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Market Analysis



Capturing carry and paying for storage

By Jon Scheve, Superior Feed Ingredients, LLC

For the 1st time in 9 years, December corn on the last day of November traded higher than the last day of October by 3 cents. Looking forward, 7 of the last 8 years, March corn eventually traded at a higher value than where it was on the last day of November. The rally was more than 25 cents 6 of those 7 years. Following the 2012 harvest was the only year when prices didn’t rally, and after the 2015 harvest March futures only rallied 9 cents.

While obviously historical trends aren’t a guarantee, I think this suggests there is opportunity in the corn market.

 

Capturing carry and paying for storage

Last week I rolled my December futures sales to July to take advantage of the 27-cent market carry available in the market.

I bought my December futures back and immediately sold the July contract.

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Developing a marketing strategy approach

By Jon Scheve, Superior Feed Ingredients, LLC

For the last 8 years the price of December corn on the last trading day of November has always been lower than the last trading day of October. Corn closed at $3.63 on Halloween.

On the other hand, for the last 8 years January beans on the last trading day of November were higher for 3 years, lower for 3 years and the same for 2 years. January beans were $8.52 on Oct. 31.

 

My marketing strategy approach

I try to maintain a flexible marketing strategy that maximizes profit potential and minimizes risk. This means that some of my trades are most profitable if the market stays sideways, especially if there is a lot of rationale for minimal price movement in the short or long-term. Like all farmers, I’m most profitable if the market rallies above breakeven price points, and I always want that to happen.

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A look at buying put options

By Jon Scheve, Superior Feed Ingredients, LLC

The market continues to watch the actions of the President and China. It’s hard to know if there will be a trade fix at the G20 meeting in just over a week. I expect a sideways market through the holiday and leading up to the big meeting between world leaders. After the meeting, it’s still uncertain, but recent history indicates the market hits its low at the end of November and starts increasing in December.

The last two weeks I explained why I prefer to sell calls and why I avoid buying calls for my farm operation. But, what about put options?

 

What is a “put” option?

Buying a put is the right to sell grain at a desired price. Basically it allows a farmer to guarantee a floor price for their grain while leaving unlimited upside potential if the market rallies. When buying a put there is an upfront cost premium, but no risk of margin call.

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The difference between buying and selling calls

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA lowered corn yield estimates about 2 bushels per acre and decreased demand a little as well. Despite these adjustments, the report still showed a drop in next year’s carryout and the tightest stocks-to-use ratio in 4 years. This could help keep corn from drifting lower.

There was a huge carryout increase with China’s stocks, but I doubt this will have a big impact on the market. One, those stocks have been present for a long time. Two, this corn is not logistically set up for easy export.

Basis levels in the U.S. have been strong since the middle of harvest. Recent increases ranging from 10 to 15 cents have been reported throughout the Corn Belt. This would suggest that farmers are not selling and that end users are in need of corn. This could indicate upside potential in corn prices.

The USDA decreased bean yield estimates 1 bushel per acre, while export demand was updated to reflect the trade war and exports to China.

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Buying calls is gambling

By Jon Scheve, Superior Feed Ingredients, LLC

The President started tweeting about trying to work with China to end the trade war and the market rallied 30 cents. The next morning a White House advisor said there wasn’t much progress, but the market still closed the day positively. After the markets closed on that Friday, the President said there had been a lot of progress made with China trade. This topic will certainly excite the market leading up to the President meeting China’s leader at the end of November during the G-20 meeting.

 

The differences between buying and selling corn calls

Buying calls gives the buyer the right to buy grain at a certain price. There is a premium to be paid to own those calls. There is no margin call risk associated with buying a call

Selling calls can force the seller to sell grain at a certain price.

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Straddles offer alternative solutions in a scary market

By Jon Scheve, Superior Feed Ingredients, LLC

After spending 5 days in Nebraska driving the combine, I returned back to Minneapolis along I-80 and I-35 Wednesday. There was a lot of progress in Iowa during that time frame. It looked like their harvest went from about 33% to 75% complete in less than a week. I even saw a little fall field work completed in southern Minnesota.

On a recent trade I managed to collect 18 cents of profit that I can add to my “pot of premium” on a later trade. Following are the details:

 

Sold straddle

On 8/30/18 when Dec corn was around $3.58, I sold a November $3.70 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

 

What does this mean?

  • If Dec corn is $3.70 on 10/26/18, I keep all of the 23 cents
  • For every penny corn is below $3.70 I get less premium penny for penny until $3.47.
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Did I consider all the possible expenses in storing beans?

By Jon Scheve, Superior Feed Ingredients, LLC

The October USDA report showed a yield reduction due to a lower plant population, which caught the market off guard. However, with the increased carryout from the stocks report two weeks ago, the U.S. and world carryout for this upcoming year are higher than what was predicted last month by the USDA. The slow pace of harvest is certainly helpful for the market as it will allow extra time to grind through more of the current production and allow for more storage of the crop still standing in the field.

