Hey everybody, sorry for being so quiet this week. We are down to cleaning and our last load of our move, by this time next week we will be settled in and I will be able to refocus.
I will start today with a brief disclaimer for those specialty, cash crop, pulse, or durum growers. I have not been ignoring those markets, but with some early sales on the books and not much movement in bids I am content to wait to make the next move. Most of those markets continue to benefit from low dollar and strong exports for old crop. El Nino and other weather events are supportive of new crop. I do expect StatsCan next week to add acres to most of these crops, that increase in acres will have already been offset by an assumption of decreased yields. I am less bullish these crops (closer to neutral actually) but definitely less bearish than what I was pre-seeding, and would be today, had growing conditions been closer to normal or average. Because seeding happened so quickly I don’t see enough changes to intentions to do much pre report analysis. I will put out a complete analysis post report (report comes out Tuesday, I apologize I believe I mistakenly said earlier this month StatsCan was tomorrow).
Next Tuesday is also USDA WASDE and “actual” seeded acres. This data has gained some focus this past week for both Soybeans and Corn, but mostly beans. There is a few areas of the more South/SouthWest regions who will not complete seeding. There are guesses from 1.5-4 million actress in total of Beans and Corn will not get seeded. Crop scores are also decreasing for Corn, Soybeans, and even Winter Wheat. This was expected by most, myself included, but when these things actually get printed in black and white for all to see the market makes a reaction. So while it is becoming more and more clear that Canada will have a reduced crop, we have for the first time in many months some support from the Soybean and Corn markets South of the border.
What to do about it?
I will start this time with Wheat as it is a little less dynamic right now. Wheat made a higher low for the third time last week. Right in the trend line of the previous 2 that I highlighted in last week’s article. We are already nearing the resistance in line with previous 2 higher highs. That line also now falls slightly above old resistance that we failed to break 3 times in April and May. I still l favor making incremental sales in that “top” range scaling in as it rises, stop selling if it retreats, until you run out of old crop to play with. At that point I would consider starting your new crop sales if you haven’t already done so. Continue to consider back end loading your Wheat sales this crop year and marketing cycle. It looks even more likely that the bottom will hold now than it did, but I am not ready to get too excited until we get the futures comfortably through $6.
Canola is much more exciting. More so if you have been fortunate enough to get rain and/or miss frosts. I had mentioned to some of you in recent meetings, and also mentioned in reports about the potential to re-enter the Canola market using Call Options. This is most beneficial and a stronger recommendation to those who chose to make New Crop sales early, or are sold out of old crop. Clearing the $500 mark sets up for lots of room for upside on the chart. The weather forecast is showing more hot and dry, and now with the first reduction to Soybean supplies this market is running hard and fast. I was closest to pulling the trigger and recommending that anyone over 10% sold on new crop or 80% on old crop buy Call Options at recent pull back to $480 futures. Admittedly I expected the shift back higher after the retracement to be much slower than it was. Now I believe there is potential for Nov futures to get to $540 and possibly even $580-590 prior to the expiry of the Nov. At The Money (ATM) Options have increased in value in this run and are currently going to cost you around $29mt. A $29 investment in an option could net you a $30-65mt profit depending on quickly the high of this range is achieved (IF the high is achieved). You are risking the full $29mt investment if market goes sideways or down. Although the Canola situation is nearing the point of no return, Soybeans are nowhere near that point. Too wet problems are less likely to cause shortages than too dry problems. August is the real make or break for Bean yields so don’t get too bullish there yet. I expect Canola to eventually reach the top end of it’s historical premium to Soybeans. After correcting for Forex that price is in that $580 (agreement with technical resistance) range with Soybeans where they are today. If bean futures get through another 0.25bu or so of upside you can increase Canola potential by that same amount. After that if crop is still poor and farmers aren’t selling (or don’t have it to sell) futures will have to narrow in to keep the flow going.
For all of you with old crop on Basis Contracts or unsold the best play is to ride this out. Downside is very limited and you are already “long” your unsold grain. Same goes for new crop, if you are at or below 10% sold you are “long” enough to capture this rally. When it looks like a top is near and it is time to sell there are ways to risk manage that I won’t get into today. If you are risk tolerant and in a cash position to take on more risk you can consider this strategy, it will work the same as everybody else, but make sure you understand you are adding downside risk.
For those of you sold out of Old Crop and over 30% new crop (don’t forget to adjust your expected yield before calculating % sold) this is the best way to add some value to sales already made. There are other ways, but there are several reasons I favor this way.
- You could buy out of your existing contracts. This will cost you the difference between today’s bid and your contract price plus an admin fee that could be as high as $20mt. Once you pull the trigger and buy out that cost is gone forever. You only benefit from today’s futures and higher, and you have 100% of the downside back. Let’s use a round number example. You have a $10bu contract for new crop. Bid is $11. For the sake of argument let’s say your grain company waives the admin fees because you convince them you are at risk of not producing the grain (which is what you should tell them, NOT “I want out cuz the market is going higher.”. If the futures rally to the top of the range stated above (590) and basis goes to 0 you will be able to sell for the bid of 13.40bu, less the dollar you pay for buyout you net $12.40. $12.40 is a lot better than $10, IF you are right and market rally happens. I always caution against too much certainty in any move, I feel that a bullish outcome is likely too, I just wouldn’t bet the farm on it. What if the market tops and backs off due to Soybean crop recovering, Canadian Dollar rising, or perfect conditions in last half of July and August here? What if you don’t pull the trigger in the rally and end up selling for the same $11bu as bid now? You will be right back where you started and done a lot of work, carried extra stress, and possibly weakened your relationship with your grain buyer who you bought out from for no benefit. What if the forecast changes tomorrow and we get the rain and the Soybean areas don’t and they finish seeding? What if USDA doesn’t reduce Soybean plantings as expected? What if StatsCan doesn’t decrease Canola acres? IF prices should somehow reverse and go down you lose every penny of the move, AND you already paid the piper the buyout so now you are selling $1bu below bids, likely in this scenario you will net less than your original contract price.
- You could take a long futures position. This will give you 100% of futures upside, no basis change at all, but you also risk having to sell out your position lower for a net loss. The good of this is that your upside is not limited, the bad is neither is your downside. I still consider futures positions to be speculative and lean toward leaving these strategies for full time traders.
- OR if you elect to go with the option strategy listed above: you still have unlimited upside, that upside is less than 1:1, and you have a “cost” which is recoverable depending on the timing of exiting. Your risk is limited to your original investment (estimated at $29 in this case). You cannot lose more than that, with the exception of possible missed basis opportunity. This strategy can be done on your Cargill grain contracts or through a broker.
Sorry so long winded today, and for the lack of visuals. As I mentioned above we are at an awkward stage of our move where we are still in the old house, but it is empty! I confess I hoped for a quiet market week, but this is why I love my job. Give me wifi and a few minutes, and I can get some info out there! This will be TMI for all of you out there but I need to get off of the only “seat” left in the house while I can still feel my legs ;).
As always don’t be shy to ask questions. I can access all planners from my phone or tablet anywhere if you want to decide on taking action. I believe I have had conversations with everyone recently discussing these ideas or similar for Canola, this developed more quickly than anticipated but I don’t think we completely missed the boat yet. In regards to Wheat I will try to warn you when we start hitting resistance.