Keep Your Cash-Flow Options Open

January 2, 2016 02:49 AM
Keep Your Cash-Flow Options Open

As you read my first column of 2016, we’re entering into  a seasonal time period of cash-flow sales. Regardless of the past, now is the time to get ready to navigate the road ahead. Here’s how the stage is set:

  • Domestic and international stocks of corn, soybeans and wheat are at multiyear highs, and technology has helped maintain high yields during adverse conditions.  
  • There were limited early sales of 2015 corn and soybeans due to an uncertain wet spring, and cash-flow needs are on the rise as 2016 begins. 
  • There’s too much corn and soybeans in the bin unpriced. It appears many farmers sold their crop by basis contracts rather than completely pricing the crop, which puts all the pricing risk on them for spring and summer. Thus an unhealthy amount of corn and soybean production will likely be held in hopes of a seasonal price bounce.
  • To avoid the long-term consequences of runaway inflation due to excessive money supply, the Fed is under a lot of pressure to slowly increase the interest rate. I would not be surprised if we see a 0.5% increase in interest rates in the first half of 2016.
  • The overall debt could very well exceed $20 trillion by early 2017, especially since 2016 is an election year and Congress will have limited action.
  • I suspect China’s economy will continue to struggle, and the European Union will find it difficult to experience a growth rate exceeding inflation. Brazil and Argentina will also be pressured to convert agriculture production to hard currency.

Most grains are expected to be range bound, with a tendency to move lower during most of 2016 due to adequate supply and stable demand.  

The bulls must remember flexes in weather and the U.S. dollar are short-term events that don’t really change the long-term dynamics of ag commodities. We’ve had a period of exceptional high profits that motivated production increases. Now demand is sputtering, debt is piling up and financial uncertainty is increasing above the world’s ability to pay. The supply engine is revving up, but remember demand is the ability to “pay” for a product. In the end, there is no free lunch.

Corn: Avoid implementing new selling plans between January and March. The seasonal bounce from March to July is quite strong historically, but this year the relationship between big corn stocks and demand will stifle any rally. If you’re forced to sell for cash-flow needs, consider buying the July corn contract in a limited-risk strategy below $3.65 by early March. 

As for new crop, because of the seasonally weak time period, don’t consider any general pricing action until May to early July. Be conservative when pricing and willing to sell expected 2016 production. Use both time and price guidelines. Start at $4.05 basis on the March 2017 contract and be done by $4.40. 

Soybeans: This year might be one that goes against the norm. Usually there is near-term weakness, and prices improve from March to July. If South America has a big crop and U.S. soybean acres stay up due to tight cash-flow considerations, soybean carryover might double by the fall of 2016. Be conservative with your amount of risk from March to July. Sell expected soybean production before expected corn production. If faced with yield variability and the need to use paper to establish a price for soybeans, I prefer buying deep-in-the-money puts and rolling them up 20¢ in strike price when it can be done at less than 8¢ premium. This should provide a floor and can improve the net selling price if a July/August weather event occurs. 

Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions. 

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Spell Check

Chappell, NE
1/4/2016 10:00 AM

  Good thing this guy is always wrong.


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