Strategies for Sizeable Supplies

November 9, 2016 02:32 AM
 
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Above-breakeven sales are nice, but focus on overall trends affecting profits

By most estimates, commodity prices will continue to drag their feet throughout 2017. Yet depending on whom you ask, there’s also opportunity in the form of strong demand from end users such as ethanol plants, cattle feedlots, poultry producers and global buyers. 

To stabilize balance sheets in the new year, revisit your marketing strategy with the advice of experts you trust while keeping in mind the recommendations shared by 10 commodity analysts in the following pages. 


Brian Basting, Advance Trading

Brian Basting


South American growing conditions will be critical to supply and demand in 2017. World demand is expanding. The market is depending on a rebound in corn and soybean production in Brazil and Argentina for the 2016/17 crop year.

One key difference in 2017 will be the impact of a new administration in the U.S. and the trade policies that are embraced. Changes in Argentina tax policies on exports could affect planting decisions, while the rate of economic growth in China will continue to impact the pace of soybean imports. Production of wheat could be lower if a reduction in 2017 winter wheat seedings is confirmed in the U.S., Europe and Russia. Weather problems could add to that trend. Support for corn prices could be capped if wheat competes with corn in feed rations.

Lock in a floor for projected 2017 production yet maintain marketing flexibility. An option-based strategy can lock in break-even pricing but also provide the opportunity to participate if a rally subsequently develops. A key advantage of buying a put option is if a crop problem surfaces, bushels are not committed to be delivered. 

 

Bill Biedermann, Allendale Inc.

Bill Biedermann


Expect an acreage decline of around 2 million to 3 million acres of corn with ending stocks between 2 billion and 2.2 billion bushels and an increase of 3 million to 4 million acres of soybeans with ending stocks between 450 million and 480 million bushels. 

The acreage shift will be because of record yields in 2016. The nearby futures soybean-to-corn ratio is historically high at 2.82, encouraging a better profit potential for soybean producers. As livestock numbers decline and a strong dollar makes it hard for our exports to compete, it will likely take a supply disruption to change the price outlook from neutral to bullish. 

Collectively, China, the U.S., North Africa, Russia, India, and the European Union (EU) hold 82% of the world’s wheat ending stocks. The U.S. is fighting to compete with Russia. India frequently changes export rules. The EU out-exports us with transportation advantages we don't have. The 1-billion-plus-bushel ending stocks the U.S. has might take a few years to whittle down barring a weather adversity.

Depending on tolerance for risk, getting sold ahead by 30% to 85% is acceptable. Be consistent and lock in profits when you can. Many types of positions can be used to manage risk, such as establishing a floor price, a floor and a ceiling price, and even a floor and ceiling price with a kick-out price. These can manage risk before we know if the year will be bullish or bearish at little cost.

Naomi Blohm, Stewart-Peterson

Naomi Blohm


Supply-and-demand factors I’m watching closest are South American grain production and Chinese buying. Is it possible for South America to grow another year of near record crops? Or will La Niña finally become a threat by creating dry conditions? Regarding China, will the country start to import DDGS or corn? If so, it would be an acknowledgement its stored corn is non-blendable, meaning global ending stocks are not as plentiful as some believe. La Niña could also create dry conditions in the U.S. Plains, affecting production of winter wheat and reversing price pressure. Globally, factors most likely to influence commodity prices are Russia and Ukraine, the U.S. election and the question of whether the Federal Reserve will raise interest rates—and how it affects the dollar.

What Does It Mean To Me?

• Bullish generally describes overall price sentiment for corn, and mostly for soybeans.

• Key macroeconomic drivers include South America and the U.S. elections.

• Any rallies depend on a severe weather event or global production problem.

Make cash sales when profits are available. Have your forward contract, basis or hedge-to-arrive orders in place at your elevator well in advance. Profits can occur, but they usually only stick around for a few days. Understand your weighted average price. Be ready to re-own grain with a call-option strategy if fundamentals become extra friendly. 

For producers with low risk tolerance, focus on cash sales and look at fixed-risk option strategies that maximize opportunities.

Richard Brock, Brock & Associates

Richard Brock


During bull markets in corn and soybeans in 2010 and 2012, high prices encouraged more acres worldwide, increasing our export competition. The tide is turning. Lower prices will cut back on planted acreage of corn and soybeans, and export demand will shift to the U.S. This will be positive for prices. It will likely take a few years to eat through the massive supply of wheat. These supplies are probably more of a negative influence on corn and soybean markets than any other factor. 

Everyone’s breakeven is different, and unfortunately, the market does not care what that is. Nevertheless, if a producer is strapped for cash and breakeven is important, he had better be aggressive. We look at marketing above the average price of the year and also incorporate the seasonal tendency of corn and soybean prices. The first big pricing opportunity we are waiting on will likely occur in March. If prices then are above breakeven, be aggressive in the cash market on old crop and somewhat aggressive in forward-cash contracting in the new crop. 

If you have a lot of storage and want to maximize returns, sell out-of-the-money calls in summer contracts. To do that on 20% or 30% of production is prudent.

Alan Brugler, Brugler Marketing & Management

Alan Brugler


Expected corn ending stocks will be more than 2.2 billion bushels in 2017. The 16-billion-bushel total supply pile will keep a lid on rallies. The full-year cash average price will likely be 30¢ below that of 2016 to get global customers, excluding China, to buy more. A nine-year cycle low is likely in wheat. Russian attempts to talk the market higher are key to the timing of the low. 

