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Market Analysis



Should farmers be bullish or bearish on beans?

There is often conflicting information in the trades on whether farmers should be bullish or bearish. Usually there are reasons to be both. Therefore, I will often write down the reasons why the market could go up or down when developing my marketing strategy. I can then use this information to determine what I think is most likely so I can make the best trades possible given the information I know at the time.

 

Reasons to be bearish beans

• Seasonally the South American weather market is approaching an end

• U.S. carryout is the highest in 10 years and it’s still increasing due to slow exports

• World Stocks are still at high levels

• $10.20 beans has better returns than $4 corn for the average U.S. farmer leading to speculation increasing that U.S. farmers will plant more beans in 2018

• A possible trade war with either Mexico or China (or both).

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How to roll futures to capture market carry

The USDA report didn’t affect the markets much. Corn exports were up a little, while bean exports were down slightly. The South American bean crop looks average, with Brazil likely having above average yields and Argentina likely below average.

Next question: how many corn and bean acres will U.S. farmers plant in 2018? Many suspect beans will finally dethrone corn for the most acres planted. Regardless of acres planted, summer weather will have the biggest impact on prices going forward.

 

How to roll futures to capture market carry

Recently a farmer asked how I “roll” my futures to capture carry and what that looks like in my hedge account. Following provides an example of how this is done using real prices from the past few months. Questions I will answer more specifically:

  • How does the transaction in my hedge account take place?
  • How did I get paid?
  • How do I account for profits/losses on each trade?
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Generating higher prices in a low price market

The groundhog saw it’s shadow last week and it reminded me of the movie Groundhog Day. Similar to the plot of the movie the corn market is repeating itself day after day, week after week and now month after month. No one knows when or what will cause the cycle will end.

Beans, on the other hand, are primarily driven in the short-term by Argentina weather for the next few weeks.

 

Generating higher prices in a low price market

For over half a year the corn market has gone nowhere. Farmers don’t want to sell at low prices, and supply doesn’t warrant end users to pay up for corn. Consequently, prices are stuck at levels farmer dislike. Still, it’s essential for my farm operation to try and sell at higher levels. This has meant considering alternative solutions in my market strategy. And in the past year, I’ve had some success increasing profits by selling options, specifically calls and straddles.

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Finding marketing opportunities

Conflicting government information affected the markets late last month. First, the U.S. Treasury Secretary said he was hoping for a weaker dollar. Then 24 hours later, the President said he favored a stronger dollar. Exports are sensitive to exchange rates, so these conflicting statements caused some market volatility.

Constantly changing weather forecasts in South America also continue to help move markets in both directions. On Jan. 26, corn traded at its highest level since late summer and after a few wild weeks beans also increased to levels unseen in the last month. With these price increases, several grain buyers throughout the Midwest reported the most farmer selling they’ve seen in months.

 

Beans — 2018 sales

With the strong rally, I hedged some 2018 beans. On 1/22/18 I sold Aug futures at $10.06 and on 1/25/18 I sold more Aug futures at $10.20. Each of these sales represent 25% of my 2018 crop, so that makes me about 50% sold for 2018 with an average price of $10.13.

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Does market volatility matter?

Bean prices bounced off the recent trading lows this week. While this was positive for farmers, there still remain several unknowns. Dry weather throughout the Midwest has many in the trade concerned and wondering what summer time weather will be like and if yields will suffer. Also, it’s uncertain how many acres farmers will plant this spring. This may ultimately mean some speculators will exit their short positions with some profit now and look for other opportunities down the road.

With farmers generally not selling, basis and short-term corn spreads have narrowed throughout the Midwest until late this week. Then the corn market moved to the top of a narrow 10-cent trading range, which encouraged some farmers to sell some of their grain. I expect small fluctuations like this to continue in the short-term but I’m not expecting there will be a big rally unless something catches the market completely off guard.

