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Market Focus Strategy: Plan Outline

By | Market Focus Alerts | No Comments

We review a basic plan for crops this winter: store and hedge corn, sell and spread soybeans, and hold and hedge wheat.

 

Rising coronavirus cases and tightening social restrictions joined pre-election jitters to spook the markets this week. In the grains, bearish traders predicted prolonged political risk and pointed to an improved global weather outlook as reasons for selling, while the bulls suggested upside would resume on the back of strong physical demand and increasing interest from investors buying into the commodity inflation storyline.

Sharp selloffs in the stock market like the one experienced this week often bring out Warren Buffett’s most famous quote, “Be fearful when others are greedy and greedy when others are fearful.” Does that apply to the grains to mean that current price weakness is an opportunity for buying?

While it might be my personal opinion that heightened downside risk in the short-run will be followed by long-term upside opportunity for grain prices, I am also reminded to offer the warning of another wise Warren Buffett quote: “Don’t ask the barber whether you need a haircut.”

Your opinions about price direction are at the foundation of your individual marketing plan. The expectations you hold for both futures and basis influence your decisions to sell or to store, and when to price grain and what contracts to use. See if your opinions and strategies align with those that make up the current Market Focus marketing plans:

Corn – Store and Hedge

The Market Focus corn strategies have encouraged storage hedges like long put options for bushels left unpriced after harvest. Basis contracts may be an attractive alternative in lieu of commercial storage charges, or consider a professionally managed minimum price contract. Use May contracts for short hedges against stored grain so that they may be rolled forward into wider carry if the outlook calls for continued storage, or they can be liquidated or left to expire if market conditions come spring support making the cash sale. The Market Focus strategies also include a plan for buying futures to re-own cash corn sales made during harvest. Look to scale further into long replacement hedges after the election and keep October lows in mind for possible price targets.

Soybeans – Sell and Spread

Market Focus soybean strategies involve selling enhanced nearby premiums that are being offered by strong basis and spreads. Soybean selling is encouraged for cash flow needs and financing hedges for stored corn. Replacement hedges may be opened against cash soybean sales, like the previously-considered bull call option spread that would open upside participation in the market for July futures. Price weakness this winter would be explored as a possible opportunity for the program to recommend buy backs or long call option hedges for sales previously booked against SX21 new crop futures. Sustained strength for the export program and market efforts to ration 2021 acres will be thought of as likely sources of support for soybean prices early next spring, so the Market Focus outlook has marked out that timeframe with price targets and decision points to be used for settling out fall contracts and starting to sell new crop.

Wheat – Hold and Hedge

With wheat on a different crop cycle than corn and soybeans, producers with wheat are not currently facing the same sell or store decisions being made for the row crop harvest. Basic advice for the wheat position is to hold off on selling bushels in storage but protect unpriced ownership with a long put option or fence spread strategy. Place hedges in the March or May contracts. Consider minimum price strategies that would establish long exposure to WZ21 futures when new-crop cash sales are being made this spring.

The strategies that form our current Market Focus marketing plan are not right for everyone. Example recommendations are being reviewed to support an outlook for elevated downside risk this winter but still rising confidence for further upside in the marketing year ahead. Join a Market Focus program to follow the specific recommendations of the pricing committee or contact us to build an individualized marketing plan.

 

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Disclaimer:

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results.

Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.

There is no guarantee that the advice we give will result in profitable trades.

The views and opinions expressed in this newsletter are those of the author and do not reflect those of R.J. O’Brien & Associates LLC. This report may contain political opinions as well as market opinions and commentary. Any content provided by Commstock Investments or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Copyright © 2020 CommStock Investments, All Rights Reserved.

CommStock Launches Market Focus Pricing Programs

By | Market Focus Alerts | No Comments

CommStock Investments welcomes Joe Camp as new Director of Managed Programs:

I am beyond excited to join CommStock and begin the rollout and development of a new grain pricing program called Market Focus. With it, we are building something innovative and different to drive the mission of managing marketing risk in pursuit of improved farm profitability for our clients.

