How To Win In Uncertainty

November 11, 2015 02:48 AM
 
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Gather intel to assess your marketing options

As commodity prices remain low and farmers wrap up harvest, the marketplace turns to expectations for stored crops and 2016 price potential. Top Producer asked top crop analysts to provide insight on demand drivers, global production, strategies for marketing next year’s crops and more. As you prepare your marketing plans for the new year, keep the following advice from these 10 experts close at hand.

Brian Basting, Advance Trading

Export demand could bump prices back up. U.S. corn is priced higher than supplies from Argentina, Brazil and Ukraine. If U.S. corn remains expensive and weather is normal for these areas, competition may remain keen. 

Lock in a floor for projected 2016 production. The market could offer a pricing opportunity well before crops are planted or before harvest. An option-based strategy can lock in breakeven pricing but provide the opportunity to participate in a rally.

Options establish a floor for anticipated (or realized) production and also provide the chance to participate in rallies. A put option can provide an additional advantage before harvest if a crop problem surfaces, since bushels are not committed to be delivered.

There are regional differences for 2015 corn. Reduced yields in the eastern Corn Belt have led to strong cash basis levels. Consider forward sales, combined with the purchase of a call option. In the western Corn Belt, where crops were larger and basis weaker, a producer should be a student of the market. In other words, lock in market carry with a flexible marketing tool and then monitor basis levels to trigger sales.

Jeff Beal, The Gulke Group

As harvest wraps up and final production for 2015 becomes known, our focus will shift to demand. USDA has struggled in the last couple of years in realizing the magnitude of demand and thus, final ending stocks. For example, remember last year when, after record corn and soybean crops, USDA projected a 2-billion-bushel corn carryout and a 450-million-bushel soybean carryout? The carryout ended up at 1.7 billion bushels for corn and 191 million bushels for soybeans. 

Despite eastern Corn Belt wetness, it looks like we are going to produce a near record national crop again, only this time USDA has increased its initial outlook for demand. 

Fundamentals do indeed matter, which is why we will watch demand levels evolve over the next several months. In the past decade, the production increases from competitors have created an extra 3.2 billion bushels of corn and 2.4 billion bushels of soybeans. 

Most of this grain has been consumed by growing global demand. We don’t suffer from a global demand problem; production just grew a little faster than demand. It would only take a small production hiccup to get the market excited about grains again. 

It will only take an unexpected 200 million to 500 million bushels of reduction in corn or soybean production to get carryout projections to a level that the market would need to incentivize more U.S. acres next year. 

Bill Biedermann, Allendale Inc.

World demand for corn is huge. The problem is getting our share of it. The strong U.S. dollar is going to make competition with the world difficult. Our best customer, Japan, has barely shown up for the cocktail party. Feed demand hinges on the livestock market, and we’ve seen feeders become efficient. If cattle prices firm up and corn stays relatively flat, we could see a little bump in feed use. All eyes are on Asia and South America for production troubles. El Niño has created uncertainty for crops in Malaysia and Indonesia.

Protect the upside when marketing. Figure in an extra 15¢ to 20¢ per bushel if the market is going up so you can participate. We do three-way option position structures. We do positions that give producers $1 of protection on the downside and 50¢ of gain on the upside. That can be done for less than a nickel. Or do a covered hedge where you sell futures and buy a call. 

Most farmers have at least 30% of their stored grain pre-sold. Don’t wait for $4.50 corn. Anything at $4.25 or above is a place to be selling. Start at $4.25 with covered positions that would allow you to gain if the market goes up. Watch basis and the carry in the markets. If the market isn’t paying you to store it, the basis will be stronger.

Naomi Blohm, Stewart-Peterson

Corn demand for ethanol and feed have been steady overall, but our exports are lagging because of the higher U.S. dollar. 

