Monthly Report: October 1, 2015

Corn: The corn market is very polarized as we head into the month of September. The bulls are still counting on yield losses to support the market with the assumption that the excessive rains experienced in the eastern belt will be enough to drag the national average yield lower. The bears are focusing on demand related issues, most notably the export sales pace. Where do we stand? If you have been following our daily reports you are probably aware that we are focusing our attention on the poor market setup and poor demand.

The market setup: Managed money funds have been underwater for a good majority of 2015 and most recently because of their reluctance to reduce positions from the long side. Many of our fellow market analysts believe that the risk of their liquidation is lower because the NET long position has fallen from a high of 279,665 contracts on July 21st, to the current position of only 73,537 contracts (as of August 25th). While this is true, that NET reduction mostly came from new shorts entering the market, not from liquidation. The long side only liquidated 90,082 contracts during that time and have another 70,197 contracts to go just to get back to their lowest position size in 2015. We believe they will exit these positions before year end if the USDA doesn’t start to give them (and their investors) a reason to stay the course. The worst part of this scenario is that it may come at the worst possible time of year, when harvest pressure would be at its highest. Here is a summary of the long, short, and net positions held by the managed money in corn over the course of 2015:

There has also been a recent reduction of shorts by the commercials. We should be seeing this position build leading into harvest as farmer’s make cash grain sales at the elevator, however this has not been the case. This could also be a sign that the producer has a record amount of unsold grain pre-harvest and even more of a reason to see harvest pressure for cash flow and storage needs.

The poor demand setup: When we say poor demand setup, we are not talking about a reduction in demand for ethanol production, or from the livestock industry. Between those two sources, corn usage should be at an all-time high, up slightly from last year. However that is where the enthusiasm stops. The blend-wall and herd size are limiting the growth from those sectors, and we believe the USDA has already reached a max estimate for these categories. Now it comes to the exports. The USDA is forecasting a carryout of 1.713 billion bushels again next year, but that assumes export demand will remain at last year’s final demand of 1.850 billion bushels. Unfortunately, the forward export sales are running well behind. As of August 20th, the forward sales pace is only 67% of where it was at the same time last year. This is most likely related to the strong US Dollar and available supply from our competitors. The Dollar is 14% stronger than it was on this date in 2014 (that’s huge!) and total foreign corn carryout is about 6% higher as well. The following chart is the export sales pace “marketing-year-to-date” for 2013, 2014, and 2015.

To summarize we still believe a position of heavy sales (100% of expected) and as much basis risk as we can unload is the way to go. Basis was a problem at harvest last year and could be again this year with the USDA projecting the same amount of bushels at harvest. Our downside target would be in the low $3’s with last year’s low of $3.18 ¼ being a significant number. There is still a chance to see the USDA lower their yield estimate from the August WASDE like they did in 2010. For that risk, we like staying with the $4.00 calls on 50% of production. To see the rest of the recommendations and how we got to this point, please check out that section at the bottom of the email.

And just as a reminder to what happened last year at harvest, here is the chart of December 2014 corn:

Soybeans: A lot of the same talking points can be made for soybeans as for corn. Export sales are substantially less than they were at this time last year which is likely hinging on the strong US Dollar and world availability. There is a strong opposition from those who believe the US will experience production loss from late planting and excessive rains. Where do we stand? We think there are more cons than pros when we look at the factors affecting price action.

The first negative for soybeans would be the recent devaluation of the Chinese currency, the Yuan. Their forex system is quite unique in that it falls somewhere between a market based (free floating currency) and a government peg against the US Dollar. There are many who believe the Chinese should just let their currency float and be done with it, and that would likely change the import dynamics even more. To keep it simple, just know that a devaluation of the currency is seen as negative for commodities in general because it reduces their buying power.

