April 11, 2016

March was an interesting month for grains and oilseeds, culminated by the March 31st report. In this monthly update we are going to discuss some of the problems that have led to the current global supply gluts. It is our belief that markets will continue to have a difficult time holding support over the course of this year unless we see a sudden supply shock such as a drought. World supply continues to expand at a time that it should be contracting. For these reasons, we continue to advocate a sold out old-crop position, just as we have been since October. For new crop, this letter will touch on the corn-soybean ratio, Planting Intentions Report, and the demand impact that South America and China may have on US grains this year.

POST PLANTING INTENTIONS REPORT
The March 31st Planting Intentions release rocked the market with many more corn and soybean acres than anticipated. At a combined 175.84 million, this represents the largest combined corn and soybean acreage in history. From our point of view this is negative for both crops as there are more acres available than are needed for either.

This survey based report had corn at 93.601 million, 2.6 million above the highest estimate and 5.6 million above last year. The initial corn market reaction was clearly negative as it priced in the chance to see a 2.5 + billion bushel carryout or more in 2016-2017. Soybean acres were reported at 82.236 million, down about 800,000 from the average analyst estimate.

These acres are a problem for row crop growers because the market needs to reduce production for these crops, not expand it. Initially, the market’s focus over the next few months is to cut corn acres; 93.6 million is too much for the market to handle without prices suffering.

At this point the corn-bean price ratio has rallied to a level that should entice some corn acres to swap back to soybeans. We estimate corn will drop 1.6 million and beans will pick up 1.5 million. We have included these estimates in our forward Supply and Demand tables. As you can see, even if some acres switch from corn back into soybeans we are looking at large carryouts both in terms of total bushels and stocks-to-use ratios (about 17% for both).

CORN

The latest Quarterly report showed March 1st corn stocks at 7.808 billion bushels. The quarterly disappearance was 32 million less than that of a year ago which implies weaker demand, something we have been projecting since early harvest. The USDA has been slow to reduce their demand estimates and have corn carryout pegged at 1.837 billion bushels. At AgYield we have slightly lower demand estimates due to export sales trends and the quarterly disappearance. For those reasons we are using a slightly higher carryout of 1.912 billion.

Our new crop estimates place carryout closer to 2.385 billion bushels! This is actually a conservative projection considering the 1.6 million acres we are taking away from corn and factoring in a record demand of 13.750 billion. The yield estimate of 168 is actually taken directly from the USDA’s February Ag Outlook Forum. The 30 year trendline yield may be a few bushels behind this, however even a 164.5 yield would still project carryout north of 2.2 billion.

Although we have factored a record demand estimate we know it will be difficult for that to actualize unless the market makes it happen by adjusting prices. To see another 200 to 300 million US bushels consumed next year may have to come at the expense of either a price drop, US currency devaluation, and/or a supply problem from a competitor. Otherwise, we see Argentina and Brazil coming in with even heavier competition as the US is no longer the world’s low cost corn producer. Some of the recent Chinese policy changes are also likely to have a negative impact on our forward demand.

ARGENTINA
Argentina elected a very pro-ag president, Mauricio Macri, back in October. Immediately after taking office Macri allowed the Argentine Peso to free float on the world market by lifting capital controls. This resulted in the following currency move.

This chart is the one year currency move of the USD/ARS. Basically it’s an illustration of how much better off the Argentine farmer is from a year ago. The currency has collapsed by 64% which means more peso’s per bushel received just as the falling US dollar helped US growers receive more dollars per bushel. In theory, this would make them more competitive as they are more likely to sell than store now that they are receiving fair value for their grain.

Not only has Macri let their currency free-float, he has also eliminated corn and wheat export licenses and tariffs. This has obviously opened the door for more of these acres but it goes beyond that. The economics allow those producers to plant a wider variety of crops and therefore they have better yield potential in the future. We expect these changes to not only produce more corn acres but higher yields as well.

CHINA
Chinese policy changes have been critical to many commodities. They have been unloading stockpiles of copper, steel, cotton and vegetable oils. And now the government is taking steps to reduce their largest position which is actually in corn. As a country they are expected to carry an estimated 4.3 billion bushels into 16/17. This is the USDA estimate and some believe it may be much, much larger than that. This carryout represents over 51% of their actual use for the year. It also represents a failed government policy. The Chinese have attempted to subsidize their growers with a government purchase program that was often valued above the international corn price. By doing this they have attracted a large increase in corn equivalent imports into the country. Now they have a major problem because they have to reduce their holdings during a supply glut. They timed it perfectly, buying it on historical highs and are now about to liquidate on 10 year lows.

