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Corn

4/25/2020

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Farmers are eternal optimists.  If a bad year was a deterrent to farming, nobody would be farming.  I had conversations with several farmers this week who are beginning to sound scared.  I have had many conversations through the years with frustrated farmers who thought prices were too low, but this is the first time I have perceived their fear.

Despite what many farmers believe they tend to do a terrible job selling grain.  We know that most farmers sell grain at the bottom 1/3 of the market.  Advisory services that promise to sell grain at the top do not fare much better, typically selling just below average.  This is why "equalizer" types of contracts are good.  Farmers just cannot sell when prices are high because they always believe prices are going to go higher.  It is not so much a fallacy that farmers sell grain near the lows but that humans are hard wired to make bad decisions at the worst time, and farmers are human.  Now is one of those times where you can do terrible harm to your farm selling grain.

I believe we will see higher grain prices soon.  I believe, barring something crazy, that the lows are in.  I have some strategies I will recommend later which should help your cash flow and put you in a better position with any of last years crop that you have not yet sold, and for the new crop you are putting in the ground now.

For now, I want you to look at where we are in this grain cycle.  This is corn since December 2013 meshed with a sentiment subgraph.  This terrible sinking feeling you have as a farmer is sentiment.  Sentiment values today are at 19.  The only time sentiment values have been worse in the past 7 years was in late 2017 when sentiment values reached 15.  The main take away from this chart is this.  Every major rally began with extreme bearish sentiment.    
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Oddly, back in 2017, the extreme bearish sentiment occurred in November but it is normal that we reach extreme bearish sentiment at planting time just ahead of the weather rally.

Seasonality wise, May normally gives you the third best marketing opportunity of the year.  Safe to say we did not get an opportunity in March to sell corn.  May usually gives a good price appreciation. 
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April 24 marks day 115 of 2020.  In an average year, corn would appreciate 4.41% by now.  So far this year, corn has dropped 20.73%.
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I have heard at least one expert say we are not technically oversold.  True, we could get more technically oversold I suppose but this weekly corn chart shows price is at extreme oversold levels on the RSI and Stochastics.  We are much more oversold now than we were a year ago when corn prices suddenly shot up  over a dollar to $4.60.  The weekly RSI readings have not been this oversold since 2014.
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Things can get oversold and stay there for a long time as it did back in the fall of 2017, but this is not about a market that will be trading supply and demand.  This is about an extreme oversold market that regularly rebounds during weather scares.  You can almost count on it.  Every major corn peak the past 6 years has occurred in May, June and July.  
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Knowing this, why would a farmer sell grain now?  Why not wait a month or two when the likelihood of a strong rally is so great?  Possibly fear of prices moving even lower, and to raise some cash flow.  We all know the fundamentals are bad this year, but the worst years always have some sort of snap back rally.  Revision to the mean is the bread and butter of all professional traders.  At some point the market will come back to average.  

The 200 day moving average is the most commonly used indicator of an average price.  I think over the next couple months we will have a rally that is stronger than most analysts would predict that should bring price back near average.  A 50% retracement from the contract high would bring corn to $3.75.  A 61.8% retracement would bring the price of December corn to $3.86.  That is the price range where I could see corn rally to by early summer.
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As crazy as that sounds, remember that there has been no weather premium put into the market yet.  Once traders begin looking at weather, it does not take but a few traders exiting their short positions to trigger a massive buying frenzy.  

So a cash strapped farmer has 4 choices the way I see it.  
1.  Sell corn for cash - the worst possible thing 
2.  Basis Contract - Collect 70% of the cash price today
3.  Sell corn for cash, then buy December Futures.
​4.  Sell calls (new crop)

Old Crop:
The only reason you should consider selling cash is that you believe futures and basis values will both decline further for months to come.  December corn has already dropped 20% from contract highs.  I guess theoretically it could follow oil down to zero or lower but that is not going to happen now while the new crop is mostly still in the bag.  Maybe this fall if there is no place to put the corn the price goes to zero, but I suspect nobody will be harvesting any corn if that happens.  Of course, to collect on the crop insurance farmers would have to harvest the crop which would be a different problem altogether.

Basis levels are very high now.  They would be much higher if ethanol plants were operating at full capacity, but basis levels are still at historically good levels.  Basis levels in Louisville for corn are around .20 over May right now resulting in a cash price of $3.38.  You really need to get this locked in.  If futures rise 50 cents, we could see the basis drop to -.10 or lower.  The two best ways to lock in these basis levels would be with a basis contract or by selling corn for cash and buying futures.

Basis contracts would be a very good alternative.  You would collect 70% of the current $3.38 cash price now, giving you around $2.35 a bushel to operate with.  If we get a 50 cent rally over the months ahead, you would wind up netting $3.88 for your corn when you price the futures.  You do not need a commodity account to do this.

Selling corn for cash and buying futures would require you to have a commodity account.  You would go ahead and sell at the cash now and collect $3.38.  You would then buy any futures month you wanted.  I would suggest going out to December.  Margin on a corn futures contract is $1100 which is .22 per bushel.  This creates more cash for you than the basis contract UNLESS the price of corn drops.  If that happens you would have margin calls to make.  Meeting the margin calls is what the elevator does with that 30% they kept out of your check when they paid you on that basis contract.  If corn goes up 50 cents like I think it could, you would profit the same with a futures contract as you would with a basis contract.  

New Crop:

A farmer could generate some additional cash by selling $4.00 December corn calls for 8 cents and selling $3.00 December corn puts for 8½ cents. This results in a breakeven on the trade at $4.16½ on the upside and $2.83½ on the downside. (this is assuming you carry a crop insurance revenue policy that gives you a floor)  This would cap your potential gains on the corn market at $4.16.  If prices remain between $4.00 and $3.00, the options would capture the 16½ cents.  It's almost like free money.
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I have a similar strategy to use on soybeans that would allow you to capture over 20 cents.  If something like this interests you let me know and I will send it to you.

In summary, we need to be smart with how we start the year so that we can finish out the year strong.  Every year, farmers leave dimes, quarters and more on the table and survive anyway.  This year we can't afford to do that.  Lets do some things to capture every nickel.
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Steve Wade and Tyler Wade of Wade Assurance are associated persons for AgDairy LLC.

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The risk of loss in trading commodity futures contracts can be substantial.  You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

Wade Assurance is an equal opportunity insurance provider.
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