Another negative is the export sales pace. The record South American production (and their tremendous portion of the record world carryout) is allowing for more price competition. The Brazilian currency, the Real, is trading at a 12 year low. South American farmers are getting more for their soybeans than they did when prices were at a record in 2008! Like corn, this is translating to less forward sales in the US and potentially a smaller share of that export business. The current US sales pace is running at only 57% of last year’s number, and 60.4% of the pace in 2013. Meanwhile, the USDA is only projecting an export sales decline of 5.5%, which may be optimistic. Even with this conservative demand reduction they are penciling in a 470 million bushel carryout! We think it is safe to say the US has a little wiggle room if the yields don’t come in as expected.

The market setup of soybeans is not as bad as it is for corn since the managed money has been quicker to reduce positions to a net neutral situation. They are however, holding a net long position considering the products. The NET breakdown of their holdings in the complex is: long 775 contracts of soybeans, short 9,007 soyoil, and long 45,128 soymeal. If crush margins start to fall toward historical norms that would reflect poorly for these positions!

While the board crush margin could potentially be a negative factor if the funds decide to liquidate their product holdings, it is also generally seen as supportive for a steady crush demand. Commercials are going to want to run at 100% capacity with crush well north of 100+. That means they will be consistent buyers as long as these margins remain in-tact. Crush demand is still capped by crush capacity however, and last year we likely tested the limits at 1.845 billion bushels. The USDA currently has their crush estimate set at 1.860.

To summarize we see the record world supply and currency problems as an ongoing negative force for beans. The market is already trading at contract lows, but we believe there is still downside risk from here. We have recently rolled down our long $10.40 November puts to the $9.40’s (collecting 92 cents) to allow for more upside potential in case yield variability becomes an issue, which at this point is the only hope for an extended soybean rally in our opinion. Currently we stand with 25% of production in straight sales, 75% of production in long $9.40 puts, and 50% of production in long $10.00 calls.

Our next monthly report will be on October 1st, 2015. If you have any questions about this report or other EHedger and AgYield services, please give us a call at 866-433-4371.

It’s an often phrase: I’ll sell my corn IF… The “if” can be anything, if it reaches my target price, if it looks like I will grow a decent crop, if basis gets to my target, etc. Many of these stipulations are in fact solid rationale for a marketing plan. Where we run into trouble is having unrealistic goals set in the first place, no contingency plan, or fail to make changes to lock in that goal after the target has been reached.

While this article may sound like the typical fear vs greed speech, it’s much more than that. It’s about making those hard decisions based on knowledgeable assessments of the potential outcomes, at any yield and price. Insurance provides the backdrop for this certainty, meaning you have guaranteed bushels to market against with confidence. A certain amount of those marketed bushels need to be “non-deliverable” to avoid oversold problems at harvest, but by making calculated marketing changes, you can improve your minimum return throughout the year.

For a case study let’s examine a theoretical Midwestern grower who has 2000 acres of corn-on-corn during this marketing year. His APH is 200bpa, his cost of production is $800 per acre, and he selects an 85% RP policy. To keep it simple we will assume his basis will be zero.

His guaranteed revenue is $705.50 per acre (calculated $4.15 x 85% x 200). Obviously this is below his cost of production of $800.00, but if he is able to grow his average of 200bpa he would be just fine selling those bushels at $4.15. If this producer decides not to sell anything and the price drops below $4.00 a bushel, he will quickly fall below his cost of production, even at his normal yield.

After some consideration and thoughtful analysis of how far corn would have to move to achieve his target, he sets his return on investment goal at 7% over cost, or $856 per acre. While this is his target, he is also aware that the market may not give him that opportunity, so he sets another goal to at least stay above breakeven assuming he will grow his average 200bpa. He sets out to find a plan that can try to achieve both. The following chart is his profitability as it stands after the insurance floor has been set and before any other marketing decisions have been made. I have highlighted the $4.00 level since that is the breakeven point.