To put the size of the Chinese carryout into context, consider the goal of getting down to a stocks to use ratio of 10%. That would be equivalent to taking out 20 million acres of US corn production, acres that would head to other row crops. That is exactly what China is planning for the next 4 to 5 years. They recently announced some acreage swap goals, aiming to reduce corn acres by 8.2 million by the year 2020. The acres would swap to soybeans and potatoes. Soybeans are likely to pick-up most of that lost acreage. This isn’t the best news for the US grower. Less soybean demand from China could eventually lead to higher US carryouts, pushing both crop prices lower in the process. Especially when South America just ramped up production and is going to be competing heavily for that demand.

The bottom line is we believe the recent Chinese policy changes are a bigger bearish factor in the medium to long term than is currently being discussed in the general marketplace.

OLD CROP EXPORT SALES
Weekly export sales have been better over the last few months however they need to remain elevated to catch up to the USDA’s forecast. By this time of year, the US has typically sold about 87% of what it will actually ship for the marketing year. This year, the US has sold 78%. This 9% difference represents a lag of 150 million bushels under the USDA WASDE estimates. Nine percent is still better than six weeks ago when it was 16%, which implies that sales have been stronger and are attempting to close the gap.

Sales typically start to slow down by June as the marketing year comes to an end and South America takes over a lot of that business. To catch up to the USDA pace by then, sales will have to average about 914,000 MT per week. This is certainly possible since the 4 week average is 941,500. However, if sales taper off to their normal spring/summer pace, carryout will grow 150 million bushels and settle near 2.00 billion bushels. Our assumption is that they will lose 50 of that 150 million in projected demand.

SOYBEANS

Like corn, soybeans will have an uphill battle in 2016, especially if Chinese soy demand remains flat. The world is carrying a record amount of soybeans with no signs of production slowing down. If if the March 31st bean acreage estimate actualized that would be enough acres to grow carryout in 2016.

We believe crush demand is slightly lower than the USDA is writing down. By lowering crush our 2015/16 carryout would jump to 490 million bushels. AgYield’s 2016 carryout estimate is even larger at 640 million, and that is even after factoring a demand increase of 111 million!

The US is not the world’s low cost soy producer. This was evident in 2015/16 as our exports dropped off 153 million bushels from 2014/15. Why did this happen, was demand poor? Actually total soybean use spiked 5.4% as China loaded up on cheap beans. The US didn’t reap the benefit of that excess use for two reasons, the strong US Dollar and large basis discount from Brazil. Had the USD/BRAZILIAN REAL currency pair been weaker during this time, maybe the US would’ve picked up more of that market share.

This Chinese corn stocks problem is just as big for beans as it is for corn. Through support prices, the Chinese government has kept their domestic corn prices very high versus imported soybean prices and consequently soybean meal prices. Because of this, their feed ratio has been running very “hot” for years, meaning their feed rations are much higher in soybean meal than corn compared to the rest of the world. Naturally, this feed ratio should change as their domestic prices realign with world prices for corn and soybeans.

Chinese demand doesn’t have to shrink year-over-year for prices to decline. We believe even an unchanged demand would be negative. Yields continue to grow and more and more ground has been allocated to beans around the world.

WHEAT

Corn and soybeans have built large supply gluts, however wheat is even worse. The following chart shows global stocks-to-use ratios for the 3 main row crops.

World wheat stocks have been growing for 4 years and ending stocks are projected to be over 4 months of demand! This is the highest wheat stocks-use level since 2001, and back then wheat prices were trading $2.75 a bushel!

The market is doing its job to reduce wheat acres in the US but that is part of the reason corn and bean ground is projected to be a record this year. All-wheat acres in the US are expected to be down 9% in 2016 at 49.6 million. This should help the US reduce some of its own wheat carryout burden which is approaching one billion bushels.

