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October 2013 Archive for EHedger Report

RSS By: Dustin Johnson

Dustin works with a wide net of large producers throughout the Midwest. His analytical market approach and objective hedge strategy development is specific to the needs of every individual.

Corn Slides on Crop Ratings

Oct 22, 2013

Corn settled lower on Tuesday after favorable crop ratings were reported on the Weekly Crop Progress report.  December corn closed 5 ¾ cents lower at $4.38 ¼, November soybeans a penny lower at $13.02 ¼, and December wheat a penny higher at $7.00 ¾.

To the market’s surprise, corn ratings were up 5% from the September 29th report while soybeans were up 4%.  These are major crop rating increases for this late in the year and immediately put corn and beans on the defensive during the overnight session.  The weakness continued for corn, but there were some strong buyers in the bean market throughout the day session to recoup the early losses.

The bulls continue to discuss the rumors of strong corn and soybean sales to China over the last few weeks. We won’t have confirmation of these sales until October 31st which is the date the USDA chose to release the withheld information.  I think the market is figuring out that even if they sold 3 million MTs of corn to China, it really won’t make a significant dent in our final carryout.  Three million metric tons of corn equals 118.1 million bushels.  As we have shown in our estimates, even when doubling our export demand and dramatically increasing feed and ethanol demand we still come out with a carryout well above 2 billion bushels using our production estimates.  The last time we had a carryout this high was 2009 and the marketing year range was $2.96 ¾ and $4.26 ¼.  These last few years of poor production have conditioned the market to expect $5-$8 corn and we quickly forget what a sizable carryout can do to the price.  It is true that the American producer will be more likely to store grain in a holdout for better prices.  In our opinion this may help basis levels but may not have a significant impact on futures prices, at least not a lasting impact.

What happens if the cash market DOES get tight from the lack of producer selling?  The world just got accustomed to the US exporting only 735 million bushels of corn and has shown true elasticity during times of higher US prices.  Our domestic livestock industry has thinned out substantially and will not likely pick up that extra demand we discussed earlier.  The ethanol industry is capped due to the blending wall.  In this scenario time will likely work against the stored grain since it will eventually be sold before the next crop arrives.  If we get to next summer and prices did in fact rally due to an artificial squeeze, demand will have been curbed and an even larger market correction would likely be the result since final carryout would increase.

We have strategies in place to help protect the downside for 2013 and 2014 corn.  Please contact us today if you would like a second look at your marketing plan using the Agyield software (www.agyield.com).  November CBOT options will expire this Friday.  The next major USDA report will be November 8th and will be especially significant since we did not get one in October.

EHedger  |  866.433.4371

 

Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. Click Here to subscribe to EHedger's Grain Commentary that comes out twice daily.
 

Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. EHedger is a premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. The market information contained in this message has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Market information may not be consistent with current or future market positions of EHedger LLC, its affiliates, officers, directors, employees or agents.


Insurance Protection Expiration

Oct 09, 2013

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Markets closed mixed on Wednesday without much fresh fundamental news for direction.  Overnight there were some heavy sellers of January soybeans and the overall negative bias remained for the back months of soybeans.  December corn settled 1 ¾ cents higher at $4.43 ½, November soybeans 1 cent lower at $12.87 ¾, and December wheat 3 cents lower at $6.90 ½.

If there has been an impact on the markets from the partial government shutdown it may be more related to lower volatility than an overall negative or positive affect.  The price swings appear to be tapering as the trade waits for production and export data from the USDA.  The cash market continues to talk about Chinese demand for US corn but we won’t have an accurate sales estimate until the USDA starts reporting again.  Even if the Chinese are ramping up their US corn purchases it shouldn’t make a significant dent in our final carryout assuming we get that strong national average yield we are expecting.

We have been voicing our concern over the past few days about the Federal Crop Insurance price protection expiring this month.  There are many in the market who believe most of our downside risk has been capped around this $4.50 level and can’t go lower.  Consider 2008 for example. December 2008 corn had a contract high that summer of $7.99.  By October 9th it was down to $4.38 ¼ but it didn’t stop there.  It fell to a contract low of $2.93 ½ on December 5th!  This is why we recommend replacing that insurance "put" as it expires this month.  Many producers could be left without that protection, only to see the market break into the end of the year.  Like always, we can’t predict the future but we can try to position ourselves to maintain profitability if this were to happen.

Here is a chart of December 2008 Corn (blue) along with the Dec08-Dec09 Corn Spread (black).  I included the spread to show that it also continued to widen as the price dropped.   We are currently at 41 ¾ cents carry from Dec13-14 but that got up to well over 60 cents in 08.

December Corn

Harvest Price Example

There are 23 business days during October which means every day you will have 1/23rd (4.35%) less price protection on your crop insurance "put".  The average December corn price so far in October is $4.42 after 7 trading days which makes up over 30% of the harvest price already.  To show how this is already limiting your coverage take the following as an example:

Seven days are already set at $4.42 but the remaining 17 days theoretically trade at an average price of $4.00.The equation is (7days/23total)*$4.42 + (16days/23total)*$4.00 = $4.12 ¾ final harvest price instead of $4.00.  The higher price means less "revenue" lost and even though a producer had a good insurance put on he may not be getting the payment he would otherwise be expecting at $4.  As time goes on this discrepancy will only get larger until the insurance "put" has expired and no protection is left.

Those who are relying on that "guaranteed revenue" are less and less covered everyday and need to make a decision of whether or not they want to stay protected and take action.  If you would like to look at a strategy to help with the crop insurance in detail please contact an EHedger risk manager to discuss a trial of our services at 866-433-4371. 

EHedger  |  866.433.4371
 
Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders.
EHedger is a premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders.

Premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. EHedger is a premier full service commodity brokerage offering risk management services for the agricultural sector as well as professional traders. Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. The market information contained in this message has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. Market information may not be consistent with current or future market positions of EHedger LLC, its affiliates, officers, directors, employees or agents.


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