As seen on the chart, the risk flatlines around $3.50. This is where the revenue policy will begin to pay if his yield averages 200 bpa. With that in mind, the producer implements the following strategy: Sells all of his expected production (200bpa) between futures and cash sales at the available price immediately after insurance was set, which in this case it was $4.15 on March 2nd. To keep his upside open to try to achieve his target return, he also sells an equal amount of the $3.50 December puts for 10 cents to help pay for December $4.50 calls at 23 cents. The net premium cost of the options was 13 cents which means he was able to keep a floor of $4.02 (13 cents minus a futures price of $4.15). The plan will keep revenue above costs as long as he gets his 200 yield or above, even if the market falls to $3.00. If corn rallies he still has the ability to make more with the $3.50-$4.50 put/call spread. The following chart shows this producer’s potential outcomes with the new strategy in place.

We all know how this marketing year has gone so far, corn broke down to $3.625 by June 15th only to rally to 4.54 ¼ on July 14th. Corn is back down to the mid $3.70’s as of the first trading day in August. Most businesses do not have to deal with this kind of price instability for their products! During this volatility, the example producer’s income fluctuated but at a much slower pace than the market. He had the confidence that he was going to be alright while the market was at the lows and still had his upside open to improve his floor on a rally. After the June 30th report, the producer decided to raise that minimum floor from the current level which was breakeven. He was comfortable at that point in the year because his corn was fully planted and he knew that his insurance would protect him in the event of a large yield loss. The target return of 7% was not possible yet but he had long option premium to manage. He sold half of his calls on the close of July 2nd. He also bought all of his short puts back since they were down to only a few cents. This allowed him to raise his minimum floor to $17 per acre, keep upside on 50% of production, and leave room to get that “double revenue” from the combined sales and indemnity payment in case the market fell below $3.50 by harvest. The chart below shows his latest profitability chart after the changes on July 2nd:

A month has gone by and the market is down significantly from the July 15th high. At this point in the year the producer still has many options to improve profitability. He could sell those $3.50 puts again for 10 cents and raise the floor by another $18 an acre, bringing him closer to that 7% target. Or he could let the market fluctuate. If CBOT corn were to fall to $3.32, the producer would still be able to reach that 7% return and lock it in by exiting the shorts using long futures.

This marketing year has been a testament that anything can happen. Most businesses do not have the price swings that farmers are currently facing, which means we have to think creatively. Hedging was very difficult with all of the analysis of crop size and fund positions throughout the summer, but knowledge of your positions allows us to cut through a lot of the noise and emotions, and focus on what really matters – securing farm income. This producer obviously made some decent moves throughout the year based on the market performance, however even if that rally never came in July he would have been above breakeven at today’s price with the original strategy implemented on March 2nd.

In 1983 the agricultural sector looked very strong. Farmland values had almost tripled in a decade’s time. Harvest prices were near their historical highs and farm profitability was elevated even though yields were sharply below their trendline average. Not many had predicted that in only a few short years farmland values would fall over 22% and total assets by 25% (source USDA). During this three year stretch companies that depended on farm incomes such as John Deere saw a sharp decline in revenues and share values. Perhaps the most surprising aspect of this decline was that it happened on record grain production years. These events have a very natural cycle however, since demand elasticity can have a time lag, especially for feeding livestock.

In more recent history, average farmland values have jumped 117% from 2003 to 2013 and in many areas values have tripled. Farmers had record corn prices and net income in 2012 after a large production decline and record insurance payments. Today we are looking at corn prices that are less than half of what they were in 2012. Net cash income was projected by the USDA to be down 22% in 2015 on their February Outlook Forum and prices have staged further declines since the report was released. We believe the market is in the downward leg of a large cyclical commodity bubble.

The general consensus of many analysts is that the industry is prepared for this decline, that all is priced into the market. However, there seems to be a large misconception that farmers are cash rich. Tax policy has facilitated large capex spending during these high income years in an attempt by the producers to avoid large tax liability. This spending has been in the form of land, machinery, irrigation, bin storage, and other value-added investments. But these assets are illiquid, and the lack of cash leaves many with severely limited resources to service the record amount of farm debt currently outstanding. Furthermore, many producers are still holding onto unpriced corn in the bin from 2014 and even some that has been commercially stored at high cost. Growers in this situation may now be looking at negative returns for two crop years in a row. In many cases we are seeing banks rolling operating debt from last year forward. If grain prices stay at these levels land values could quickly return to their trendline mean just as they did in the 1980’s. We see many parallels to the housing bubble and this is part of the reason we believe the industry is more susceptible to the adverse consequences of interest rate hikes.