Given the supply burden in the US and around the world, wheat isn’t likely to enter a bull market anytime soon. This is why the funds have been so comfortable holding short positions that represent almost 1/5th of the total open interest. The cost of carry is also historically very high for wheat, which means they have tremendous staying power if they want to remain short for an extended period of time.

To summarize, world production is still pointing to growing stocks not declining. More and more countries are trying to compete with the US and the supply glut doesn’t appear to be going away anytime soon. As the market looks for signs of bottoming, it needs to see global production growth begin to slow down, and by all accounts we see the opposite. Growth appears to be accelerating. Without a sudden and dramatic supply shock this bearish trend will be difficult to change.

With a strong Dollar, the US is feeling the full force of this extra supply through reduced export demand. However the US also has the best government support program for growers. This is likely why acres are being added when they so desperately need to be taken out for profitability to come back to a sustainable path.

To see true bull markets form in this global supply situation, we believe the national average yields need to drop by +13 bushels for corn, +3.5 for soybeans, and +7.5 for wheat. This is what it would take to get US stocks-use below 10%. This is certainly possible as we have seen in recent years, however it is not probable. There is still plenty of downside risk despite what many in the industry believe. Our new crop positions are a way to be hedged until crop insurance is likely to take over, while also keeping the upside open in case weather hits this spring/summer. For more information about our marketing approach, please give us a call at 855-266-6241

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Febuary 1, 2016

January was a positive month for corn and soybeans after three straight months of decline. The strength came after the January 12th report which showed slightly less stocks held than anticipated. The investment community may have been caught a little short going into this period as well which helped grains rally into the end of the month.

In this monthly update we will focus on the upcoming acreage battle. We will also take a closer look at demand trends, especially the weak corn sales. Our opinion is that poor demand could still weigh on the markets for the next few WASDE reports.

2016 Acreage: The January 12th report was somewhat of a bombshell for winter wheat. The USDA reported all-winter wheat acres at 36.6 million which was well below the average market guess and down nearly 3 million from 2015. After the vomitoxin problems, low prices, and extreme carryouts, this reduction is understandable. But it still begs the question… where do those extra acres go this spring?

Acreage breakdown for the last 3 years:

Without knowing the prices of the next 2-3 months, we believe soybean acres stand to gain the most ground this year. If corn were to gain 25-30 cents in the next month that might change the outcome, however with what we know right now it looks like beans stand to pick up a good amount of acres.

WHY? For starters, soybeans are the obvious choice in a cost cutting environment, which we are certainly in. Plus, many producers have just come off of knock-out bean yields in 2015 and are feeling a little more comfortable designating a larger portion of their acreage to the complex. It also comes down to lending standards. Some margins are so tight that lines of credit have actually restricted some acres from going all corn, due to the maximum loan value per acre. Ultimately, these macro shifts all point to more bean acres in 2016.

Where are these acres coming from? Well winter wheat just lost 3 million acres and we think spring wheat will lose another million as well. Assuming that the US has a normal planting season, another 2-4 million acres WON’T go to preventive plant this year. Cotton could gain up to a million acres, but we think those will be mostly swapped out of corn in those regions. Whats leftover for large row-crop acres will likely go to beans. In that case we could see up to 4 million more bean acres in 2016!

It’s not that beans NEED the acres, in fact it’s quite the contrary. What US growers really need is LESS North American acres in order for prices to stabilize. How does that happen? The infrastructure and debt are already there, it will just take more time for a significant amount of acres to get worked back into CRP. With a record amount of South American beans for sale and an overly-abundant US carryout, the prospects of a soybean rally are starting to dwindle. If we get 85.0+ million bean acres have another favorable yield, US carryout is likely to grow again. There is always a chance for drought in August to put us back into a bull market. We aren’t ruling anything out, however in the mean time the status-quo is negative.

But China is buying a record amount of beans, that should help right?
China has proved to be a price buyer this year, booking a record amount of beans as prices collapsed. Still, their record appetite isn’t causing a supply disruption, the world is meeting their demand needs. This can be seen in the following chart which shows not only a growing world carryout, but a stable stocks-use ratio near the record high:

China’s demand won’t likely bail the bean market out this year, unless a production cut happens in the US. That just puts extra pressure to meet those yields. The only thing we can say is that when a weather event does finally occur the Chinese factor will make it extra volatile.