South American weather is always key, as any production issues will be good for a price rally this winter. We’re keeping an eye on the Black Sea region, specifically dry weather in Ukraine and Russia. For a big price rally, it would take a serious drop in South American production coupled with a summer drought in the Northern Hemisphere. 

To lock in breakeven pricing, at a minimum, forward contract as much as you can in conjunction with your crop insurance (not more than 50%, if you have a lower level of crop insurance coverage). 

Focus on cash markets and master your knowledge of basis contracts.  On rallies, buy puts and, if you have the ability to tolerate some risk, buy puts and sell out-of-the-money calls at the same time. Print off a continuous weekly futures corn chart and tape it to your truck’s dashboard. See how little corn futures traded above $4. When corn futures top $4, look at the chart to recall how little that happened in 2015 and have courage to pull the trigger.

Richard Brock, Brock & Associates

No one can tell where new demand will come from, but we do know building demand takes a long time. Markets peak quickly and bottom over a long time frame. The cure for low prices is low prices, and while that’s not what producers want to hear, in order to build demand that is what will be necessary. 

Ukraine ramped up production the most when corn prices moved above $6. But it will likely back off because of lower prices and political turmoil. Other countries with marginal land will also cut back. 

The best marketing plan is to limit your losses. We market based on beating the average price of the year. 

We plan to use a combination of futures, options and forward cash contracts. We’ll mostly use futures and options because they offer more flexibility and by selling call options out of the money, we can lock in
premiums and add significantly to the average selling price. 

Use grain storage to capture the market’s carrying charges. July corn futures are trading at a 20¢ premium to December. Be hedged (short) in the July futures and profit when the futures market comes down to meet the cash market.

Alan Brugler, Brugler Marketing & Management

U.S. corn ending stocks will likely be more than 1.6 billion bushels. That will cap rallies because producers will need to move inventory—unless they are well-financed. With non-U.S. and non-China corn stocks shrinking, exports are the key price driver. The U.S. soybean stocks-to-use ratio is not tight at 11.5%, but it tends to get tighter as the year goes on because of global demand growth. The final was less than 5% the past three years. The projected global stocks-to-use ratio in 2015 will be ample if South America is close to projected production numbers. World consumption should continue to grow at about a 6% clip, but that won’t be enough to absorb the 2015/16 crop without price pressure. Bullish hopes are tied to Brazilian crop problems. Without them, board rallies are capped around $10.75.

For 2016, control margin exposure. Don’t make big input commitments without offsetting forward sales or setting options price floors. Know the price and probability forecasts targets and make scale-up sales when they are hit. Capture on-farm corn storage returns by setting a futures/options price to earn the carry. The Ohio, Indiana and Illinois area will see unusually strong basis because of tight stocks, but don’t overplay your hand. Grain can be railed in from surplus areas. 

Mark Gold, Top Third Ag Marketing

Bears think it will take a demand driver to move prices higher. They forget about potential supply problems. Demand could come from Mexico, Japan or other countries if supplies from South America are jeopardized. 

5-Year Trend for Prices
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After peaking in 2013, the average monthly price per bushel for corn and soybeans now mirrors levels from half a decade ago. 

I’m watching ocean conditions to stay on top of an El Niño situation. The Australians are losing wheat bushels because of dry conditions. An El Niño event has the ability to move a market quickly. This could lead to La Niña conditions in the Midwest next spring.

We recommend using put options where financially feasible to protect prices and keep the upside open. Buy call options to replace any cash-forward sales when there’s upside potential.

Long-option positions, coupled with timely cash sales, are the best marketing tools. They eliminate margin calls and keep higher prices on the table. At these low prices, I’d avoid selling futures contracts or selling call options to pay for put options. Re-own 2015 cash sales in corn, soybeans and wheat with call options to capture higher prices.  

For farmers storing grain, buy a cheap put option to protect the value of the crop in the bins. Then look for a rally in February or March if there is a problem in South America and again in June and July if our weather heats up.

