1 May 2021
For a year I have been preparing a “Weekly Summary and Recommendations” in which I identified four factors to determine if you should price the futures. Those factors are:
Seasonal Trend: If seasonal trend is up, don’t sell
Fundamental Outlook: If fundamentals are bullish, don’t sell
Technical Outlook: If the technical outlook is bullish, don’t sell
Profitability of Current Price: If current price is not profitable, don’t sell
If two of the above factors say sell and two say don’t sell, the tie breaker is profitability. If the current price is profitable and one of the other three indicators say sell, I will recommend you sell.
Since last September, with the exception of three weeks, the above factors indicated no sale for soybeans.
For the past 20 months, the above factors indicated no sale of corn.
The third week in June, the seasonal trend turns down for corn and it turns down for beans the second week of June. Note the seasonal charts:
You must have a really solid fundamental or technical reason to not have price protection on your corn by the third week in June and beans by the second week in July.
If, over the past 30 years, you had priced 100% of your corn and beans during the week of the seasonal high every year that offered a profitable price that particular week, your life would be a lot different now.
Clearly, the prices for new crop corn will be profitable the third week in June and the soybean price will be profitable the second week in July. The only two things that will keep me from recommending you price 100% of your 2021 and 2022 production will be a parched Corn Belt with no rain in sight or Lake Superior expanding to Memphis, Tennessee.
The two reasons farmers don’t price 100% of their expected production in June and July is because they don’t know if they will have normal production and they know prices might go higher after the sell and they want to have unpriced to sell if the price goes higher.
Therefore, you need a market plan that includes the tools to overcome those two problems. Here are the two tools you need to eliminate those two obstacles preventing you from pricing 100% of your production near the top of the market. Both of these tools can be provided by your merchandiser. If he won’t do them, find one who will and do it before the third week in June.
You will be surprised what your merchandiser will do for you if you just ask.
Here is the conversation your need to have with your merchandiser:
As you know, the high futures price is usually before the size of the crop is known. I want to have a shot at catching a price near the top of the annual range on 100% of my expected production.
I am looking for a merchandiser who will allow me to engage in a HTA contract for 100% of my expected production before I know for certain what my production will actually be.
You can make that possible for me if you will let me contract on a HTA 100% of my expected production and, if I come-up short on bushels, I want to be able to roll the delivery of those bushels to the next crop year. I will take the risk on the spread from one crop year to the next. I fully realize the market may be inverted. That is at my risk, not yours.
One of the reasons I and most farmers don’t sell enough of their production at a profitable price is because farmers want to have more grain to sell if the price continues higher. Eventually, no matter how high the price goes, it will fall like a rock and all us farmers still have a lot of unpriced bushels because we were holding out for higher prices.
Therefore, I am also seeking a merchandiser who will buy put options and attach them to my HTA, just like you do calls now. I will only buy puts if the market firms after I price the HTA so I can make the money on the way down I did not make on the way up. I will never exercise a put; I will either have you sell the puts or I will let them expire worthless.
If I buy corn puts at strike prices 40 cents apart and bean puts at strike prices 60 cents apart, my market plan will probably capture the top of the market with very little stress on you or me.
Will you buy corn puts at 15 cents and bean puts at 30 cents for me and attach to the HTA delivery contract?
What is the fee for HTA, the fee to roll to the next crop year and the fee to purchase puts?
If your merchandiser will do these two things for you, you have no excuse not to price all of your expected production at the seasonal high. You may wish to price your corn and beans much sooner if you want the security of having prices locked-in. Note, if the fundamental or technical outlook turns down before the seasonal trend turns lower, I will be recommending you price 100% of the next two and three years’ production before the week of the seasonal highs.
If your merchandiser will not buy puts, but will do the multi-year delivery HTA, you can buy the puts in your own futures and options account because there will never be a margin call.
For those of you with a futures account, I recommend you be prepared to short (sell) 2021 new crop (Dec corn and Nov soybeans) and buy 2022 new crop corn and beans. That bear spread will capture for you most of the inverse from the 2021 crop year to the 2022 crop year.
One more thing. The USDA lied to us in March when they said US farmers would plant small acreages of corn and beans. That was a ploy to get prices much higher so US farmers would plant enough acres to produce the bushels USDA overstated for the 2019 and 2020 crops to keep food prices down. The 2021 Actual Planted Acres Report will be issued at noon eastern time June 30th. It will be bearish beyond belief as the USDA will return to its cheap food policy.
The crops are being planted early. Prices may turn lower sooner than normal this year. Typically, it will be another 8 years before you see prices like this again.
Practical Application of the Market Plan for 2021 Corn and Beans
After you have priced with a HTA up to 100% of your expected 2021 production, place orders to buy puts as follows:
1) Place an order to buy a put for 15 cents on every HTA bushel at a strike price close to the HTA price.
That it is to say, if you execute a HTA at $5.94, place an open order to buy a December $5.90 put at 15 cents. December corn futures will have to rally to about $6.70 (given current volatility factor of the market. In a more normal year, you could buy a December put for 15 cents 45 to 50 cents out-of-the-money (strike price below futures).
2) Place another open order to buy the same number of puts at the same price (15 cents) at a strike price 40 cents higher than the first put's strike price.
3) Place another open order to buy the same number of puts at the same price (15 cents) at a strike price 40 cents higher than the second put's strike price.
Let's say it is Friday, July 2nd, 2021 with a three day 4th of July weekend on tap. It has been hot and dry for two weeks. December corn futures just made new highs. You have not sold corn yet.
You know if the forecast after the weekend is for rain, corn futures will be limit down. You also know if it does not rain and the forecast has no rain, corn will be limit up after the weekend.
What do you do? Have a nervous breakdown? Price half your crop?
No, you price 100% of your expected production with a HTA and place the open order to buy the puts.
If corn is limit down on Tuesday and/or Wednesday, you will just have to live with the fact you hit a seven year high with 100% of your 2021 crop.
If corn is limit up on Tuesday, and/or Wednesday, you will get the first round of puts bought. By the end of the week (or two weeks or three weeks), the overbought market sees rain in the forecast and a week a later December corn is well below your HTA price and the put(s) has tripled in value and are headed higher as the futures are headed lower as the 2021 crop is made.
Every day that corn futures go down, your HTA contract goes up in value.
Place an order to buy that put at 40 cents. Given this years' volatility, soybean futures will have to rally 90 cents to get that first put bought at 40 cents.
Place another order to buy puts at a strike price 60 cents above the first put's strike price for 40 cents.
Place another order to buy puts at a strike price 60 cents above the second put's strike price for 40 cents.
Stand back and let the market plan capture the high for you with no reason for you to be stressed.
How many times in the past years has the market value of your corn bushels increased as the futures declined in late July, August and September?
Talk to your merchandiser about rolling short delivery bushels to the next year and buying the puts at a reasonable service fee.
For those of you who know what a bear spread is, I recommend you forget the puts and bear spread the 2021 crop (November & December) futures against the 2022 crop (November & December) futures, when you think the 2021 crop futures have topped Not before!
The bear spread will take less investment and make more money than the puts for the first three or four months. When the market calms down late in 2021, we will look at buying puts. Below is the USDA May 2021 Supply and Demand Report. Note the National Average Price.