Outlook: It's Time to Make the "Courage Calls"

September 26, 2015 02:42 AM
Outlook: It's Time to Make the "Courage Calls"

I realize many of you are busy with harvest right now, but the decisions you make in the next few days will have a big bearing on your level of flexibility going into 2016 and beyond. The past year has not been easy to navigate on numerous fronts—and now you’re dealing with the brutal fact that costs are out of line with revenue. In this high stakes game, who will blink first—the producer who has to sell inventory to raise capital or demand that expands because of low prices? I think you know my expectation.

Since the early 2000s, producers who stored unpriced  grain at harvest and held it until the following summer have been bailed out of their poor pricing strategy thanks to: 1) a period of historical high demand growth due to ethanol and foreign buyers, 2) a stimulated global monetary policy and 3) a period of significant weather reduction events. All of these forces helped create a perfect bullish storm for those who simply waited long enough.

In 2016, and perhaps the next few years, we could transition to more stagnate demand growth and tighter global monetary policy as interest rates return to historical norms. This implies the real trigger for sharply higher or lower commodity values will fall on weather supply events. Most producers’ inability to sell summer weather scare events is their biggest weakness. Why do they think they will be capable of selling a weather scare event if that hasn’t been the case with a bin full of grain or pressure from a banker?  

I’m not saying we’re going to have a supply reduction event in 2016. However, if producers don’t start to prepare now, they will never be able to take advantage of an event if it does occur.

It’s seasonally time for feed buyers to aggressively purchase most of their 2015 and 2016 needs. Producers who have not sold should focus on using on-farm storage to capture the carry and expected basis narrowing. I prefer storing corn and wheat first and then soybeans because of carry, and I expect a better basis pattern in corn.

I suspect the demand side of the equation will hold limited bullish surprises, and there’s risk demand will struggle to grow as fast as the market needs to eat up excess supply. Subsequently, the greatest potential for price appreciation lies with next summer’s prices. Focus on selling cash inventory when December 2016 corn hits $4.25 to $4.50, while cash soybeans have to be aggressively priced between $9.50 and $10. Since these prices are above current prices, I know it’s easy to say you will act “if” prices get to these levels, but history suggests the fundamental events that must develop to give us these price opportunities will turn producers bullish.

To get in on the action, I urge producers to immediately buy September 2016 corn calls and November 2016 soybean calls above the market and, if possible, have their cost reduction program completed by no later than early March. Try to get corn calls (total cost with premium), commission and potential losses below 10¢ for $5 or lower corn calls and 25¢ for $10.40 or less November soybean calls. In the end, these calls become what I call “courage calls.” It’s important to keep the costs down because this strategy should be done every year from now on. 

As we move into 2017 and 2018—when there will likely be fewer corn and soybean acres, stocks have tightened and demand has finally stabilized—you will be set to aggressively react to a weather event when it occurs. Since I can’t predict when Mother Nature will react with a vengeance, all I can suggest is it’s like fishing. You can talk about it all you want, but you will never catch a fish if you don’t have bait in the water. 

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Spell Check

Western, NE
10/14/2015 09:21 AM

  The price of call options a year out even out of the money are pricey. All time value AND you must find a willing seller. Time ALWAYS erodes in the favor of the seller. Most cost reductions are going to be in the form of reduced inputs--not the cost of the inputs--but how many inputs are used. Arrrrrgh--always good on paper!

Sioux Center, IA
10/13/2015 10:35 PM

  Bob, what do you mean by "cost reduction program"? Do you mean the cost of the calls?

Garden,City, KS
10/13/2015 09:23 PM

  I am not selling anything till next year. I'm getting a big government payment at the end of October (I think , maybe,maybe not, don't know for sure, I have a feeling USDA will probably try and get out of paying us ) www.afairmarketprice.com


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