On Sunday, Canadian Pacific (CP) locked out 3,000 employees over a labor dispute. CP is the 2nd largest railroad in Canada, with service extending as far south as Kansas City.
Nutrien warned that it would need to reduce potash production if the shutdown were to last more than a few days; the statement came as fertilizer prices in the US hit record levels.
Intermodal transport (ocean freight containers) accounts for ~40% of CP carloads year to date, followed by grain (13%), energy (12%), coal (11%), and potash (5%).
Crude oil by rail has fallen 67% from pre-pandemic levels two years ago; however, rail barrels still deliver ~130,000 barrels per day of heavy oil to US refineries. A sustained reduction in availability could support US oil prices while pressuring Alberta hub pricing.
Around 12% of US coal imports come from Canada on CP.
For two years now we have used a weekly analysis of corn, wheat and soybeans to determine our recommendation of sell or don’t sell. We put equal value on the seasonal trend, technical outlook, the fundamental outlook, and profitability. It has worked pretty well. Things change, therefore, the market outlook changes. Pricing futures at a target price will always leave money on the table because one will sell too early and too low or one will not get anything sold.
Six dollars is a very attractive target for any year, but that was $1.35 below the July 2021 high and so far, it is $1.82 below the May 2022 high. We would never discourage anyone from selling $6 corn because that works very nicely on the cash flow sheets, and we did recommend selling the 2021 crop at $6.24. But that recommendation was not because we thought the top was near, but because it was time to lock-in a floor price. A HTA or cash sale was, by far, the cheapest way to lock-in a floor. When we think the top is in, we will recommend buying puts to make the money on the way down that was not made on the way up. By far, the least risk marketing plan.
Most market people (and farmers are market people) would lock-in a floor price with the purchase of a put option or sell the cash or HTA and buy a “courage” call option. Either way, the cost of a reasonable option would be 30 cents and the futures price would have to move 70 or so cents just to get the cost of the option back.
Would you rather pay 30 cents for a put and lock in $5.85 when the market is at $6.24 or pay 30 cents for call that will breakeven at $6.80 and lock-in a net futures price of $5.94 plus anything over $6.70?
We recommend you lock-in the corn at $6.24, and net $6.24 plus or minus the basis. If the futures top at $7.50 plus like we expect, then, and only then, if our four-part analysis steps say sell, then buy a put option for 30 or so cents.
Why do we love this plan? Which of these three investments is the safest:
Lock-in $6.24 HTA and buy a $6.60 call for 30 cents requiring the futures market to get to $6.90 to breakeven.
Buy a $5.85 put for 30 cents when futures are at $6.24 requiring the futures market to get to $5.55 to breakeven.
Lock-in $6.24 and do nothing until the top is looks like it is in place, then buy a put 40 cents out of the money for 30 cents.
If corn futures go down from $6.24, the net HTA price will be for each of the above:
If corn futures go to $7.50, and then decline to $5.50, the net HTA price will be:
$6.54 if you sell the call when the futures are at $7.50.
$7.20 if lock-in the futures price at $7.50.
$7.64 if you buy the $7.20 put when the future price is $7.50.
If corn futures decline to $5.00 with the same options transaction as described above:
Why? Because the profit on the put would be 50 cents more to add to the HTA price of $6.24. Each penny the futures declines below $5 adds one cent to the net HTA price.
We understand if you do not thoroughly understand options, the above is confusing. If you want to learn about put options in simple terms, go to: https://www.wrightonthemarket.com/post/how-to-use-put-options-simplified-version
Otherwise, be patient and we will walk you through it when the time comes. You full service clients just ask after you read the simplified version on our website.
Discussion You Need to Have with Your Grain Merchandiser About Marketing Tools
This is exactly what you need to say to your prospective buyers of your new crop corn, wheat and beans:
As you know, the high futures price is usually before the size of the crop is known and I want to have a shot at catching a price near the top 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. 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, the price will peak, then fall like a rock and all us farmers still have a lot of unpriced bushels.
I am also seeking a merchandiser who will buy put options for me 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 30 cents apart and bean puts at strike prices 40 cents apart, my market plan will probably capture the top of the market without any stress on me or you.
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 you can roll short production bushels to the next year and buy puts if the market goes higher after you do the HTA, what excuse is there left to not sell 100% of your expected production when you think the top is in?
This morning: Crude oil is at $108.91, up $4.21
The dollar index is at 98.21, down 0.02 July palm oil is at 5,795 MYR, up 228. The contract high was made March, 9th at 6,531 MYR. Palm oil owns 36% and soybean oil owns 28% world market share. December cotton is at $105.70, up $0.46 per cwt. The contract high was made February, 10th at $106.36 per cwt. Cotton competes with soybeans and corn for acres. July natural gas is at $5.061, up 0.064. The contract high was made March, 7th at $5.270. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $3.1117 per gallon, up 0.1030. The contract high was made March, 9th at $3.7675. ULSD stands for Ultra Low Sulfur Diesel.
Rain Days Update
Yesterday, in the dry areas of South America: Santa Maria high temperature 80°F with 0 inches rain. Cordoba high temperature 64°F with 0 inches rain. Salto high temperature 77°F with 0 inches rain.
Total rainfall and temperatures expected in the next ten days: Santa Maria 2.98 inches, 72 to 84°F. Cordoba 0.67 inches, 72 to 85°F. Salto 1.75 inches, 61 to 82°F. The Western Corn Belt has 1 more rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 6 more rain days than yesterday.