Big things are happening over at AgYield, and we want to update you on your account. We have added even more features to the AgYield account you already know and love. We have highlighted some of the main features below, but if you would like to go in depth about the changes, please contact one of our AgYield consultants.

The biggest change in this update, is the ability to view your individual fields on a map. As before, you will have the option to still view them in a list. However, the map options allows you to see exact coordinates of your fields, color coded by crop type. The ability to filter by entity and county is still available for both list and map view. Lastly, you are now able to see each individual fields profitability; both on field and map views.

We realize this is not a major change, and won’t dramatically affect your use of the platform as you now know it. However, we think it gives our customers more flexibility and a visual representation of their operation. If you do not have your fields uploaded and need some assistance, please contact one of our AgYield associates; they will be more than happy to assist you. We will update you as more changes go live on the platform. We hope you enjoy the changes, let us know what you think!

As planting is in full swing (or wrapped up!) for farmers across the United States, we are noticing some unusual industry trends we wanted to discuss with our readers. Over at AgYield, we have been hearing more and more stories every week about farmers and bankers not having a good idea of where they stand financially.

Specifically, several weeks ago in Western Illinois, there was a land auction over a large piece of land. There were obviously many bidders on this land as it was a great piece of dirt in a desirable location. However, when the bidding was over and the auction ended something astonishing happened. The three highest bidders were unable to get funding from their bankers. How could farmers be in such a position where they aren’t sure if they have the appropriate funds or the ability to work with their banker to fund an investment in land?

Similarly, we are getting more feedback from bankers that they are now requiring secure hedge agreements for farmers–meaning the bank controls the assets that are deposited and withdrawn from the growers hedge account. It is very alarming when the bank is unsure about the repayment capacity of their growers. The fact the bank are taking these steps further illustrates the liquidity crunch that is taking place in the country.

As Banks are now beginning to dig deeper in their portfolio of farmers, they are discovering gaps and inefficiencies within the farmers financial plan. This is creating an inordinate amount of work for bankers.These same bankers are being forced to run additional risk discoveries this late in the game and having to present multiple farmers to the credit board for approval.Much of this could have been completely bypassed had they been caught earlier. What’s even more concerning is that some producers haven’t even had the opportunity to meet with their banker regarding renewals–and they’re already planting or done planting altogether.

The game is changing for farmers and bankers alike. So many of these problems that are popping up could have been avoided altogether had all parties involved had a better idea of where they stood financially. There are tools to help you get on the right track and know where you stand at all times; we just need to start using them! This is exactly why AgYield was created–created by farmers for farmers–to help you come out on top. At AgYield, we have been anticipating this environment for several years, helping growers position themselves to weather this financial storm. Now, more than ever, is the time to start taking control. Contact us at the information below if you feel you’re in a tight spot. We’re here to help.

During this busy time of year for Farmers, it seems there is a never ending to-do list that is constantly piling up. Preparing for planting season, anxiously trying to anticipate the weather, or even figuring out what you want to do with old crop are just a few of the major things that are on farmers’ minds coming into the spring months. In order to alleviate at least a little stress for the farmers, we took some time to speak with an Ag Lender to get a better idea of what they are looking for from the farmer this time of year, and how they can keep their meetings quick yet efficient.