2016 Corn Acres: Even though the combined corn-bean acreage pie is expected to grow, corn acres are expected to remain flat. If some acres will be lost to cotton, some of the would be prevent-plant and lost wheat acres could go to corn to make up the difference.

The 2016 corn-bean ratio fell to 2.11 on September 11th but has been increasing ever since. A high ratio entices bean acres, a low ratio entices corn acres. Fundamentally the world outlook has changed since the ratio bottomed in September. The 2015 US corn production is much higher than what was anticipated at the time. Also, the Argentine general elections were held in October and November. When Mauricio Macri won, the market started to price in the pro-ag policies in Argentina that will lead to renewed export competition.

2015/2016 Corn Demand
Part of corn’s problem comes down to the lack of demand for exports. We have been saying this for months. Export sales do not match the USDA export estimate and as such they need to lower their expectations on the WASDE reports. In their typical fashion the USDA has been slow to react when it comes to demand trends. Over the last three reports they have lowered their export demand by 150 million bushels, 50 million at a time. This is why the January 12th report had final carryout above the average guess even though quarterly stocks were below estimates. Even after these adjustments the current commitments are about 310 million bushels short of what’s needed to pace with the current USDA projection. With the sales window closing and Argentina still undercutting the US, we don’t see that export revival happening. Therefore, the USDA will likely have to keep cutting the demand by 50 million bushels at a time for the next 4 months at least. The growing WASDE carryouts could negatively impact the market as everyone starts to concede that the US will have a 2.0+ billion bushel carryout this year.

And that chart could result in this Supply and Demand table:

2015/2016 Soybean Demand
Last week the market was shocked to learn about the cancellation of 395,000 MT of soybeans that had been going to China. This cancellation didn’t make a whole lot of sense since it is still not certain that Brazil will be able to fulfill some of its early bookings with China in a timely manner. Even before this cancellation, the sales pace has been behind the USDA by about 97 million bushels. This may not seem like a lot compared to the corn sales deficit, however it would raise carryout by over 22% if those bushels stayed in the US. There are also over 2.4 million MT of soybean sales outstanding to China that are also susceptible to cancellations like we saw last week.

Crush margins have rallied some since our last report but still remain depressed compared to their 50 and 100 day moving averages. It is unlikely for crush to hold a record pace and for that reason we have our estimate down 50 million from the USDA.

March Board Crush Margins:

To conclude we do not believe the market setup has improved since our last monthly report. The January rally should be viewed as a selling opportunity for those that need to catchup on old crop sales. We recommend staying with our current recommendations which are located in that section below. If you have any questions please give us a call or email info@agyield.com

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January 5, 2016

December was a weak month for grains, a culmination of the year apparently. From December 31st 2014 through December 31st 2015, March corn was down 70 ½ cents. There were only 13 trading days from late June through early July when corn could be sold higher than it was at the beginning of the year.

That amounts to a 16.42% loss annually for the forward contract. Interestingly, many commodities should expect to see that kind of carry lost even in a sideways market this year. The current spread from March 16 corn to March 17 for example is 9%. The current cost of carry for crude oil is over 21%! This is a major problem for the investment community that has become an even larger portion of price discovery recently.

Investment money, primarily index funds, hedge funds, ETFs, and large speculative traders, has an uphill battle with carry. Carry is defined as the premium the future month contracts hold over the front month, due to the cost of storage and interest rates. As the front month comes off the board, the next lead month tends to ‘lose’ that premium if prices are stagnant and sideways. Think of it as a negative dividend for those holding long positions.

Over the last several years, funds have poured into long commodity investments to keep a portion of the portfolio in an inflation hedge. Commodities were viewed as scarce at the time, and the ideas of peak crude oil, endless wars in the Middle East, cheap monetary policy, and a rising global population all added to the fear and conviction of the trade. There was actually a backward market for many of these products as supplies dwindled, meaning the long position holder was able to roll and collect money. This probably helped the position stay in place for longer than it should have. However the market has changed.

The world has risen to the demand needs and stock piles have been rebuilt. Not only in grains but in almost every commodity sector around the globe. A few years of great production has resulted in a complete reversal of those bull market years. This is where the funds come in. All of these long-only products that were so popular have taken time to unwind. And in a carry market, the longer they go without a rally, the more they lose in carrying costs.