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The benefits of selling options explained

Last week’s USDA report showed an increase of just over one bushel per acre in the average yield to 176.6 bushels per acre. Despite a slight decrease in the harvested acres in the report, there will likely need to be a supply disruption sometime in the next eight months for a significant rally to happen. It will probably need to be either a weather issue in Brazil over the next three months or in the U.S. this summer. Even a two million acre decrease in planted corn acres won’t likely be enough to get nearby corn back above $4 at this point. It will take five bushels below trend line yields too.

There is considerable fear that corn could slide down further over the next few months. While I think corn could test $3.30, I doubt farmers will sell that low which might help keep prices from staying at those values for long.

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Bouncing back from a worst case marketing scenario

While it’s a new year, there is nothing new for corn prices. A sideways market for the next three months seems likely.

There are indications that farmers would be willing to start selling as futures approach $3.60 to $3.70, but many seem to be refusing to sell below $3.50. On the flip side, end users indicate they don’t have much coverage and will buy during any market dips.

Bean prices are now largely driven by rain in South America. As the South American mid-summer approaches, they have had perfect growing conditions so far; however, mid-February is when moisture levels are most critical. Add to that, exports here are not pacing as planned to meet USDA estimates, and higher prices than the current upper $9s might be difficult.

 

Options — Straddle — Beans

As a part of my marketing strategy, I always understand all possible outcomes of each trade I do, and I make sure I’m willing to accept all potential scenarios.

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Setting basis on beans

Largely due to great weather in South America, soybeans have steadily declined every day since their high on Dec. 5 losing nearly 65 cents. However, there is still plenty of time left in South America’s growing season. If there is a weather issue, $10 is possible again, if good weather continues, sub $9 could be likely.

 

Setting basis on beans

Many farmers just concentrate on the cash value of their crop when selling, without realizing the three major variables that make up that price — futures, basis and carry. All three of these variables actually move independently of each other, and the most profitable marketing plans take into consideration each separately to maximize profit potential. Basis is often discussed as something farmers should be considering when selling their grain, but often the practical applications and detail in understanding how to actually do that is not provided. That’s a shame, because having a basis strategy as a part of a farmer’s overall marketing plan is important in optimizing profit and minimizing farm operation risk.

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Understanding how to capture market carry

This week the USDA report and the markets were uneventful. Farmers aren’t selling and corn export demand is pacing slow. Good weather conditions in South America eroded bean market premium.

 

Understanding how to capture market carry

I recently attended a grain marketing conference where the presenter discussed ideas for farmers to be more profitable in the current marketing environment. One suggestion mentioned was to sell the market carry (i.e. when the further future month is higher than the current future month). This is a popular recommendation trending right now, but it’s been something I’ve been advocating for years. It’s a relatively low risk opportunity for farmers to pick up additional premium and add profits to their bottom line. I think all farmers should be doing this.

However, this strategy is often casually mentioned as something farmers should be doing with minimal detail and explanation. But in my experience, many farmers don’t really understand how to capture market carry effectively and the upfront planning and logistics required.

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Don’t give your storage away

The markets continue to go nowhere. Corn exports are pacing slower than what USDA is forecasting but farmers aren’t selling. Beans earlier seemingly had upside potential due to South American weather, but couldn’t sustain it. Beans still have some potential in the short term if there is a weather scare in South America, but no one knows how much at this point.

All too often farmers are too focused on cash prices and don’t pay enough attention to their storage expenses. However, if farmers want bigger premiums and profits, they need to think about grain marketing differently than “conventional” wisdom. This is especially true in years when grain prices are at or under breakeven points. Following illustrates mistakes many farmers make who don’t have 100% on-farm storage capacity.

Often farmers make their first and maybe only sale before harvest for December or January delivery to capture some market carry premium while at the same time allowing them to core their bins during the winter.

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Capturing market carry

With too much supply in the U.S. and around the world, corn isn’t likely to move in the short-term without a big event.

