Hoping for a rally while managing risk

By Jon Scheve, Superior Feed Ingredients, LLC

For the first time in 7 weeks, March corn finished the week outside of the $3.85 to $3.90 range with a close at $3.81.

The market is being cautious with the coronavirus. After 2 weeks, the mortality rate is still around 2%, compared to the 2003 SARS outbreak which was near 10%. There is concern all over the world as many countries continue to report the spread of the virus. Some reports indicate that doctors and scientists need at least 45 days from the start of a new disease to truly understand the outbreak potential. This likely means another month of market uncertainty.

U.S. corn is competitive globally right now, which should support the current price level and could mean better prices down the road. Beans have had a difficult month, dropping nearly 90 cents. First, China hasn’t announced any major purchases since signing the Phase One trade deal. While disappointing, this shouldn’t be a huge surprise to the market, as both sides said it would take at least 30 days for those details to be provided. Second, South America has had good growing conditions and another record harvest is now expected. Finally, the coronavirus’s unknown impact on China, the world’s largest buyer of soybeans, is raising economic questions that are spilling over into the bean market too.

 

Lack of market action

Normally I share details and rationale on trades I make for my farm operation. However, this week I’m providing trades I considered doing this past month, but ultimately didn’t make, because I thought they were too speculative. The following details my thought process as bean prices have declined 90 cents this past month.

On 12/31/19, when March beans closed at $9.55, I was still working an order to sell more beans at $9.60 that hadn’t been filled yet. At the time, I considered pulling the $9.60 offer to replace it with a $9.75 order, because I thought beans should go higher. However, after discussing it with my team, I kept the order as is. On 1/2/20 my order was hit at $9.60, and after the market traded $9.61 it started going down from there.

On 1/3/20, I considered buying back the $9.60 sale at $9.40 to capture a 20-cent profit. At the time, it seemed a rally was likely going into the Phase One trade deal signing and the upcoming USDA crop report. Again, after discussing it with my team, I didn’t do anything because I was concerned the market might go lower.

Two days after the trade deal was signed, beans traded to $9.20. I again debated buying the beans back. Technical market indicators suggested beans were slightly oversold and some analysts were saying bean re-ownership at this level was good. However, I again chose not to buy the beans back.

Beans continued to fall to $9.00 and then traded below $8.75 this week. While I think beans are close to a low, I’m not buying any back, even at these levels.

 

Why not?

I reminded myself that I’m a farmer who is always long beans. I constantly need the market to rally, so I can sell more beans at higher levels. Plus, there is no guarantee that bean prices have to rally from here. There are many reasons that beans could go nowhere or even lower.

If I remove a sale and prices go lower, I’m hurt twice. I miss out on the good sale, and I don’t guarantee that I will get this year’s beans, or even next year’s, sold at better levels.

With the market high at $9.61 since my original sale, I feel fortunate I sold when I did, and that I didn’t buy back any beans, especially at the $9.40 or $9.20 levels. My sale is now nearly 90 cents better than where we are today.

 

Can’t beans rally back to $9.60?

Sure. They could even go to $10 by summer. By then I may wish I had bought back my beans at $8.72 today. However, I still have to price the remainder of my 2019 crop and all of my 2020 too. I still need beans to rally.

While I know the market will always find a bottom and a top, nobody is lucky enough to pick both all the time. My goal is to avoid being a speculator by managing my risk. That’s why I’ve decided to not try and time the market by buying back beans. Right now it’s too speculative and risky for my comfort level. Like all farmers, I’m hoping for a bean rally. Not only to get my remaining beans sold, but a bean rally could help pull corn prices a little higher too.

 

Please email jon@superiorfeed.com with any questions or to learn more. 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.

 

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