In addition to this, a key grain chart has just broken through an important target. The combined price of corn, soybeans, and wheat just broke through the support level that has been held for years.

There is still plenty of investment money that could come out of the market which is one of the many concerns we have for price risk in grains. To get back down to January 09 holdings index funds would have to dump over 125,000 contracts.

Commodity Index Funds Holdings of Corn, Soybeans, and Wheat

Corn Outlook
Last month we talked about why corn was pressing the contract lows and we will continue to focus on those same unanswered problems in the market. The US market share of exports continues to decline, farmers hold a record amount of unsold bushels in the bin, and an upcoming Argentine crop is currently offered cheaper than US corn.

What’s different today is that more time has passed which means the sales window is that much smaller to see a rebound. Also, the South American growing season is well underway and weather has not been enough of a problem to warrant a yield reduction. As time goes on, and their crop is realized, even more premium could come out of the market. Traditionally, US markets look for a rally to encourage acres heading into spring, but a rally from what level?

Exports: We have discussed the slow sales pace that continues to raise the US carryout expectations. The USDA acknowledged this in their December WASDE report by reducing corn exports by another 50 million bushels. We believe they have to ultimately reduce that by 250 million which would bring us to a final 2015 corn carryout of 2.035 billion bushels.

To support why exports could be down 250 million bushels (or more):

What is possible for the price of corn? The two year front month low is $3.18 ¼, we still think that is a potential risk for old crop corn if panic selling ensues. A lot of inputs and debt need to be paid for in the next few months, and that sell pressure is not likely to be met with large end user buying if they have already booked up their flat price needs on the board. The market is capable of lower prices despite those analysts that continue to call for a bottom (many have been since October 2nd). There is still a potential for a weather event in South America this year but those chances are slowly eroding.

2015 CORN POSITIONS
Our old crop positions stand at 100% sold at an average futures price of $4.23. We aren’t recommending a re-ownership strategy at this time but have done some call options for those who are looking for the upside potential. Bean calls have a nice volatility advantage over corn right now which means we can get a larger position on for a lower price but are subject to the bean/corn ratio risk. Since long option risk is defined, we aren’t too worried about the cross hedge and find the benefits to outweigh the risks in many cases. Please call your broker if you want more details on this.

2016 CORN POSITIONS
The new crop position stands at 30% sold using the May 17 futures at an average price of $4.32 ¼, short 50% of production in December $3.50 puts, long 50% in December $4.50 calls for a net price of 12 cents paid (was 10 cents but add 2 cents from $6 call exit – see below).
Update since last month’s letter:
Bought $3.70 Short-Dated New-Crop Corn puts on 85% of production for 2 1/2 cents. (This was to protect the crop insurance revenue guarantee.)
Bought $6.00 December Corn calls for 2 cents (an exit order to once again keep upside open)

Soybean Outlook
Last month we talked about the upcoming Argentine Peso devaluation and its impact on their soybean sales. By that time, it was becoming clear that the new President, Mauricio Macri, would lift capital controls and allow their currency to free float. This resulted in the ARGY falling from 9.77 pesos per dollar to the current price of 13.72. To Argentine farmers, that would equate to a 40% increase in the price of soybeans virtually overnight, on top of a 5% export tax reduction at the same time. While this has sparked some farmer selling down there, it has been less than expected. Analysts were guessing anywhere from 300-500 million bushels to be sold for export, and so far it has only been about 100 million.

Even though Argentine sales have been slow, CBOT futures continue to gravitate toward the contract lows. This has a lot to do with favorable growing conditions in Brazil (generally favorable). If Brazil produces a 100+ million MT soy crop this year, prices could really surprise us to the downside. The demand for US soybeans has been slower than anticipated so far which is also building our domestic stocks.

Export Sales
Soy sales are running behind the pace needed to reach the USDA estimate. For that reason we have lowered our final export demand estimate to 1.625 million bushels, which is 90 million less than the current USDA estimate. The sales window is much shorter for beans than it is corn because of the size of Brazil’s production. Over the last 5 years, the US has sold on average 87% of its final export demand by December 29th. This year, the US has sold 80% which is 109 million bushels short of where it should be to meet the USDA estimate. However much these sales fall short is just going to get tacked on to the final carryout.