Randy Martinson, Progressive Ag

The U.S. grain market has been in a transition between tight and abundant supplies. For this shift to take place, the price needs to decrease to a point where either current demand increases or new demand develops. 

Even with China somewhat backing away, soybeans have continued to see strong export demand. Meanwhile, corn has seen demand slow down, both in exports and domestically. Feed demand should start to see modest increases because of growing U.S. livestock numbers. The biggest increase could come from ethanol production. Brazil is a larger user of ethanol, with most of its in-country ethanol coming from sugar cane, so there can be disruptions in the ethanol supply, especially if sugar-cane production varies. There are concerns about the size of Brazil’s sugar cane crop, which could help the U.S. corn market. 

With increasing commodity supplies, producers should be aggressive when approaching sellable levels, even though this environment makes you want to avoid risk. That said, producers should consider minimum price contracts—for example, buying puts or pricing cash and covering with calls—when pricing 2016 production. For the 2015 crop, sell soybeans now since there is no incentive to store. For corn, look at selling March futures to leave basis open.

Angie Setzer, Citizens LLC

Feed demand is the wild card for the corn market. I’ll be watching for developments in the bird flu epidemic as we repopulate barns. I also expect corn exports to pick up after Jan. 1.

South America has my attention for possible production problems. Their currency woes continue to impact production costs. We could see a significant cut in corn production there, hence my outlook for increased corn exports after the first of the year. Chinese support-price changes could have an interesting effect on their production outlook.

Have a breakeven point and your cash flow needs in mind, and market your grain accordingly. Selling cash and using call options allows you to lock in a bottom pricing value while you’re still capturing some upside. When you can lock in a profit, just selling the cash will also work for protection. Using hedge-to-arrives for deferred sales will help you capture basis opportunities, but you must understand how your local market structure works.

Using hedge-to-arrives will also allow you to market stored grain as an elevator would. Hedge when the price surpasses your breakeven, then work the spreads and basis to improve those sales as the market moves. Be aware of your cash-flow needs. Sell grain when you want to move it and not when you have to.

Bob Utterback, Utterback Marketing Services

Corn demand is not bad compared to recent history. The problem is the rate of growth of overall global demand relative to production—not the usage level. Essentially, ethanol is stable, and exports, while strong, are not growing every year. 

What Does It Mean To Me?
  • Establish price triggers to sell grain, then don’t be afraid to act quickly.
  • Use proven marketing tools to limit downside risk and capture price hikes.
  • There are plenty of revenue opportunities in spite of low prices.

China and the U.S., which are the world’s top corn producers, are of greatest concern for production problems. The market will watch the effect of the El Niño and La Niña progression. There’s concern the U.S. will see a cold winter, wet spring and possibly dry summer. 

Use weather uncertainty to price expected production. Sell expected 2016 corn production between $4.15 and $4.50 and soybeans between $9.60 and $9.90. If a price spike occurs in June or July, use it to sell expected 2017 production. 

When bad weather hits, producers tend to buy back all cash sales, pull all sell orders and get long. They often ended up worse off than if they had done nothing. It’s now time to develop a plan to sell April-to-May highs, survive any June-to-July weather scare and, if prices spike, make multiple-year sales. Be flexible to changing market conditions. This is best accomplished by buying in-the-money puts or selling cash and defending with calls. 

Corn sales around $4 should be made before USDA’s December Supply and Demand report; otherwise, producers will have to wait until May or June to sell. 

On a scale of 1 (Bearish) to 6 (Bullish), where do you stand for corn and soybeans in 2016?
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Disclaimer: This material has been prepared by a sales or trading employee or agent of these analysts and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions and agree that you are not, and will not, rely solely on this communication in making trading decisions. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that these analysts believe are reliable. Such information is not guaranteed to be accurate or complete, and it should not be relied upon as such. Trading advice reflects good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice provided will result in profitable trades.
 

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