To achieve our objective, I will draw on prior trading experience and rely on past lessons and future support from colleagues and customers that I am happy to know and trust.  Looking ahead, I am pleased to form the Market Focus pricing committee with guidance from one of agriculture’s defining voices and with leadership from a dynamic and respected CommStock advisory team.

My goal is for the Market Focus programs to offer farmers the advantages of expertise, execution, diversification, and transparency. These principles should become apparent in related program content so that you know why a recommendation was made, when it was made, how it fits into your plan, and how it is performing.

Keep an eye on Friday publications of the CommStock Report for more news about Market Focus and check back here for free previews of the Market Focus Alerts that outline our trading strategies. I welcome your comments and questions along the way and look forward to meeting and working with you in the future.

 

Joe Camp

joec@commstock.com

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The Market Focus program may be able to assist you with execution of this strategy or one that fits your marketing plan.

Sign up to receive more free Market Focus News Alerts!

Disclaimer:

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results.

Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.

There is no guarantee that the advice we give will result in profitable trades.

The views and opinions expressed in this newsletter are those of the author and do not reflect those of R.J. O’Brien & Associates LLC. This report may contain political opinions as well as market opinions and commentary. Any content provided by Commstock Investments or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Copyright © 2020 CommStock Investments, All Rights Reserved.

Market Focus Strategy: Spreads Say Sell Soybeans, Look for Replacement Options

By | Market Focus Alerts | No Comments

Spreads have been the star of the soybean market show as of late.  Active bull spreading follows firm fall cash market performance and increasing interest from speculators who hang close to the front of the futures curve. The narrowing of spreads and general flat price strength run counter to the usual seasonal expectation of markets pressured by surging harvest supplies. Now, a quick futures sell off and relaxing for soybean spreads have market participants wondering if the party is over.

It has been covered in recent CommStock Reports why basis, spreads, and futures have all firmed together against the seasonal trend – USDA is making considerable revisions to the balance sheets after overshooting on supply projections and underselling demand; domestic consumption is recovering while strong export business is underpinning margin elevations; hoarding efforts by China and other big importers begin as La Nina stirs up concern for the next growing season; and new buying interest is showing in commodities as a result of a weakening dollar and rising inflation expectations.

Those with on-farm storage have been encouraged to use it while basis, spreads, and the board all rise higher in an attempt to entice additional selling; however, storage preference was given to corn after the soybean-to-corn spread stretched sharply into harvest and while the soybean curve inversion incentivizes selling now.

The relevant Market Focus strategy under consideration today is:

Sell Cash Soybeans and Buy a July Bull Call Option Spread.

The structure of corn and soybean spreads suggests that selling soybeans can serve as a hedge against patience on corn being stored.  But what if soybean futures are poised for bigger upside after the cash sale?

Consider amending your marketing plan to include hedges for soybeans sold across the scale this fall.  Hedging involves taking a position to offset risk exposed by the cash marketing decision.  Hedging will be seen as increasingly important for risk management if the agricultural markets are poised for a stronger, if more volatile, future as we expect.

Bull call spreads opened to hedge cash sales would establish a minimum cash selling price on grain delivered.  Basis is locked in with quality risk and storage and handling costs transferred to the buyer. Premium collected from selling an out-of-the-money call offsets part of the premium paid for purchasing an at-the-money call.  The short option side of the spread position is margined and risk of loss for the spread includes the net premium paid plus commissions and fees.  The options may be offset before expiration to adjust the effective selling price for the grain hedged.

Look out for related recommendations to follow.  Future updates will feature a look at how the Market Focus managed bushel programs can work with you to manage minimum price contracts.  Sign up to receive new alerts in your inbox!

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Disclaimer:

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results.

Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.