Another alarming figure is the sharp decline in crush margins. For a long time this year the market was experiencing very favorable levels which suggested a record crush pace. The USDA was still forecasting a record crush demand on the December WASDE report. Now a different picture is starting to emerge. The last NOPA crush estimate missed by over 5.5 million bushels. Crush margins have tanked and there are reports of Argentine meal imports. Between low margins, fresh imports, and an increased use of US DDGs, we have had to start lowering our own crush demand estimate by 50 million bushels. Without a yield change in January, those two demand reductions raises the carryout by over 100 million bushels from the December estimate.

It is too soon to say that the South American crop is made, but assuming their crop has no more issues we are concerned about the downside. That is why we want to remain with the current hedge recommendations and have sold more beans during the December rally.

2015 SOYBEAN POSITIONS
We should be 100% sold with an average price of $10.03. Like corn, we have not officially recommended to buy calls since we have technically closed out this marketing year. Soy volatility is low right now which means the call options are not a bad price for what they provide. We expect normal volatility to resume through the March 31st planting intentions report.

2016 SOYBEAN POSITIONS
Coming into December we had recommended to be 25% sold at an average price of $9.225 plus another 75% in put protection using March $8.00’s for 5 1/2 cents.
Updates in December:
We have since added another 15% in May 17 futures at $9.29. To keep our upside open, we sold $8.00 November puts and bought $10.00 November calls on 50% of production for an average price of 8.625 cents. And finally, we bought the Nov16-May17 bull spreads at -14 cents on 25% of production, which will also help build upside potential for this low margin environment

In conclusion, we are still very concerned about prices sliding lower because of the record world supply and the poor market setup. We will have more information about the upcoming January reports in next few EHedger evening commentaries. If you have questions about this letter or our current positions, please call us at 866-433-471 or email info@ehedger.com.

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December 1, 2015

November net changes:
December corn 17 ¼ cents lower
January soybeans 4 ¾ cents lower
December wheat 62 cents lower

November has passed and new contract lows have been made for corn, soybeans, and wheat. The sell pressure continues to come from the investment community and the managed money has built a decent short position once again. Meanwhile the US grower is still holding the bulk of the ownership. Volatility has remained exceptionally low, which may present some opportunities prior to the January reports. The market will continue to fight the record world supplies while trying to account for weather risk premium in South America. Without a weather event the currency and supply gluts are likely to be heavy burdens for grains.

CORN

Our corn market outlook hasn’t changed much in the past 30 days. It has become abundantly clear that the crop was bigger than expected which is why futures hit new contract lows recently rather than making an early harvest bottom like so many analysts had anticipated. The hedge funds appear to be front running the producer, building a large short position with the knowledge that heavy farmer selling is likely to come behind them in the coming months. Judging by the record long-only commercial position in November, it looks like end users have booked a fair share of coverage already. The question remains, who now can step in to bid the market higher, and why would they?

Managed Money Net and Commercial Long Only Positions

South American Competition
The flurry of headlines coming out of Buenos Aires have been mostly positive, bringing hope for many of those citizens who have been suppressed by the socialist agenda of the previous administration. The new President elect, Mauricio Macri, is expected to bring a pro-business agenda and give their agricultural sector a large boost with favorable policies. The problem however is this situation doesn’t bode well for the US producer who now has more competition from a low cost competitor ramping up production. All of the focus thus far has centered on the short term implications; mainly the fact that the market wouldn’t be able to handle the record soybean supply that Argentina currently holds without a large price decline. While this is a concern, the impact of a vibrant Argentine Ag sector will certainly be noticed in the years to come. As you can see from the chart below, Argentina has consistently held the world’s second place title for corn exports, obviously the US takes first. However Argentina has slipped in the last five years and Brazil now holds that market share.

The first thing that Macri is expected to do is lower the corn and wheat export tariffs to zero which will encourage producers to plant what works for them, not what public policy dictates. Argentine corn hectares should be up substantially next year as a result, especially with so many years of planting beans-on-beans. The US is already having trouble competing for market share this year due to the currency disadvantage. Emerging market currencies like the Brazilian Real and Ukrainian Hryvnia have been historically weak which has helped facilitate exports.

The bottom line is that Argentina’s currency is about to go through a major devaluation while their supply gets a boost and this could make it harder for any rally of substance to occur without a major world supply disruption. That is not to say that a rally can’t happen, but if it did, we would be willing sellers with everything currently known.