The USDA report increased both last year’s yield by .2 bushel per acre acre and this year’s yield by .3 bushel per acre, but then offset these increases with a reduction of upcoming harvested acres. There is little bullish news for beans right now. The most recent stock report showed more stored beans than previously anticipated and the upcoming carryout will likely be double last year and 50% higher than the highest carryout ever recorded.

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Collecting soybean carry

By Jon Scheve, Superior Feed Ingredients, LLC

Corn and beans rallied last week because rain swept through the Midwest slowing harvest. In select areas where harvest is behind, processors are bidding up for grain. It’s unlikely these basis bumps will last long, but some lucky farmers who managed to harvest some grain early could benefit.

The slow harvest progress may help corn from sliding all the way back to lows from two weeks ago. I doubt beans will be as lucky. There are just too many in the fields and as they get harvested it could be too much for the market to deal with.

 

Collecting bean carry

On 8/30 the November to July bean spread was a 49-cent premium. With all of my bean sales hedged against November futures, I was concerned about the current low basis levels. Since I can store all of my 2018 harvested beans and I have all of my beans sold, I moved my sales forward to capture the 49-cent carry.

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Hoping for a rally but preparing if there’s not

By Jon Scheve, Superior Feed Ingredients, Inc.

I travelled from Minneapolis along I-35 to Des Moines and west on I-80 to Lincoln last week. I was amazed at how few acres had been harvested for a crop that was supposed to be so far along. I saw nothing harvested until I was near Ames, Iowa and even then only about a dozen combines running between Des Moines and Lincoln. It seemed that what had been harvested was evenly split between corn and beans.

The trade issues continue to hurt beans and expected yields are very high, which will lead to a large carryout. Last week, futures rallied on the hope that exports will be higher than the USDA is forecasting. Some speculators are buying in their profitable short positions to reduce risk. Consequently basis at processing plants dropped, and there is still very weak basis around the country, which to me suggests that the upside for bean futures is still not there.

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Consider market carry when making basis comparisons

Wheat futures continued their collapse in early September, down 16% in value since August. In the last 3 months, corn is down 12% and beans 20%.

A record harvest is expected and many farmers are sitting on a lot of unpriced old crop. This in turn is creating logistical problems everywhere. Without a huge surprise yield reduction in the USDA report this week or a trade fix with China, the market will probably stay at these low values through harvest.

 

Understanding market carry’s relationship to basis values

I recently reviewed if there was a better basis opportunity to sell my 2017 corn earlier this year. My explanation confused a few people. Here is recap of that review:

I had the opportunity to set the basis at -.21 the Sep instead of the -.43 the Dec that is posted today. However, if we apply the value of the spread at 15 cents to the Sep basis we find that -.21 the Sep is/was actually -.36 the Dec.

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Marketing plans for the big crop looming

By Jon Scheve, Superior Feed Ingredients, LLC

The upcoming corn and soybean harvest is expected to generate the largest crop ever. Combine that with one of the largest carryouts ever and it’s panicking both farmers and end-users without enough storage. As a result, basis levels are at mid-harvest levels before we even begin, suggesting end-users are overwhelmed with grain arriving on their doorstep as farmers clear out space to make room for the crop that will be arriving in a few weeks. The market is paying to store any part of this crop for a while, which may spur some creative storage solutions.

On a positive note, corn futures seemed to bounce off the bottom by 10 cents this week, which may suggest this year’s corn low has arrived. If this turns out to be the case it would be the third year in a row for that to have happened at the end of August.

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Reviewing September trades

By Jon Scheve, Superior Feed Ingredients, LLC

Wheat values dropped 40 cents last week, the biggest weekly decrease in 2 years. Wheat had been pulling up corn prices some, so this probably contributed some to corn prices being down another 20 cents this week. While this is disappointing, both of these crops still have upside potential after the new year due to dry weather outside of the US. Global buyers may need to come shopping for US grain down the road.

Historically corn prices drop during the last week of August. This is because many end users set Aug 30 as the final day to price any deferred-priced (DP) grain in storage and farmers with these type of positions tend to wait until the last possible moment for a rally.

With no resolution to the trade war this week and an expected record soybean crop, soybean futures also lost some ground.

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What should be stored at harvest?

By Jon Scheve, Superior Feed Ingredients, LLC

There was some positive trade news last week. Mexico and the U.S. may be able to avert trade issues — which is positive for corn — and Chinese officials are coming to Washington to resume talks, which could help soybeans.

Bean futures are reacting quickly to any trade news. Many suspect if the trade dispute was resolved, beans would rally $1 per bushel. Because of that upside potential there is usually a quick surge in prices because so many fear of missing out on the potential rally.

The basis or cash market isn’t reacting as well though for beans. The west coast export facilities’ bean basis is at least 60 cents below normal levels, which is putting downward pressure on basis throughout the Midwest. This suggests a lot of beans that normally go for export need to find a new home. That has put downward pressure on the processors bids here in the Midwest.

