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Russia-Ukraine, Basic Factors Explanation, USDA Forum, Market Switch & Rain Days on 02/22/2022

The Biden Admin giving itself some wiggle room on the Ukraine incursion by Russia versus invasion definition: “…the Russian troops moving into Donbas would not itself be a new step. Russia has had forces in the Donbas region for the past eight years”. Senior admin official briefed reporters late last evening.

 

Thursday and Friday is the USDA's Annual Outlook Forum for 2022. This is the USDA's biggest dog and pony show of the year. You see the agenda here: https://www.usda.gov/oce/ag-outlook-forum


 

For the past two years, we have made weekly sell or don't recommendations based up four factors:

  • Seasonal Trend

  • Fundamental outlook

  • Technical Outlook

  • Profitability

The tie breaker is profitability.

For the most part, prior to the 2020 crop year, we had used targets primarily based upon fundamentals, seasonal trend and profitability.

Here is why we changed:


Corn Marketing Plan 2019 Crop as of January 2019

1) Price 100% of Expected 2019 Corn Production Between Mid May and Mid July with HTA

Target was $4.20 to do a HTA contract on 100% of expected corn production with a merchandiser who would allow one to roll delivery period to the next crop year if production came-up less than expected.

Also wanted the merchandiser to buy multiple puts to attach to the HTA

My thinking was market conditions may require the $4.20 HTA target price to be adjusted higher or lower. Why $4.20? December corn had traded above $4.20 every year for the past 13 years except 2017. The high in 2017 was $4.17¼.

After the HTA order was filled $4.20, then:

2) Place orders to buy December puts at 10 cents per bushel on all HTA bushels at a strike price of $3.90. If the HTA price was $4.20, buy $3.90 puts for 10 cents.

3) Place orders to buy December puts at 10 cents per bushel on all HTA bushels at a strike price of $4.20.

4) Place orders to buy December puts at 10 cents per bushel on all HTA bushels at a strike price of $4.50.

5) Continue to buy puts at strike prices 30 cents higher at 10 cents until rally stalls and then collapses. If December ran to $5.00, the $3.90. $4.20 an $4.50 puts would all have been bought at a total cost of 30 cents plus commission or service fee, say 2 cents per bushel for each put.

6) If futures do not decline by expiration of the puts, buy one round of at-the-money March puts.

28 March 2020 analysis of the 2019 Market Plan:

An order to sell December corn at $4.20 would have been filled at $4.20 on the high for the day on 24 May or at $4.23 on the opening May 28th when it gapped higher. Let’s say it was filled at $4.20.

So, 100% of expected 2019 corn production would have been locked-in at $4.20 futures.

The open order to buy $3.90 December puts was filled on May 28th at 10 cents. Open orders remained in place to buy $4.20 puts and $4.50 puts at 10 cents. However, they were not filled.

The $4.20 put premium traded down to 10¼ cents on 17 June, but the order to buy at 10 cents was not filled, a very significant stroke of bad luck as things turned out.

Normally a December put 33 cents out of the money can be bought for ten cents, but not in 2019 due to extreme volatility of the futures. A December put had to be 40 to 55 cents out of the money to be filled at 10 cents in June and July of 2019.

The highest settlement for December 2019 corn was $4.68 on the 17th of June, the same day the contract high was made at $4.73.

That evening, if you had followed this plan, you would be 100% sold 48 cents below the market and spent 12 cents (with 2 cents service fee) for a $3.90 put that gave you the right to sell December futures 78 cents below the current price with rain still pouring down the third week in June.

As you know, prices were all down-hill from the 17th of June. The low was made on the 9th of September at $3.52¼. At that point, the $3.90 put was 37¾ cents in-the-money and could have been sold at 51 cents for a net profit of 41 cents.

Let’s say you and your market advisor were smart enough to sell the $3.90 put when December corn was at $3.60, nearly 8 cents above the contract low.

The right to sell corn futures at $3.90 when the futures are at $3.60 will always be worth 30 cents plus time value before expiration day.

Let’s say gross income from the put sale was 32 cents. Ten cents were paid for it with 2 cent service fee, so the net income was 20 cents. When that net income is added to the $4.20 HTA, that made it a $4.40 HTA.

Again, the high trade for the year was $4.73, the highest settlement was $4.68, the low was $3.52¼… A $4.40 HTA price plus or minus the basis is not so bad, especially when the floor was locked in at $4.20 on May 24th.

For those with grain bins, the December HTA would have been rolled to March with a net gain of 10 cents, so the corn delivered the first two months of 2020 would be on a $4.50 March HTA plus or minus the basis. The contract high on March 2020 corn was $4.76 on June 17th and 18th 2019.

But, I did not recommend any of my clients follow this plan. A third of the corn was planted in early April followed by six weeks of cold, wet weather. Another third was planted the last week of May into the first part of June. The last third of the crop was planted after June 2nd and most of that was planted after June 10th.

All the corn yield research my whole life said corn planted after the 10th of May lost one bushel of yield potential each day and each acre of corn planted after May 31st, lost 2½ bushels of yield potential. That was the reason I strongly recommended not to sell corn the third week of June when the seasonal trend turned down or any other time during the growing season. I certainly did not expect 2019 the be the fourth best yielding crop in history in 2019. By the way, June 17th is in the third week of June… the week the seasonal trend turns down.

I think I had a good excuse not to sell, but don’t we all have a good excuse every year for not following our own market plan? But, I was all wrong and my clients paid the price.

I knew a technician, Mark Davis of Crop-Side Marketing, had called the top in the corn market in late June 2019. That winter, I asked him to teach me more about technical analysis.

http://www.crop-side.com/

He explained a head and shoulders formed during June and it confirmed the high was in on June 28th. That was the day the right shoulder traded below the bottom of the left shoulder.

We looked at the December 2019 daily barchart.


This is what I saw:


This is what Mark saw:

And that, Ladies and Gentlemen, is why technical analysis has been a growing part of our service for two years now. Learning technical analysis is like learning a foreign language. It is tough.

 

Market Data

Today we begin tracking December cotton, July palm oil, July natural gas and July ULSD instead of March futures. This morning: Crude oil is at $94.36, up 0.25 The dollar index is at 96.18, up 0.1 July palm oil is at 5386 MYR, up 67 after making new contract high today at 5,423 MYR. Palm oil owns 32% and soybean oil owns 28% world market share. December cotton is at $102.11, down 0.68. 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 $4.628, up 0.132. The contract high was $5.121 at February, 2nd, 2022. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $2.6947 per gallon, up 0.0644 after making new contract high today at $2.6977. ULSD stands for Ultra Low Sulfur Diesel.

 

Rain Days Update

Rondonópolis, Mato Grosso, in the heart of Brazil's most productive soybean area, received 0.4 inches of rain yesterday; 0.5 inches a year ago and 0.5 inches two years ago (one inch = 24.5 mm). Yesterday's high temperature was 83°F. Day time highs the next ten days will range from 88 to 92°F (100°F = 38°C). Yesterday, in the dry areas of South America: Santa Maria high temperature 85°F with 0 inches rain. Cordoba high temperature 81°F with 0 inches rain. Salto high temperature 93°F with 0 inches rain. Total rainfall and temperatures expected in the next ten days: Santa Maria 3.02 inches, 77 to 92°F. Cordoba 1.20 inches, 72 to 84°F. Salto 1.42 inches, 77 to 87°F.

The Western Corn Belt has 4 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 4 less rain days than yesterday.


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