Scheve: Lifting Hedges - Should I Be Buying Corn or Beans Back Right Now?

Published on: 16:20PM Jul 03, 2018

Market Commentary for 6/29/18
This week the USDA confirmed there are more bean acres planted than corn acres for the first time in 35 years. The report showed 1 million more corn acres and a ½ million more bean acres planted than the March report. This wasn't bullish news, but still in line with most pre-report estimates, so it was mostly neutral. Now mother nature and political agreements (or lack of any) will be driving the market. 

The President and Secretary of Agriculture continue to promise that American farmers won't be negatively affected by tariffs. This sounds good, but there haven't been any details provided. It seems Labor Day would be the soonest that any “help” would be made.  Even then there is no guarantee that any “help” will actually be provided.

Should I Be Bullish Or Bearish?
It is rarely clear if farmers should be completely bullish or bearish at any given time.  Instead there are usually several reasons why farmers could be either. 

My Reasons to Be Bullish:

  • There are still 2 more months of growing season left and the weather is uncertain
  • For corn, a record 180 national yield would have to be achieved to keep prices down
  • Night time temps are still extremely warm. If that continues past pollination yields will likely suffer
  • A record US crop would still mean a reduction in world corn stocks
  • Some beans have been getting too much rain
  • Some corn roots aren’t very deep and dry weather could suppress yields
  • South American crops can only sustain world demand in a trade war for so long
  • Dry weather in other parts of the world could increase need for US corn through increased exports
  • Market technical indicators suggest that corn and beans are oversold and due for a correction

 

My Reasons to be Bearish 

  • The weather has been very good for a very large part of the country
  • The weather forecasts don’t have a lot of negative outlooks at the moment
  • With increased corn acres even a 177 national corn yield won't likely push corn above $4.00
  • Exports don’t have to increase and feed demand could slow from tariffs
  • If the trade war continues it will be difficult for beans to sustain any significant rally
  • A sideways drift in the markets could negate any positive technical signals in the market allowing prices to push even lower

 

Lifting Hedges - Should I Be Buying Corn or Beans Back Right Now?
Many are trying to estimate the bottom of this market. I have heard analysts suggest buying beans anywhere from $10 a couple weeks ago to Friday when they closed at $8.79. Everyone seems to be trying to pick the bottom to this market.

Some farmers have asked me if I want to "lift hedges" in the corn or bean markets. The short and simple answer is, no. 

Why?
“Lifting hedges” is code for speculating (i.e. gambling), and I want to minimize risk in my farm operations' marketing plan. 

With the hedges I currently have in place, I know exactly where my grain is marketed. Right now 100% of my 2018 bean crop is hedged at profitable levels with a normal yield. Unfortunately, not enough of my 2018 corn is sold above breakeven prices. I need a rally in bean prices to pull corn values up too. So, like all farmers I need both beans and corn to rally, but they may not if the great weather continues.

While I know lifting hedges sometimes works, I typically don't lift hedges because there is always next years's crop to be sold (right now 15 months away).  I don't want to worry about selling even more bushels in an uncertain market. If prices would continue to fall after I "lift my hedges" it adds more risk to my operation.  More risk makes it difficult for me to sleep at night.

Understanding The Difference Between Speculating vs Hedging

Over the years I've made several trips to Las Vegas. I've noticed on the flights there everyone is all smiles. Many are talking about all the ways they have heard on how to beat the casinos.  Some are even reading books on how to win at blackjack, roulette, or poker, hoping to have an edge when they sit down at the tables.  Its about the only flight that I have been on that everyone breaks into applause and cheers when the plane lands. 

The trip home isn't nearly as fun.  Many are tired and moody.  Some talk about how they should have stopped while they were ahead. I have yet been able to ride home on a private jet with my winnings (or know anyone who has).

The reason -- gamblers in Vegas don't have an edge. While some may be lucky in the short term, in the long run casinos have a built in advantage that means they will always come out ahead.  

As I mentioned above speculating on the grain market is gambling.  In both, there are highs and lows, so speculators generally either win big or lose big.  In my experience though, like gamblers in Vegas, speculators usually only tell you when they win big, and rarely mention how much they've lost getting to that win.

Lifting hedges doesn't give farmers an edge in the markets. Lifting hedges is about being lucky.  For instance, speculators that bought beans at $9.50 a couple weeks ago aren't too happy now with the market down $1/bu.

Hedging, on the other hand, is very different from gambling. Hedgers have an edge because they only have to worry about selling their crop at some point and eventually they will have an opportunity to sell at a profitable price.  The downside for hedgers...they never feel good about their sales.  If they sell and prices go up, they shouldn't have sold.  If prices go down, they're frustrated they didn't sell more when prices were higher. But, while hedgers may never be happy, they are STILL playing the game. 

I have seen plenty of people go on a winning streak in Las Vegas or speculating on the grain markets.  Nobody who gambles goes into the bet planning to lose, but in the end the odds will always catch up to them and they fall behind. 

 

Jon Scheve

Superior Feed Ingredients, LLC

[email protected]

 

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