Prepare to battle the bear

Corn highlights

Last week corn dipped below the 100-day moving average, which usually indicates the market will move lower going forward. However, farmers aren’t selling, so many are unsure what to expect. Corn exports are difficult due to lower priced corn coming from the Ukraine. Warm weather in the South last week was hurting feed demand, especially in the cattle markets. Ethanol plants are still strong buyers, but margins are tight.

Bean highlights

Bean prices continue to decline as the strong South America harvest begins (10% complete last week). Some reports indicate Brazil’s economic problems could cause the Brazilian currency to drop in value, which may lead to more farmers selling their beans. Export vessels are lining up; however, the number of ships waiting to load is lower than last year. This may suggest lower demand than previously estimated and fewer logistical issues, which would mean less need for load outs from the U.S. On a positive note, North American crusher margins are extremely good, so the demand for meal will likely continue. Look for the pressure of a record crop in South America to weigh on CBOT prices longer term.

Beans verses corn

For the last few months, analysts have predicted corn acres will shrink with bean acres increasing. Seed company reports echoed this. Many people estimate corn prices would need to rally to “buy” acres back from beans. After speaking with Midwest farmers the past few weeks, my impression is most farmers would be better off planting more corn than beans. Largely, I’m seeing ranges between $30 to $100 per acre premiums to plant corn. Obviously, there are still areas that will favor beans, but I think farmers should be cautious about expecting a huge acre change this spring. This could ultimately put resistance in the corn board.

Iowa State University put out breakeven points at $4.23 for corn and $10.96 for beans this year. Personally, I think those breakeven points are a little high, but it still indicates corn is still clearly a better choice to plant compared to beans, based upon the market today. Ultimately, the world has plenty of both corn and beans, so while no one can predict the summer weather, I estimate the market is giving a warning that “normal” may mean much lower prices for both.

Ideas for marketing the 2015 crop

Several new perspective clients called me to ask what they should do about marketing their grain. While most were looking for advice on old crop, I said NEW crop actually had more downside risk right now that required protection. As I have mentioned previously, I am not a fan of just buying puts and hoping for a rally. Typically market conditions are too complex and a simplistic plan won’t produce the outcome desired.

Following is one trade I suggested last week to cover 5,000 bushels of corn:

  • Buying (2) – $3.80 Dec puts
  • Selling (1) – $4.10 Dec call
  • Cost – nearly free

What does this mean next November?

  • If corn is between $3.80 and $4.10, corn would be unpriced.
  • If corn is above $4.10, they would get a maximum price of $4.10 no matter how high futures went. Dec futures was trading $4.11 at the time. So, in other words, it is like selling futures at that day’s price.
  • If corn is below $3.80, the value of their corn would go up 2 cents for every penny below $3.80. Examples, if corn is $3.50 they would get $4.40 for the corn they hedged. If corn is $3 they would get $5.40.

Why would a farmer do this?

Think of it like hitting a home run in a game the farmer is going to lose. A small percentage of their crop is covered, and if the market tanks, it will do very well. However, the vast majority of their crop could still be unprotected and lose significantly.

Obviously, if these farmers became my clients I would work through an entire marketing plan and not just make one trade. But this example illustrates how farmers can limit their risk because no one knows where the market will go. This type of trade can ease a farmer’s mind when corn prices are in decline by helping them keep perspective by thinking, “that’s unfortunate, but I have trades in place to balance out a future bear market turn.”

On Wednesday last week when the market dropped it was impossible to replicate this trade. Will there be another chance down the road to do this type of trade? Possibly, but the market is always changing. Farmers need to have their plan in place to take advantage of these opportunities when they come along. Failure to plan could result in missed opportunities and potential loss.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE.  Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process.  After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits.  A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

 Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons.  All of these investment products are leveraged, and you can lose more than your initial deposit.  Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction.  The information provided here should not be relied upon as a substitute for independent research before making your investment decisions.  Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs.  All investors should obtain advice based on their unique situation before making any investment decision.  The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative.  The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions.  Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

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