We spoke with Jason Vanlanduit, Vice President of Central Bank of Illinois, headquartered in Geneseo, IL. He helped us to summarize this brief list, because this time of year is so busy for Ag Lenders and Farmers alike. According to Jason, these are the most important aspects going into spring:

1. Balance Sheet. An accurate balance sheet as of December 31st for the previous year is vital. It allows the Ag Lender a holistic look at your entire operation from the previous year.
2. Operations Income & Expenses. This can come into play more during Tax Planning sometimes, however; these are important in order to get a good estimate of where your prior year will end up profit or loss wise.
3. Projections. Projections the farmer has for the upcoming year are very important. Whether that be planting intentions, per acre production estimates, yield estimates, other loan obligations, etc. the Ag Lender needs to know them all. It is important that the Lender and Farmer are on the same page, and have a good idea of what the breakeven prices are.
4. Risk Management. In terms of Insurance and Marketing: What do you already have marketed for the upcoming year? What is your marketing plan moving forward? Where are your guarantee levels? The more the information or plan you have, the better! If you need help developing a marketing plan, we suggest speaking with a trusted advisor, such as AgYield.
5. An Open Mind. This one could go without further explanation, however, we’ll dive just a bit deeper. The Ag Lender has to take all of the financial information, along with the client’s character in order to justify continuing business forward. When margins are tight, that is when ongoing communication and an open mind will come into play. These tighter times build more loyalty and stronger bonds, as long as both parties are reaming truthful and open.

Some of these may seem like common sense, or things that every farmer should know. We are learning more and more, however, that some farmers push their bookkeeping to the backburner and are sometime unaware of their statistics from the year before. Therefore, these are things that the Ag Lenders needs to know, but also things that you should be aware of as well.

Having all of this information upfront, in extensive detail helps both parties enormously. If the lender can get all of this information upfront, this means they can put together a more accurate and timely presentation for the farmers Credit Renewal sooner in the operating year, providing peace of mind. When the farmers know their credit is available for their operation, timely decisions are able to be made in order to execute decisions. Therefore, don’t fear the meetings with your lenders and advisors. Come in with an open mind and abundant information and you should have smooth sailing into another year of loyal business together.

Let us know what you think about some of these tips Jason so graciously provided us with! Do you agree with what he has to say? Has taking any of these tips helped in expediting your lender meetings in the past?

We understand that hedging can be quite complicated and it takes a skilled individual to make all the correct, informed decisions. Utilizing a hedging strategy has multiple benefits, two of the most important are locking in favorable costs and reducing volatility.

Futures and options on agricultural commodities have been seeing phenomenal growth in trading volume in recent years, due to increased global demand and the expanded availability of electronic trading for these products. It is now more important than ever to understand how to incorporate these tools into the management of risk. We’ll take you through this blog post today to ensure you understand the basics of hedging.

For the purposes of this post, we’ll focus solely on corn, although the same scenarios would remain true with all grain commodities. Corn prices are established in two separate but related markets; the futures market and the cash market. In the futures market, a futures contract is a contractual agreement that allows the flexibility to hedge the corn price with the ability to exit before the delivery is required; it simply locks in a future price of a commodity at a specific point in time in the future. Most futures contracts are rolled before delivery takes place, although some people may chose not to. In the futures market, all contracts must be executed by a broker, and cleared through a clearing firm. The cash market is where the physical grain is handled; the local delivery point (elevators, co-ops, etc). The cash price varies by the marketing location and can change over time.

Now, let’s take a look at an example between the futures market and the cash market. Let’s say for example the price of corn futures is $4.00; the cash price is $3.80. The difference between the two is -$.20, which is commonly referred to as the basis.

For this scenario let’s assume we bought the future contract of corn for $4.00. If the futures price decreases by $.50, and the cash price also decreases by $.50, we would have a $.50 gain in our futures account because we used a hedging strategy and were able to lock in the price. In the picture below, you can see a visual diagram of this profit and loss.

Since no one can actually “predict” where the market may go, there is always an equal chance for profit and loss in the futures market. However, one of the biggest advantages of hedging in the futures market is the flexibility to exit a position, without actual delivery of the commodity. In a marked to market futures account, profit and loss are settled on a daily basis.

February and March present a very critical decision making time for farmers. Between February 27th, the last day of the price discovery period for federal crop insurance, and March 15th when the producer has to have a policy selected and signed for, farmers have a lot of vital, operating altering decisions to make. Farmers also need to be updating their base acres with their local FSA for the new farm programs that are going into effect. To see a full list of your states deadlines, please see the RMA website.

