We've all seen the classic scene in sports movies where the disheveled and frustrated coach hastily draws a new play on the locker room blackboard at halftime. Players gather closely around, bewildered at first by the flurry of Xs and Os all over the board, but then come to the realization that the coach must be an absolute genius. In Hollywood, the play always turns out to win the game. In real life, more often than not, the play tends to not work any better than the previous plays, thereby not changing the inevitable outcome of the game.
Those of you who have read my report review, "Now That's a Yield!" on DTN Thursday, know USDA's new production and ending stocks numbers didn't change the game in corn, but rather put producers still holding newly harvested cash bushels further behind. Furthermore, if you've read my previous columns "Stayin' Alive with The Gambler" (10/20/17) and "Knowing When to Walk Away" (11/03/17) you're familiar with the original game plan to not hold cash corn any longer than necessary. What the November USDA numbers did was to change the game plan through the last three quarters of the 2017-2018 marketing year.
I've included a monthly close-only chart for the DTN National Corn Index (NCI.X, national average cash price) with this column. The white background of the chart combined with the variety of colored circles, or Os, brings to mind a white board (rather than a classic white on black chalkboard) similar to the one hanging on the wall behind my desk. The blue, green, and red circles lay out the possible path of the NCI.X, culminating with a possible monthly close in August or September 2018 near $2.63.
How could this happen? Again, going back to my report review, USDA raised the crossbar for 2017-2018 by upping its domestic ending stocks guess to 2.487 bb, creating an ending stocks-to-use estimate of 17.2%. And, unlike USDA's ever-shrinking domestic soybean ending stocks estimates, its guesses toward corn ending stocks don't change a great deal through the September Quarterly Stocks report. Given the potential for a 17%-plus ending stocks-to-use next September 1, the trendline figure for the national average cash price for corn would be approximately $2.60, with a potential final range from $2.90 to $2.15. As of this writing, the NCI.X was calculated at $3.01 1/2 and averaging $3.07 for the marketing year.
So, what's the new play for those holding cash grain, trying to gain at least some market advantage?
First, we have to understand the structure of the market has not changed. The market's major (long-term) trend remains down on monthly charts and its long-term forward curve bearish. This creates a long-term extremely bearish Type 9 market, one where the optimum position is to be short cash or sold out of production (naturally).
But most of us aren't in that position, for any number of reasons, and need a new play.
Producers will be bombarded with a number of origination contracts over the course of the fall and winter, all promising the potential to take advantage of the strong carry in the corn market and offering higher prices if/when the market rallies. However, make sure you read the fine print regarding the other side: What happens if the futures market doesn't rally? Many of these new origination contracts are little different than taking out a government loan, some paying 70% of the agreed-to cash price and withholding the other 30% to see what happens in the market over a set period of time.
If I could make a suggestion to you: Before signing one of these long-term origination contracts you should attend the annual DTN/The Progressive Farmer Ag Summit in Chicago in early December, sign up for the DTN Marketing University, and sit in on my friend Tregg Cronin's talk on these types of contracts. Nobody breaks them down better for farmers than Tregg.
A less expensive alternative to doing the same thing as some of these origination contracts is to establish a Minimum Price contract with your elevator/terminal. To do this one sells cash bushels and immediately replaces with an at-the-money call option. Using DTN's Six Factors, we see that seasonally both futures and cash tend to trend up through early June, and given corn's low market volatility, we could maximize time value by purchasing a July call option. Note that on the above-mentioned chart, the last three years have seen high monthly closes in the May to June timeframe.
Here's how it would look Friday morning. Let's say we sell cash at $3.00 and concurrently buy a July $3.70 call option at $0.20 (roughly half of total cost of storage and interest for the same time period). This gives us a minimum cash price of $2.80 ($3.00 minus the option premium) and stops storage on those cash bushels. If July corn, somehow, rallies to the projected $4.06 (based on the futures market monthly chart) by early June, the July $3.70 call option could be worth between $0.45 1n $0.50 cents. Selling the option as the futures market tops out would raise the cash price received to $3.25 to $3.30.
On the other hand, if corn futures fall below the expected early spring floor of $3.39 (again, nearby futures are already pressing $3.40) and keep falling through the summer, as the projected ending stocks-to-use figure would suggest, the July call option could expire at $0 and leave the minimum cash price received at $2.80.
Just a reminder, this is not an official DTN recommendation, but a discussion of a possible strategy given the market structure at this time.
If one didn't already price cash grain or short-hedge with the December contract providing the opportunity to roll out to a deferred futures contract and take advantage of the strong carry, then doing so now could be difficult. What tends to happen given the market structure corn is showing is what I call the "Down Escalator Scenario," where each successive futures contract moves down to the price where the previous contract went off the board. A strong carry does not promise a rally in the future, but usually the opposite. An important thing to keep in mind as we draw up a new game plan on the white board.
Editor's Note: To take part in our DTN University sessions and attend the full DTN/The Progressive Farmer Ag Summit, visit our registration page here:
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Darin Newsom can be reached at firstname.lastname@example.org
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