It was another mixed day at the Chicago Board of Trade with grains lower and the soy complex higher.
Rain amounts in Argentina were a little disappointing over the weekend resulting in a stronger open on Sunday night’s trading session. South American weather concerns are still providing the leading support for soybeans. Corn and wheat futures were stronger for the overnight and morning sessions but found heavy resistance before the closing bell.
Wheat seemed to lead the grain markets lower which may be due to the very strong US Dollar Index on Monday. The stronger dollar could eventually threaten our competitive pricing on the world market. Beneficial rains had been forecasted to relieve some of the driest areas of the HRW Country this upcoming weekend but much of that precipitation was REMOVED from today’s midday models. Normally this would be considered supportive for wheat. We feel that wheat has the best fundamentals for supportive market action because of the current drought conditions affecting much of the HRW country. It won’t be long before wheat comes out of dormancy and without proper moisture in the near term we feel there needs to be more weather premium built into this market.
On Friday the 8th we will see the next USDA Supply and Demand report. Changes to demand have not been very dramatic so we don’t expect to see too many changes to their US estimates from January. We may see another increase in their feed estimate for corn and a slight increase to soybean crush, but really we don’t have much to give on the balance sheet. The bigger focus will be on the South American production estimates. Many analysts are calling for the Argentine corn production to drop to 25-26 million mts (from 28.0 currently) while increasing Brazilian corn slightly. I am also seeing estimates reducing Argentine soybeans by 1-2 million mts while increasing Brazilian soybeans by less than 1 million MTs (from January USDA estimates). We will report the official analyst estimates from the polls when they become available this week.
NEW CROP HEDGING TIPS
For new crop corn, cost of production estimates are running at record highs! The market is planning on a large amount of acres. Last year we steadily traded lower into the June timeframe before a weather market came to lift price. We can't rule out the same thing happening this year. For those of you who heavily rely on the revenue protection of crop insurance as a hedge against declining prices, your risk will be going down as long as the average price of corn (and/or beans) stay strong during the month of February when crop insurance prices are set. We still recommend you having the additional protection of 30% in sales and 20% in the put/call strategy. As we get through February we will re-evaluate using AgYield each individual's situation to see if this is too much or not enough coverage based on the spring federal crop insurance price and your personal cost of doing business.
For producers that do not heavily rely on the revenue protection of federal crop insurance (example: fields that do not have an APH that is representative of your expected yield because the history is not built up yet, OR those who take policies that have coverage levels of less than 80%): We want to make sure you have adequate coverage going forward. Corn volatility on December puts is running between 26 – 28% which isn't bad. Since you will not have a great "synthetic put" from the crop insurance, we recommend having another form of price protection coverage. If it is irrigated ground and you are comfortable with the yields, we think selling a healthy combination of cash and futures* may be the way to go. If you are coming off of a poor growing year and are worried about what you will have this year look at using straight puts to get that "near-the-money" price protection for December corn and November soybeans. I don't always advocate using long options with that much time value but it is basically another form of insurance on your price risk without having to dedicate bushels. If you are comfortable with margin risk please contact your EHedger broker because there are other opportunities that may look better using AgYield, including selling in the cash market and then selling puts and buying calls*.
For direction the market will likely continue to hang onto any changes in the South American forecast. Please call us if you have any questions or email firstname.lastname@example.org . Have a great week!
*Strategies discussed involve margin requirements and may not be suitable for everyone. Please carefully consider your own situation and risk tolerance before getting involved.
If you would like EHedger's Grain Commentaries emailed to you, Sign Up Here.
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.