We understand that it can save time and appear to be easier to stick with a policy or strategy that you have used year over year, however, that could be an ineffective way to manage your way through this tough marketing year. There are going to be situations where thinking outside of the box and using tools that a producer may have never used will be necessary to eliminate risk and lock in margins. Grace Hopper, an American Computer Scientist once said, “The most dangerous phrase in the language is ‘we’ve always done it this way'”.

At AgYield, we could not agree with Grace more. This is why we have had to lean on the new and improved AgYield 3.0 to analyze complex crop insurance decisions and look to see what strategies should be put in place to reduce risk and lock in margins.

AgYield can help you analyze how different factors will affect your farm. You need to eliminate the guesswork in your marketing plan. Think about your operation from a different point of view this year.

The USDA’s Risk Management Agency (RMA) announced in late 2014 the release of Whole Farm Revenue Protection crop insurance for the 2015 crop year. This allows producers to insure 50-85% of their whole farm revenue, making crop insurance more affordable for producers. It also allows for farmers to embrace more crop diversity, and helps support a wider variety of foods. The plan aims to protect farmers with up to $8.5 million in insured revenue, including those with specialty or organic commodities (crop & livestock), or those marketing to local, regional, farm-identity preserved, specialty, or direct markets.

The new Whole Farm Revenue Protection combines two well known plans, Adjusted Gross Revenue (AGR) and Adjusted Gross Revenue Lite (AGR-Lite). The primary changes in this new plan include a wider range of coverage levels, replanting coverage, livestock and crop coverage, provisions that increase coverage for expanding operations, a higher maximum amount of coverage and the inclusion of market readiness costs in the coverage.

The policy is currently available in 45 states, and to see if it is available in your state, we recommend checking out the USDA RMA website here for more information. The sales closing date is set for March 15, 2015 for the 2015 crop year, and sold through your preferred crop insurance agent. AgYield recommends consulting with your crop insurance agent to see if this is a viable plan for your operation.

What are your opinions and experiences with Whole Farm Revenue Protection thus far? We’d love to hear some opinions of real farmers out there. Feel free to tweet us @agyield.

Despite what some may think, the Winter proves to be quite a busy season for farmers. Although there is no heavy duty planting and harvesting, there is still plenty to do. With some farming operations as complex as they are now, many farmers have to spend majority of their Winters prepping and planning for the year ahead. Below, we have compiled a list for new farmers on what they should focus their efforts on in the Winter months, should they be feeling lost.

1. Moving Grain. With grain yields at a record high, many farmers have a large volume of corn and beans to move this Winter. The unpredictable Winter weather can make this task more difficult than originally anticipated. That’s why it is so important to ensure you are taking the proper precautions and traveling safely to your destinations.
2. Prepare Equipment. Finding time during the busy season for repairs and preventative maintenance on essential equipment is almost non-existent. If a vital tractor, truck, combine, etc should go down during harvest, that could substantially put your operation at bay and your schedule greatly delayed. Take the time during the Winter to ensure that everything is running smoothly for all of your machines in order to avoid the stress of having to fix something during peak times.
3. Budget. Winter is sometimes the only opportunity that farmers have to crunch numbers. Before planning for the next year, it is important to look at where you stood for the year before. That way, you can make informed decisions about the years ahead in order to be more profitable, year after year. If you are having difficulties with this step, keep in mind there are resources out there to help you with these projections. Contact AgYield and have one of the representatives talk with you about how you can eliminate the guesswork from your operation.
4. Meetings.The agriculture industry is fast paced and ever changing. Going to a variety of meetings during the Winter can help farmers keep up to date on what is changing in their industry. Whether that be meeting with your banker, crop insurance agent, trusted advisor or going to a seminar, all can be very helpful. Not only does it help you gather vital information relevant to your operation, it is also a great way to meet other farmers and grow a network that you can thrive in.

Even though it appears that Winter just began, Spring will be right around the corner sooner than we expect. I can’t seem to believe that January is half way over already! Take this opportunity to look at your to-do list and see what else you need to accomplish during these cold months that lay ahead.