EPA Announcement
The EPA was out with its Renewable fuels requirement on Monday. The increases were actually quite large, about 11% from the actual observed volume in 2014. This could positively impact corn usage in 2016 but estimates are running anywhere from 50 to 125 million bushels, but not enough to get anyone excited.

2015 CORN POSITIONS
Our old crop position stands at 100% sold. We aren’t officially recommending a re-ownership strategy at this time but aren’t ruling it out either. This is especially true for those customers who have expressed extra interest in participating if a price rally occurred however do not want to hold the risk of unsold bushels. The one attractive attribute to a strategy such as long call options is that volatility is historically low (not surprising given the lackluster market action). The CBOE Corn Vol Index actually traded down to an all-time low in November, going back to its inception in 2011. Volatility typically rises throughout the month of December as traders gear up for the uncertainty of the January reports.

CBOE CORN VOLATILITY INDEX

2016 CORN POSITIONS
Due to the ultra-low volatility, we are getting very close to exiting our short December 16′ $6.00 call options for 2 cents. This is part of a larger strategy that can be found in our recommendations section below. The strategy change will ensure that we have our upside completely open and not limited. With a full year left, 2 cents isn’t worth holding that risk any longer. If this order is filled, that would leave us with 30% sold using the May 17′ futures at an average price of $4.32 ¼, 50% short December 16′ $3.50 puts, and 50% long December 16′ $4.50 calls for a net price of 10 cents paid. We have a working order recommendation for 20% more sales using May 17′ futures at $4.45. If everything is filled, we will be protected down to $3.50 (61 cents of hedge protection) and will not be obligated to be short if the market rallies above $4.50 (a risk of 38.75 cents). With so much unknown about the next 12 months we believe this is a great hedge to establish on the first half of production.

SOYBEANS

Jan soybeans have bounced off their contract lows, especially over the past few days. This recent strength may have something to do with the latest Argentine announcement. Rumors had been floating that Macri would temporarily eliminate the soy export tariff altogether in order to boost central bank reserves. This rumor was mostly squashed on Sunday after it was announced that they would go ahead with only a 5% reduction of the original export tariff. That may have been a slight letdown for the bears and we know that the funds just loaded up on shorts in the last few weeks. If capital controls are removed in Argentina, their currency should have a rather quick devaluation and prompt a decent amount of soybean sales in the process, however it will NOT be in combination with an all out tariff reduction. The market will have a better understanding of the currency impact by late December after Macri takes office on the 10th.

Still facing an uphill battle
There are still a lot of negatives going against soybeans right now. The latest WASDE report increased production dramatically. The idea of big crops/big demand likely caused the USDA to raise their demand forecast along with the increased production. If they hadn’t raised demand on this report, final US soy carryout would have been projected over a half billion bushels! US export sales have shown signs of decline and that export window will begin to close soon. We still see the potential for a carryout above 600 million bushels this year. If everything holds steady and Brazil really grows a 100 million MT crop, the price of soybeans could easily trade sub $8.00 in our opinion. This is the reason we have bought the March $8.00 puts as a cheap form of price insurance for the winter. Like corn, soybean volatility has been hammered, and the index traded below 16% vol recently. If you weren’t able to enter these options at 5 ½ cents previously the market rally is allowing that opportunity again.

CBOE Soybean Volatility Index

2015 SOYBEAN POSITIONS
Like corn, we have recommended to be 100% sold (see recommendations section below for more details). For those customers that have expressed interest in having a stake in a price rally (beyond what the 2016 crop will provide) we don’t mind buying March and May soybean options, especially if they are sub 17% volatility. Nobody can predict the weather and this is a much better strategy than holding unsold bushels as an alternative.

2016 SOYBEAN POSITIONS
We have recommended to be 25% sold using the May 17′ futures with an average price of $9.22 ½ and 75% long the March $8.00 puts for 5 ½ cents. The 2016 corn/soybean ratio has been increasing, so we want to be mindful of that getting back to last year’s levels above 2.50. In that case we may recommend more protection, but for now we are comfortable with these sales.

