide
2) Corn and wheat prices are very competitive, with imported US and Ukraine corn now cheaper to China than their domestic supply

3) The US $ is 12% weaker than a year ago

4) Argentina weather is concerning, too warm and dry, and Brazil is too wet in places, delaying bean harvest which delays safrina corn planting, of which 70% of their production will come from

5) Early surveys and analysts suggest lower corn acres in the US for 2018

6) US drought monitor shows a big area of excess dryness impacting the corn belt, and wheat ratings have been falling


We do not want to sound overly bullish, as we are not at this time, rather more like cautiously optimistic. There is still a large amount of unsold and unprotected bushels out there, both here and in South America, especially beans, and our bean export totals may have to be cut yet again at some point. But until the crop size in Brazil and Argentina are more certain, there remains some doubt and with the funds still short, we remain hopeful that prices could move a bit higher. This does not change our stance that risk should be removed, when a reasonable chance presents itself. Cash flow needs will come quickly with rent and farm payments coming due, inputs for planting, and everything else. A rally is only possible if there are more buyers than sellers, and while the funds hold big short positions, grain producers are still long in the bin and the only question is at what price will they come together. We need to stay focused on the risks involved, both basis and futures, and plan accordingly. As each individual has different needs and targets, don't make your plan based on what the breakfast club decides, make it work for you!


 At this time, we are more optimistic about corn futures, as our sources indicate South American corn production will fall short of USDA projections, and beans may well exceed them. Weather in the next few months will make the final call on those numbers, and the next report will be watched closely. Export sales of corn have picked up dramatically from a slow start, and with price relationships what they are, that could continue. Beans are another story, as those export numbers are less than we would like to see, as by March Brazil may be once again dominating the export market, especially if we are in a trade dispute with China or other trade partners. We do not know how these issues will be resolved, but they cause concern, and that is why we are more anxious to get bean floors in or sales made on rallies. Options are reasonable, and if we can replace physical inventory with low risk options or covered futures longs. We can also use a long July/short November bean spread if desired, but make sure you understand the risks and margin requirements involved. For wheat, we recognize the poor condition of hard red wheat areas, and again, with funds short, there remains potential for more upside. The caution is that once we reach a level of resistance, and March Chicago got very close yesterday, we need to keep the fire burning with more fuel, or a set back is likely. Wheat is very technically traded, and also used a lot in spreads. Our best advice is to make sure you know where you are profitable, select a reasonable target, and get the orders in. Getting cash grain of any kind sold on good basis is the key! We can always re-own the grain on paper for as long as you like, but we cannot recover a bad basis sale.


Which leads us to an action plan going into spring. As covered above, we are anxious to get our beans covered or sold, and would use a good set back to own calls for later weather developments. We are also looking at starting new crop corn sales in the 3.95-4.00 area, which got close yesterday, and we will aggressively add increments to cover bushels we cannot or do not wish to store in the fall. We will also buy puts and sell futures after we get comfortable with our cash sale total, and if we can rally high enough, add sell stops on remaining bushels to make sure we don't go below a certain price objective, making sure our profit targets are met. If it sounds simple, it really is, as long as you don't add to much emotion. If selling "too early" will make you crazy, then own some courage calls to help calm the sea of second guessing. If not selling enough will put you over the edge, then buy some puts to make sure you didn't miss the top. We repeat, options are cheap right now relative to the past few years, and using them for peace of mind is not an wasted expense. The reason is that volatility is low, markets have had narrow trading ranges, and hence lower risk. That may change quickly with any major weather development!


Which brings us to a point of disagreement with some of the folks giving advice out there, specifically those that advocate selling options, both puts and calls to collect premium in a low volatility market. It sounds good, collecting 20, 30 or 40 cents, and we have no problem selling options if they are part of a specific plan that involves HEDGING. What we object to is NOT disclosing the risks involved in these positions. For instance, if you sell a put and a call, you have to margin both, and if those options increase in value, put in penny for penny the amount of the increase in value. If markets "heat up" then those values can increase quickly, requiring funds. What can also happen is margin requirements for futures contracts can also be increase on any day deemed worthy by the risk managers at the clearing firm or CME. Simply put, a $10,000 initial margin requirement my turn into $50,000 in a few days. As long as you understand these risks and are prepared to deal with them, no problem, those trades may well play out. What we do not want is to get calls from folks who did not understand those risks and then have to explain what happened and why. It is not a pleasant job, and we would much rather take a few minutes and construct a plan that is prepared to deal with those issues before they become a crisis. Please take that time and if you do not completely understand, don't feel bad, as my old football coach used to say, there is no such thing as a dumb question, only dumb if you don't ask it!


Given all the notes above, on our farm in Indiana, our positions and approach going forward is as follows:


1) All 2017 beans are sold, and 2018 short dated July expiration $9.80 puts bought for 18 cents to provide a floor, looking to sell cash or futures at $10.20 or better. If sold, then after a good pull back, owning calls will be considered if reasonable

2) If you have old crop beans left, look for March over $10.00 to sell, or consider put options if basis is not favorable

3) Old crop corn sales will be made if March futures hit $3.70, if we do not get there in a few weeks, target may be lowered, but sales in the month cash flow is needed, capturing as much carry as possible is advised. (July $3.85)

4) New crop sales target is $3.95 or better, selling increments of 4-5 cents above that level, with put options purchased over $4.10

5) Stop orders in the futures market go in next, rolling up within 5-10 cents below the market to make sure sales get made, and if executed, will be covered with call options depending on time of year, crop growing conditions, and cost.


The bottom line is to reduce the risk! The risk today is the rally will fizzle out, crops will get bigger in South America, weather will improve, or the US gets into a major trade war. We have no certainty on any of the above, we can only manage that risk and sell at profitable prices when possible, using options to provide flexibility when we need it. The above targets are only a snapshot in time of our feelings about the market today- it can all change tomorrow, so keeping in touch is important, especially as we enter the 2 months before planting begins in earnest, the time of the most uncertainty and speculation about the future. There is so much market "noise" out there, everything from trade wars to huge sums of money coming out of the stock market into commodities that it is hard to stay focused on what is really important, your bottom line financial statement. Getting away from that noise to some real life numbers and projections is what we want to focus no now before we all get too busy!


In conclusion, we are happy to see the markets finally rally a bit, and hope for much more, but we also know they can be short lived and gone quickly. Getting some firm orders in to start the process is a good idea. We have talked about the funds being short a long time, and it gets old, but we also need to recognize the long position producers carry as well. There will be a price that brings those two together, and waiting too long (like last year) could repeat itself. While we are "cautiously optimistic" we are not bullish, bullish enough not to sell anything or buy some put options. Owning puts by producers is not a bad idea, and owning calls by end users is equally good. There is always uncertainty, and we are going into a time frame where a lot exists! We have found over the 20 years in this business that there will be many missed opportunities, but the ones that really hurt are passing up profit because of emotion or other factors. We may be just starting a big multi year rally, or we may be just correcting in a bear market, but if we don't sell at, or protect a profitable price, it always seems to come back to haunt us. Use the next few weeks to go over the plans and see if they work for you, and remember that every producer, in every nation, is trying to do better and grow more all the time. We do our job very well, and underestimating what is possible can cost us. We sure learned that in 2017 with our corn..............

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
  • February 8th:  Monthly Supply/Demand
  • February 23rd:  Cattle on Feed
  • February 23rd: March Options Expire