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Buying puts

By Jon Scheve, Superior Feed Ingredients, LLC

Arguably the Aug. 10 USDA report is the biggest of the year because it provides the first estimated yields for the upcoming harvest. With population estimated counts the highest ever, and ear weight estimates lower than the past two years but still on the high side, the USDA is predicting a 178.4 average national yield.

The weather throughout the growing season has been very good for a large percentage of the Corn Belt to this point. Even if there is widespread dry weather throughout the Midwest during the last half of August, I’m not sure how much of a negative impact there would be on yields. On the other hand, I think some timely rains could still have a positive impact on yields going into harvest.

That being said, I’m not bearish corn long-term. Even if national yields would climb another 3 bushels per acre, next year’s carryout would still be lower than this year.

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Taking a look at past and present trades

By Jon Scheve, Superior Feed Ingredients, LLC

I suspect everyone is waiting for the Aug. 10 USDA report that includes estimated ear weights and yields. I think if the average national yield is 175, $4 Dec corn is likely. Then every bushel above that value decreases Dec futures by 10 cents (i.e. 180 national yield would mean Dec corn at $3.50).

Beans are still caught up in tariff issues while weather continues to be uncertain. There is a lot of risk in both directions right now.

 

Market action: Previous trade results

Three of my trades expired last Friday. As you can see below, the three trades provided me with relatively low risk potential opportunities to get added premium in a non-profitable, sideways market on some of my corn. In the end, one of the three trades added 9 cents of added premium to my ongoing “pot of premium” on 10% of my production and the other two were essentially a wash.

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Consider storage expenses in marketing

By Jon Scheve, Superior Feed Ingredients, LLC

I’ve noticed far fewer bad corn crop pictures and farmer complaints this year versus previous years. Most farmers are generally happy with crop conditions. Usually by mid-July at least some farmers are complaining about drought conditions and wondering why corn isn’t at $5. This could be a sign that a huge crop is nearly made or at the very least a very good crop is out there.

Some in the trade have focused discussion to ear weight as a reason why prices should increase. They say too much June heat forced corn to grow too fast, which compromised the health of the plant and the weight of the ear. If true, this could have a big impact on yield production. In the past few years though, ear weight ended up being higher than many thought, which caused underestimating national yields prematurely.

Still, in 2010 many thought there would be a record production in August, but final national yields were 10 bushels less than what was estimated.

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Speculating and hedging

By Jon Scheve, Superior Feed Ingredients, LLC

Right now many analysts and advisors are suggesting corn and beans are too cheap and prices should rally. This makes sense because U.S. corn prices are the cheapest in the world, which means exports should increase. Elevator managers that I have spoken with indicate that farmers aren’t selling at these values. The counter side to prices having to rally is farmers are sitting on A LOT of stored corn, which could be keeping prices from increasing the next couple of months.

 

Corn

Many bulls are also saying corn is growing too fast and yields will be negatively impacted. Some are predicting a 178 or lower average national yield, at which prices should rally. The counterpoint to this is weather has been widely and consistently very good. Arguably it’s the best growing conditions ever for the largest portion of the Corn Belt at one time.

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So what are you going to do now?

By Jon Scheve, Superior Feed Ingredients, LLC

The most recent USDA report showed some potential for the corn market with strong demand expected to continue. This could mean current corn prices are near a bottom. However, the great weather throughout June and early July suggests the national yield could be another record possibly exceeding 180 bushels per acre. If yields are then less than 180, a rally is likely, and if yields are higher than 180, prices will probably trend lower.

The USDA increased old crop and export usage estimates, which could have been bullish. Unfortunately, the trade war triggered the USDA to reduce future exports by more than 10%, meaning next year’s carryout could be substantially larger than current levels. This also assumed an average 48.5-bushel per acre national yield. With current weather, yields may reach 50 or even 52, which could mean sub $8 on Nov futures.

If the trade war would end soon and China continued buying U.S.

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Marketing in a trade war

By Jon Scheve, Superior Feed Ingredients, LLC

Its official, the U.S. is now in a trade war. Last week some said a last minute negotiation could stop it, but that didn’t happen. It’s uncertain if this will last a few days, weeks, months or years. No one really knows the outcome to all of this and the market doesn’t know how to react as a result.

Good weather continues throughout the Midwest. At this rate record yields are a real possibility, meaning current prices are right in line. It’s now a waiting game through the balance of the summer to see how the weather turns out.

Beans have been looking for a bottom. Technically beans are due for a rally, but the rally on Friday could have been too quick and might be followed by a re-testing of the lows. Some say tariffs will drive Nov bean prices to $8, while others say the world needs our beans and, to get around the tariffs, will ship beans to other countries first then to China making $10 Nov futures realistic.

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The gamble of lifting hedges

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA confirmed there will be slightly more bean acres planted than corn acres for the first time in over 35 years. There were 1 million more corn acres and a half million more bean acres planted than what was estimated back in the March report. This wasn’t bullish news, and was still in line with most pre-report estimates so it probably is just 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.

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