U.S. soybean stocks are not tight at 395 million bushels, but they have demonstrated a tendency to get tighter as the year goes on. The projected global stocks-to-use ratio in 2016/17 is tighter than either of the past two years. World consumption should continue to grow at a 4% to 5% clip, but that won’t be enough to absorb the 2016/17 crop without periodic price pressure.

Don’t make big input-cost commitments without offsetting forward sales or setting options-price floors. Know the Price & Probability Forecasts targets and make scale-up sales when those targets are hit. There should be decent returns to on-farm storage for corn and wheat. 

Set a futures or options price to earn the carry. Selling cash grain and replacing it with paper works better if cash sales are made on a strong (not harvest) basis. 

Mark Gold, Top Third Ag Marketing

Mark Gold


This past year, there were cries that a terrible drought and record-hot temperatures would drive corn prices to $6 per bushel. That hype never came to fruition. It’s not uncommon to see these predictions come true a year later. I would look for a drought in 2017. No single event would have a greater positive effect on prices. 

Just because China has issued export licenses doesn’t mean they will actually export corn, and Brazil might be caught short on corn-export commitments. There are ample supplies of wheat available around the world, but what is its quality? The quality of U.S. wheat could be an advantage. Also, wheat feed usage should increase at a time when wheat acres might decrease.

A bearish U.S. dollar would help exports. Global concerns likeliest to influence commodity prices are the outcome of U.S. elections, a possible crisis in the Middle East, Russian expansion follies and weather. 

Use put options to protect against lower prices and keep the upside open. Sell cash grain on rallies. If you have a lot of storage, ask yourself why you are storing grain. If it’s to capture carry in the market, that’s fine. If it’s for higher prices, I would sell the cash and re-own the grain with call options.

Year Over Year, Brazil and Argentina Ramp Up Crop Production

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Brian Grete, Pro Farmer

Brian Grete


The 2016/17 marketing year is setting up to be one that pits record supplies against surging demand. That battle will determine whether bulls or bears win the price war. As South American crops get planted, there are again big crop expectations. Yet as 2016 proved, there’s no guarantee of a crop’s size until supplies are in the bin. If South American production matches lofty expectations, demand for U.S. corn and soybeans will slump during the second half of 2016/17. If South America has crop problems, it will open more export demand. There are signs China’s economy might be stabilizing after a downturn. 

Be aggressive when given the opportunity to sell at breakeven or better. I’m confident there will be opportunities to sell rallies that are at profitable prices. The use of forward sales such as cash-forward contracts or hedge-to-arrive contracts will be your safest and likely most effective marketing tool when prices get to breakeven or better. You can always re-own sold bushels in long futures or call options if the price outlook turns more bullish later in the year.

 

 

Randy Martinson, Martinson Ag

Randy Martinson


The 2016 crop year in the U.S. is on track to be the fourth consecutive record production year. Soybean exports and crush are projected at record levels. Feed and export demand for corn is estimated to be the largest since 2007.  

Issues that will affect U.S. exports include how competitive the price of U.S. products will be on the world stage. Russia suspended its wheat export tax for two years. Egypt lowered its tolerance level for ergot contamination, then reversed its move when it could not get tenders. 

For 2017, we will use incremental sales focused on seasonal movements. Our strategy is to use future fixed and hedge-to-arrive contracts at local elevators for the first one-third to 50% of sales. That virtually locks in 50% in the cash market, as well. The amount between 50% and your insurance guarantee can also be sold. You should not be afraid to price up to your insurance guarantee, especially if the price you are locking in is above breakeven and above the spring price. If you are concerned about a rally after you make the sale, you can buy calls to capture some of the price increase. The portion of production above your insurance guarantee should be priced to bring the least risk. Buy puts and sell out-of-the-money calls to fund the expense of the premium. 

Angie Setzer, Citizens Grain

Angie Maguire


I am watching South American production closely. Another production issue there would not only change the entire global dynamic in both corn and soybeans, it would also have the potential to cement the U.S. as the go-to supplier in the future. Russia is our biggest competitor when it comes to wheat exports, and tension there—especially with the United Nations—could limit their good standing as an exporter. The EU and China should be monitored closely. 

The cash market will eventually solve the wheat supply problem. Burdensome wheat supplies might weigh on corn, but the amount of carry offered in the futures market is allowing many who put the wheat away properly to hold it. 

Keep last year’s price ranges in mind and use them as a loose guide on targets for 2017. If you are selling at breakeven, employ a strategy to capture upside price moves. Reward rallies with sales, but take into account your local market. In areas with burdensome stocks, it will be difficult to see significant basis gains, so cash sales might be best. In areas not overrun with supplies, look to take a futures-only approach and work the basis later. Understand call options. Don't expect more of your market than it can give.

 

Bob Utterback, Utterback Marketing Services


Weekly corn-and-soybean exports must exceed expectations, and South America must have some type of supply reduction, or prices will be weak in the first quarter of 2017. We must eat through the grain inventory, which will keep pressure on corn as a feedstuff competitor.  The only real solution is to get prices weak enough to stimulate government programs to set aside acres or motivate producers to plant other crops. The big macro factor is the level of global debt built around low interest rates by central banks. 

Focus on buying out-of-the-money September corn calls this fall above a $4.20 strike price and on buying November 2017 soybeans above $10.80. Then focus on reducing costs by selling out-of-the-money puts with May or July contracts. This will allow you to aggressively forward sell from May to July if a weather scare occurs. If yield volatility is high on one’s farm, buy in-the-money puts and roll up.

If you plan to store the crop all the way to next summer, use bull spreads to protect the carry incentive.

Bull-Bear Chart 2016

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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