There is no guarantee that the advice we give will result in profitable trades.

The views and opinions expressed in this newsletter are those of the author and do not reflect those of R.J. O’Brien & Associates LLC. This report may contain political opinions as well as market opinions and commentary. Any content provided by Commstock Investments or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Copyright © 2020 CommStock Investments, All rights reserved.

Market Focus Strategy: Plan for Higher Corn Prices, Hedge for Higher Volatility

By | Market Focus Alerts | No Comments

Grain futures and basis have strengthened in defiance of harvest pressure while spreads recently tighten further to put a premium on current delivery and discount on the incentive to carry. Market volatility has also risen counter-seasonally to help amplify sell or store decisions for farmers weighing how much to reward the market and how much to believe in further upside potential.

We see potential setting up for stronger – but also more volatile – grain markets. Although the broader outlook is improved, we find that plenty of risk remains, especially in the short run. Consider whether you agree with these long-term positives and short-term negatives:

Long-term Bullish

  • USDA on path of correcting global grain supplies lower, China demand higher
  • La Nina, ongoing dryness for Black Sea and South American growing regions
  • U.S. dollar falling against competitor and customer currencies
  • Outside money taking an increased interest in commodity inflation story
  • Chinese pork market recovering from African Swine Fever
  • Global meat consumption recovering from Covid pressure

Short-term Bearish

  • U.S. meat consumption vulnerable to Covid this winter
  • U.S. ethanol consumption vulnerable to Covid this winter
  • Election outcomes are source of uncertainty
  • Political tensions with China rising again
  • Short-term weather conditions improve for global planting efforts

With this outlook, the Market Focus program is reviewing strategies for protecting stored corn with put options and keeping upside potential open with a futures replacement hedge:

The Market Focus strategy under consideration today is:

Buy May Corn Puts and Buy September Corn Futures.

Buy May corn puts for a portion of unpriced bushels in storage and buy September futures to hedge cash sales made during harvest. The position is structured to protect premium that exists in the corn futures market out to May, where the put floor is placed, while the long futures replacement hedge is opened in the discounted September contract, which could enjoy relative support if the market turns down into May options expiration. Conversely, the September futures contract could benefit if new-crop production concerns eventually become a source of support for the market.

The trades are structured to benefit from additional futures upside and may help to hedge cash positions for higher volatility in the months ahead. Long put options risk the premium paid plus commissions and fees, but a selling price is not locked in if futures prices rise. Long September futures re-establish price risk so that gains or losses can adjust the effective cash selling price on bushels already let go. Gains for the long put options may offset some losses for the long futures position, but the futures and options relationship is not penny for penny and separate use of the May and September contracts introduces calendar spread risk.

Stop-loss and profit-taking targets are advised upon position entry and marketing plans should include consideration of basis risk. Succeeding program updates will consider legging into a bear spread or fence with the sale of out-of-the-money May corn options to offset premium paid for nearby purchase of the puts. Program analysis will also include a look at scenarios for rolling long May puts forward to long July or September puts, or for buying weekly puts that could be used after May options expiration on April 23, 2021.

There are many headline risks unique to months ahead, including election outcomes, decisions on trade and ethanol policy, the Covid pandemic response, USDA crop report changes, and more. While 2020 may still have bearish surprises in store for U.S. agriculture, the long-term view is shaping up more positively tp present opportunities for those positioned to participate.

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The Market Focus program may be able to assist you with execution of this strategy or one that fits your marketing plan.

Sign up to receive more free Market Focus News Alerts!

Disclaimer:

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results.

Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.

There is no guarantee that the advice we give will result in profitable trades.

The views and opinions expressed in this newsletter are those of the author and do not reflect those of R.J. O’Brien & Associates LLC. This report may contain political opinions as well as market opinions and commentary. Any content provided by Commstock Investments or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Copyright © 2020 CommStock Investments, All Rights Reserved.