With 30 to 45 days of the major soybean producing areas of South American growing season left, there is still a lot of weather premium potential left in beans right now.

 

Capturing market carry

After Dec options expired on 11/24/17, it left me short several Dec future contract positions. Since Dec futures go off the Board of Trade soon, I have to move them to a future contract month. I want to make sure I maximize my market carry opportunities with these trades, but also consider practicalities, like when I will have to core my bins centers out. I selected March ’18 futures.

Unfortunately many farmers don’t take full advantage of market carry. This is a shame, because it’s a relatively easy, low risk way to add profit to a farm operation.

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Should my hedge account show a profit or loss at the end of the year?

As harvest finishes with record yields across the Midwest, corn prices fell below $3.40. However for the week it was nearly unchanged. Many farmers have struggled to sell at profitable levels, and while higher than average yields help offset lower prices some, it hasn’t been enough. Also contributing to lower prices, funds continue to hold large short positions with little incentive to adjust.

Beans also had average or above average yields throughout the Midwest, but beans have been high all year long in relation to corn prices, which has allowed for profitable levels for most farmers. This has eased the sting of low corn prices for many farmers. Looking forward, South American weather forecasts have been favorable, but we are nearing the part of the growing year in which every new forecast can drastically change the market direction.

 

Basis

Basis values are increasing throughout the Midwest for both corn and beans.

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Straddles vs. accumulator contracts

The USDA announced a record yield resulting in a 2.5 billion bushel carryout. Therefore, I think it’s unlikely that corn will sustain a major rally until summer 2018. A soybean rally won’t help corn prices either unless there is a devastating drought in South America. If there is a 2 million- to 4 million-acre switch next year from corn acres to soybeans acres, combined with a weather scare, there may be a chance for $4.50 in the Dec ’18 futures contract.

On the flipside, the slow harvest and the already huge fund short position is keeping prices above $3.40. It’s uncertain if this can continue but it’s certainly positive that the market has still not traded below that point as of right now. Many end users missed their opportunity for $3.40 last week, it’s unclear how long end users will remain patient or if they will chase the futures market back to $3.50.

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Selling calls

The markets didn’t move much this week. Harvest pressure continues to limit corn upside potential. Beans at first looked like they may take off as harvest slowed, but on Friday, Brazil’s currency fell against the dollar. This meant a price boost for Brazilian farmers who sold some beans, putting pressure on futures prices. The 30-day forecast for South America looks good for growing beans. The market continues to search for a reason to swing either way right now.

Even though I’m hoping corn prices go up, I still think corn prices are going nowhere for a while. That’s why I sold more calls, so I can presumably collect some premium in the meantime while I wait for other opportunities down the road to sell the grain and/or more options.

 

3 – New Trades – Selling Calls

On 10/24/17 when Dec corn was near $3.50 I sold the following calls for 10% of my production each:

  • Jan $3.60 call for 10 cents – expires Dec 22
  • May $3.70 call for 19 cents – expires Apr 20
  • July $3.80 call for 19 cents – expires June 22

What does this mean?

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Benefiting from puts, calls and straddles

Corn

The market continues to be uneventful. End users want to buy $3.40 Dec futures and farmers are hoping for $3.60 to sell some excess production. Slow exports aren’t helping. Realistically farmers may need to plant 1 million to 2 million fewer acres next year to see $4 by next summer.

 

Beans

With bean harvest nearly over, farmers are hoping for reduced market pressure, which might allow for a small rally. Export pace has also been slow for beans. Unlike corn though, demand growth for beans has been increasing year over year at great rates, which could support 1 million to 2 million more bean acres next year. In fact, 2018 may be the first year in over 30 years where bean acres exceed corn. For this to happen though, prices will need to exceed $10.25 at some point before April on the Nov ’18 while Dec ‘18 corn stays below $4.

