We are starting into a new crop year and I have been busy formulating a plan that I think will help you forget what a challenging year 2018 was. I have no prediction about where we will wind up but I do have a plan to follow before you put your corn planter into the ground.
The Carryout Spreadsheet I posted last week shows a doubling of the soybean carryout and a reduction in the corn carryout. This tells me a couple things.
1. Prices on soybeans should have limited upside. South America is having crop problems, but even with that we have a whole lot of soybeans.
2. A shift in acres back to corn won't help the corn carryout number.
The bottom line is that I am not very worried about corn or beans having a run away move to the upside for a LONG time.
In the shorter term however, we are entering a period where prices do tend to rally. This will probably be your last good opportunity to forward price what you intend to grow this year. The chart below highlights 3 times in the year when you should be marketing your grain.
Like my art work? You get the idea. Prices seasonally rise in late winter but you can get enormous spikes in the summer if the weather turns bad. It is too early yet to make any decisions about the markets this summer, but for now we should see prices holding firm, at least into March.
The tables below show that in 13 of the past 15 crop years, corn and soybeans both averaged quite impressive appreciation beginning in January. Corn rallies an average of 20 cents per bushel between January 10 and March 15.
Between January 28 and February 20, Soybeans average a 48 cent gain.
So if the odds favor a rally of some kind, I am not going to be aggressive selling anything yet. In fact, there are triggers out there now that could set the market off quite a bit higher despite the enormous carryout figures I have mentioned and they could all occur at nearly the same time:
1. The South American crop difficulties.
2. Tariffs being lifted permanently
3. The dollar turning lower.
4. Commodities bottoming at their 3 year cycle low
Did I say the dollar is turning lower? The dollar has begun what will become a multi-year cycle decline which will coincide with the 3 year cycle low in commodities. The dollar has pushed against the 200 day moving average (green line). When this support fails, expect the dollar to make a steep drop towards the 50 day moving average (blue). The dollar dropping will help all assets rise in this country, and at the very least should provide support for grains.
So as I mentioned last week, my near term targets for corn are $4.10 and for soybeans $9.71. When we hit these levels, you should consider contracting some grain, and perhaps using the options strategy I have mentioned often here to raise your floor on your crop insurance.
I should also mention something about oil. Last week I suggested this would be a good time to consider hedging your fuel cost for the year. I believe we are probably at the yearly cycle low on oil right now. Moore Research would also agree. They say that oil (and gasoline) bought January 13 and sold April 2 was profitable 14 of the last 15 years. The average gain per barrel is $5.81 per barrel on a 1000 barrel futures contract. Think about that.
For many in the area I serve, and including myself, 2018 was one that many of us will probably chalk up as a learning experience. I know I have. A new crop year is upon us, so it is time to look ahead and see what can be done to make the most we can with what we have.
Probably the best place to start is to look at the carryout spreadsheet. The numbers in the bottom rows reflect what the WASDE report estimates our carryout numbers to be and the soybean numbers are staggering. The USDA estimates we have more than doubled the soybean carryout from 438 Million Bushels to 955 Bushels, and they have also raised the world wide carryout to 115.33 Million Metric Tons. Compare the fields below with the red boxes drawn around them and compare those numbers with last years numbers and you will get a sense of what it is we are up against this year.
So yes, this will be a problem for soybeans when you figure in that we technically still have a tariff situation with China as there is still not a trade agreement. Going forward, rallies will need to be sold, and sold aggressively. I have not seen a strategy that would work any better than what I recommended using back in March of this year. If you recall, I recommended using bear put strategy to set a floor at $10.20 on the beans and at $4.00 on the corn. The strategy cost less than .10 per bushel and gave a much higher floor than the crop insurance provided. It is too early to work this strategy now, but I will be writing about it and meeting with farmers about it between now and March.
I think we will get a chance to set a floor on soybeans around the $9.70 area but it will probably take some sort of summer drought to push beans above that level. If price can get back to $9.70, wouldn't it be nice to set a floor on your expected production and just not worry about it any more?
The corn picture looks more encouraging as the carryout number has been reduced somewhat. Still, if we have a shift to corn acres similar to what we had in bean acres last year, we could find ourselves with an increased carryout number this year. We should be able to lock in a $4.10 number on corn again but the chart looks pretty sloppy right now.
If you received an email from me Monday, you know that I have turned bullish oil. Oil looks to have put in a major cycle low Monday and this would be a great place to place a hedge for your fuel needs for this year.
As I said, this would be a great place to hedge, but it would also be a good speculative trade, either with straight futures or options. I think we could see $60 oil by this summer. 1 oil contract is 1000 barrels, so a rally to $60 from $45 is worth $15,000.