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Market Commentary for 2/8/19
With the government shutdown eliminating the January USDA report, all of the key information the market needs to trade was moved to the February report, making it one of the biggest and most anticipated report of the year.
The final 2018 yield of 176.4 was surprising. This was slightly lower than 2017 and 2.5 bushels lower than the December report. This was one of the biggest yield decreases from December estimates to the final results in history. Those two bushels mean over 200 million fewer bushels, which should have had a bigger positive impact on futures. However, the report also showed a drop in overall demand.
The 125-million-bushel feed demand decrease surprised me. I've noticed high demand for corn in feed rations recently compared to other substitute ingredients, so I was actually expecting an increase. With the USDA livestock numbers showing a 2.36% year over year production increase, if feed rations stayed the same, it should have only meant a 75-million-bushel feed demand decrease (not 125 million). Maybe a future USDA report will increase feed demand estimates, if that happens and all other numbers stay the same, carryout could still end up below 1.7 billion.
While export pace has been steady, the South American growing conditions have been so good that a large crop is now expected. This could mean May to September US export potential is limited because of competition from all of that production in South America. This could keep a cap on our prices going forward and might be why the USDA did not increase these numbers this month.
Many feared carryout could exceed 1 billion bushels, so the news that final yields decreased with no real big demand reduction, resulting in a 910 million carryout, was welcome.
The problem for beans is that fundamentally there is no justification for current prices without a big China trade deal. The market will focus on those trade issues until the March planting intentions report.... if the market is still open at the end of March.
The Dec Corn / Nov Bean ratio moved even more in favor of planting beans this week. At a 2.4 : 1 ratio, there is little incentive for farmers to plant one crop over another. Corn demand remains strong as we grind through stocks. If corn acres don't increase at least 3 million acres in 2019, next year's carryout could be tight, pushing prices higher.
Selling Hope and Time
Often some experts in the industry suggest that farmers should sell their grain and "look for a possible reownership opportunity by buying calls.” This advice doesn't make any sense to me, especially in the corn market. When farmers have unpriced grain in storage, or even in the field growing, they already have ownership. They don't need MORE corn while prices are low. They need the market to rally so they can sell the corn they have, or will have at the next harvest. More corn only adds more risk to their farm operation. In essence, this advice is telling farmers, who are already speculators, to double down.
This is why I stress to farmers to really think about what they are doing when they speculate by BUYING calls. Right now, many farmers have some 2018 crop left they need to sell, and probably most of 2019's crop. So, I’m not sure why it makes sense to buy the right to buy more corn if you are a farmer who isn’t done with this or next year’s crop sales.
In most cases, farmers buy calls because they HOPE the market will go up. I've seen very few times when farmers have made a lot of money buying calls. Most of the time farmers lose some or all of the premium they pay when buying calls. Those that don't lose money are generally only going to make a small profit if they are lucky.
My marketing plan does not include "buying hope," but instead I "sell hope." Certainly not on all of my bushels, but I do for some. Basically, I get paid for selling hope to somebody else.
Farmers need to remember that based upon history 66% of the time it will be a normal year. During normal years, prices well above breakeven points are unlikely for an extended period of time. I try to position my marketing strategies where I can take advantage of opportunities assuming trend line expectations while understanding how I will be affected by unpredictable market variations.
When buying options, the longer length of time until the option expires makes it worth more. More time = more chances for market movement.
Similar to hope, I don't want to buy time. Time is expensive because it’s in finite supply and everyone wants more of it. Instead I determine what price I want for some of my grain, then I optimize how much (time) value I can get for that option and then I sell it.
The Importance of Understanding Your Goals
I always caution farmers to think about their grain marketing end goals.
- What happens if your goals aren’t met?
- What happens if the price doesn’t go up like you think or hope it should?
- What happens if you are wrong with your market assessment?
- Are you prepared for all market scenarios?
My goal is to design a marketing plan that takes into consideration as many market scenarios as possible. In every trade I analyze how my profit will be affected if the market goes up, down or sideways. I then take into consideration risk and the likelihood of each scenario happening based upon current market conditions. While I'm prepared if the market goes down or sideways, like all farmers, I ALWAYS want prices to go up. Any time I make a trade I'm hoping to be wrong and the market rallies. And if it does.... I’ll sell more corn.... because I will ALWAYS have more corn to sell. Maybe not in 2018, but certainly in 2019 and 2020.
Ultimately, I’m happy to sell my hope for higher prices to somebody else in exchange for a small amount of guaranteed income. I hope it’s the wrong decision, because all of the grain I don’t yet have sold is now worth a lot more.
Want to read more by Jon Scheve? Check out these recent articles:
Superior Feed Ingredients, LLC
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