Market Commentary for 7/14/17
There is no doubt it will be hot for the next few weeks, it's mid-July after all. However, it's the extent of dryness that is uncertain. Every day weather models show varying possibilities, which causes market fluctuations. IA, for example, is living on subsoil moisture reserves for now. This may be depleted if it doesn't rain in a week.
The recent USDA report did not show yield adjustments, only increased acres and feed usage reductions. So, the market will be able to handle some yield reduction. The recent rally after the report may have been overdone as prices seemed to settle back down to levels from two weeks ago, before the USDA acres and stocks report on June 30th.
Right now the market is estimating a national yield of 167. Some are arguing it should be 165, and a few bulls are calling for 160. When you consider the extra acres the USDA reported and plug in a 164 national yield, the carryout would still be over 1.7 billion bushels. This would make the Stocks to Use Ratio similar to 2014 and 2015 levels. There is a strong possibility that corn will trade sideways long-term.
Grand Slams vs Strike Outs
Social media has been flooded with images and data suggesting the corn crop is all but lost. There is picture after picture of dead fields and mutilated corn ears that are really frightening. These images then fuel "coffee shop" talk with tales of friends of friends in neighboring states who have lost their crop. With so many negative pictures posted and negative farmer talk, it's easy to lose perspective and assume dry conditions are more widespread than they really are.
I suggest that farmers be critical of the pictures, talk and news coverage. In my experience, if someone is negative about crop conditions there is either clouded judgement or a hidden agenda....most likely that farmer has a lot of old crop left to sell and they are really HOPING for higher prices. And they are trying to sell other people on their hope to affect prices.
At a recent convention of grain merchandisers I informally polled many in the room with the question, "where do you expect the market to go?" Every answer was, "I don't know. Depends on the weather."
This shouldn't surprise anyone that no one knows what’s going to happen, but that doesn't stop us from hoping that someone has the answers. In reality, no one has the answers (despite so many who act like they do). The market is based upon weather and mother nature for the next month. If a farmer holds, and there is a drought creating a market rally to $4.50-$5, they look really smart, basically they hit a Grand Slam. If a farmer holds, and it rains pushing prices to $3.50, then they look less smart and have Struck Out. But, in reality neither of these examples/decisions were based upon intelligence, they were based upon luck (even though it may not feel that way).
While there will always be a certain level of luck within grain marketing, it's important to recognize it and try to base your plans more on realistic expectations, understanding breakeven points, historical trends and risk assessments. Luck should have as little influence as possible in a sound marketing strategy.
Following provides the results and rationale for several trades against my '16, '17, and '18 production that I've made in the last two weeks as the market went up.
After analyzing our farm operation breakeven points, necessary profit levels, etc. I set a price goal of $4.20 for my '16, '17 and ‘18 crop. When 2018 traded above $4.20 last week, I took advantage and sold 20% of my anticipated production at an average price of $4.23 against Dec '18. With this I have a solid base at profitable levels for next year.
Typically corn trends lower into Dec from June; therefore, I made a trade to try and capture that potential. On 6/29, one day before the June 30th USDA report when Dec futures were around $3.80, I sold a $3.80 Dec call for 20 cents on 5% of my '17 corn production.
What does this mean?
- If Dec corn is above $3.80 on 11/24 - I have to sell corn for $3.80 and keep 20 cents (giving me $4.00 total)
- If Dec corn is below $3.80 on 11/24 - I keep the 20 cents to use on another trade in the future
I'll be fine or happy with either scenario of this trade. I hope futures rally, but maintaining $4 could be difficult.
Again, since corn prices tend to decrease from late June through Harvest, I made another trade to try and capture that potential. On 6/30 after the USDA report was released, when Dec futures were up around $3.85, I sold a $3.80 Oct call for 19.5 cents on 5% of my '17 corn production.
What does this mean?
- If Dec corn is above $3.80 on 9/22 - I have to sell corn for $3.80 and keep 19.5 cents ($3.995 total)
- If Dec corn is below $3.80 on 9/22 - I keep the 19.5 cents to use on another trade in the future
Since futures tend to be lowest at the start of harvest, I think the 2nd scenario is more likely but again I’m ok with the first scenario too.
Typically prices decrease from late July through Aug. On 7/6 when Sep futures were around $3.90, I sold a $3.90 Sep call for 15 cents on 10% of my '17 production.
What does this mean?
- If Sep corn is above $3.90 on 8/25 - I have to sell corn for $3.90 and keep 15 cents ($4.05 total). But then, I would “roll” this sale from Sep futures to Dec futures to capture another 12 cents giving me a sale at $4.17 on Dec futures.
- If Sep corn is below $3.90 on 8/25 - I keep the 15 cents to use on another trade in the future
Unless hot and dry weather is reasonably widespread in the next month, I think futures above $4 is unlikely considering the trend of lower prices in Aug compared to July.
On 7/6 when corn rallied above $3.90 on Sep futures I sold 5% of old crop. This takes my '16 sales position to 92% complete. Interestingly, while reviewing my trades in the last year, I noticed that I had not made a straight futures sale on any of my 2016 crop since 7/13/16, nearly a year ago.
While most of these trades do not get me to my $4.20 futures goal, there is some upside potential and some limited downside risk protection. All of the trades take into consideration if there IS significant dry weather and if there IS NOT dry weather. If it rains in IA next week, these trades will be like bunt hits to advance runners. If it doesn't rain, they will be hits. I may not have a chance at a grand slam, but I won't be striking out either.
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