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Consider all the scenarios and make a marketing plan

Many farmers tell me they do well at picking prices. Maybe some do, but many do not. If farmers were good at predicting prices, most would have sold their 2016 crop for over $4.25 and would have their 2017 crop already sold for $4. Unfortunately, most farmers didn’t get $4.25 for their 2016 corn and few have much 2017 sold. Sadly, many farmers are fooled into thinking they are good at picking prices, when in actuality they probably have been lucky.

Some farmers have the misconception that I try to predict prices and sell at the high. Unfortunately, I don’t know when the market will be at its highest. And here’s the thing: no one else knows either.

Since I don’t know where the market will go, I need to be prepared to sell all the time. That way I can take advantage of opportunities when they become available. The key is knowing your breakeven points and selling when the market hits adequate profit levels, because that may end up being the top of the market.

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What is in your marketing tool box?

While the slow harvest is keeping corn prices from tanking in the short-term, the inevitable huge supply is limiting any upside potential. The latest USDA estimates haven’t helped either. While they reduced acre estimates, yields also increased. So, there was little price impact. It’s doubtful that even a South American weather scare would have much impact at this point — 2.3 billion carryout of corn bushels is just too much. I expect a sideways corn market for several months.

Soybeans, on the other hand, were handed a nice surprise by the USDA, as they lowered the upcoming carryout estimates. The USDA is often criticized in their ability to estimate soybean demand, so many think lower carryout potential is a possibility in the ‘17/18 marketing year. While the USDA’s recent track record has been shaky, exports are behind estimates this year. For a bean rally to continue, exports need to catch up.

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The dreaded margin call

The market is boring right now because there is nothing to talk about.  Corn seems to be range bound between $3.45-$3.75 until Thanksgiving and it will take an unforeseen surprise to change it.  Beans seem range bound between $9.40-$10.00 through November.  For that to change, it will take a big South American weather scare.  Everything else is probably “market noise” right now.

 

The dreaded margin call

I recently discussed the benefits of forward selling on futures to maximize flexibility and profitability in moving sales over different crop years based on market conditions.  This likely made some farmers wince, because they know this could require a margin call if the market rallies. Generally, the fear of margin call keeps many farmers from selling forward using futures.

Sadly, these farmers don’t realize they are removing an important marketing tool out of their grain marketing tool box.  Eliminating margin call is like telling a baseball player to not swing at anything in the strike zone. 

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Farmers need to use their marketing edge

Corn and soybean yields continue to exceed farmers’ expectations across the Midwest, suggesting USDA estimates may have been closer than many had thought. Prices continue to do nothing. Spreads between futures contracts have widened to levels unseen in several years for corn and even longer for beans. This and basis also dropping indicates the market wants farmers to store their crop.

I drove from Minneapolis to southeast Nebraska on Thursday and back on Monday and was surprised how little had been harvested along I-35 and I-80 for this time of year. While I hope the bottom has been hit for the season, I wonder if the full effect of harvest pressure has kicked in. Time will tell shortly.

When reading social media or listening to coffee shop talk it’s easy to be convinced that farmers are on the losing end of the market all the time. While this may be the case for some farmers, savvy farmers know they have an edge that most speculators don’t.

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Corn neutral, friendly soybeans, bearish wheat

USDA lowered last year’s soybean production more than expected. Last year’s soybean production was revised to 4.296 billion bushels. Earlier USDA had it at 4.305 billion bushels. Corn and soybean stocks were lower than expected. Wheat stocks were higher than expected.

Winter wheat production for 2017-18 was estimated at 1.269 billion bushels, slightly lower than expected.

USDA has been in the mode of providing surprises with their recent reports. They have given producers bearish news when the August and September yield estimates were higher than producers had expected.

The quarterly grains stocks as of Sept. 1 as well as all wheat and winter wheat production will be detailed today. Keep in mind that USDA could be changing corn or soybean production from 2016 with this report. They have a strong history of changing the previous years’ soybean production with this report. Many expected the price action for soybeans today to be quite volatile.

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