Nov 16′ Soybeans / December 16′ Corn – Ratio

US DOLLAR INDEX
And lastly we just want to point out the ongoing strength in the USD index. This is the main contributor to the commodity bust. This couldn’t be more obvious than in the following chart which compares the USD next to the Bloomberg Commodity Index:

Historically the USD appreciates prior to a rate hike and then declines immediately after. This is probably the “buy the rumor sell the news” rule at its best. However in today’s debt fueled world it may actually be different this time. Many of the currencies paired against the dollar have governments and corporations who have issued large amounts of dollar denominated bonds. With a currency move like we have had this turns into a vicious circle of debt servicing. They sell their local currency to purchase USD to service debt, fueling an even larger currency move that costs more the next time. This would only get exacerbated if the world’s benchmark rate (FFR) starts to increase since new debt will likely be issued at a higher rate as well.

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November 2, 2015

October net changes:
November soybeans 8 ¼ cents lower
December corn 5 ½ cents lower
December wheat 9 ¼ cents higher

October produced relatively low volatility considering the importance of this time of year. Harvest is nearly complete and the US has carved out a larger portion of its export sales window. The December corn range was only 27 ¾ cents; the lowest monthly range since May. The soybean range was 51 ½ cents which compares to the rolling two-year average of $1.15. December wheat held a range of 48 ¼ cents which is the lowest range in over a year. The CME Group just changed the maximum daily price limits for grains.

CORN

Our corn market outlook mirrors the trading ranges of the past two months. There isn’t a clear reason for a strong bullish or bearish conviction right now. These ranges are a product of our environment: adequate supply, slow export demand and reluctant farmer selling.

SLOW EXPORT DEMAND
For those who have been following our daily letters, you already know that US corn sales have been running very cold. Every week corn sales fall further behind the pace needed to reach the USDA estimate. As of the latest export sales report, corn sales are roughly 425 million bushels behind. While the sales window is wider for corn that it is soybeans, running that far behind will prove very difficult to “catch up”. Furthermore, the factors that have brought us into this situation are still at large. We believe the USDA will begin to acknowledge this demand weakness in the November 10th WASDE report.

Slow export demand is a product of many variables but the foremost is the strong US Dollar. The dollar has been gaining on emerging market currencies ever since the commodity bust. This includes the Brazilian Real, Argentine Peso, and Ukrainian Hryvnia. These countries have consistently undercut US grain prices and many Asian buyers have turned away from US corn as a result. Even the US has recently imported Brazilian corn. A Bunge owned cargo of 54,000 MTs of corn was shipped into US Southeast… in late October! It’s hard to imagine that Brazilian corn would be cheaper to import than to source domestically at this time of year. The implications for final carryout are not good.

SLOW FARMER SELLING
Freight and barge rates have also been down as a result. Interestingly, this has allowed the river basis to stay rather strong since competition is low. Farmers have remained reluctant sellers and domestic end users are still consistent buyers, which has facilitated a stronger Midwest basis. An elevated basis can sometimes lead to a flat price futures rally, however in today’s market that is an especially difficult prediction to make. Sure it wouldn’t surprise us to see the futures rally because of slow producer selling, but if that ultimately translates to demand rationing we could see a growing carryout as a result. The slow producer selling will not have a long-term bullish market influence in our opinion.

There is also the lender’s perspective to consider. The story that we keep hearing is that a lot of “tough discussions” will be had between farmers and lenders in the coming months. We can probably expect tighter controls going into 2016 for those who are levered. Many areas will get large ARC county payments which will buy farmers some time before having to sell more supply to raise cash. However in late December – early January we could see some grain movement for debt extension and cash flow needs. In our mind, the entire industry is betting on the price of corn going up. Either through the price of land, loans against stored grain, or the elevated prices of fertilizer and other inputs. Crop insurance just expired and this may be the lowest amount of protection for a record amount stored. The industry acts like it has a bad trade on and doesn’t want to get out. The market is really hoping for a South American drought to send prices high enough to justify the large input costs.

ADEQUATE SUPPLY
Below is our latest corn S&D table next to the USDA estimates. In light of the slow sales pace, we have lowered our own export demand estimates from 1.7 billion bushels down to 1.6 billion (the current USDA estimate is 1.85). Keep in mind that the current pace suggests 1.425 so we are assuming that sales will improve before the window starts to close.

To summarize, corn fundamentals appear to be holding the price in limbo. The record amount of unsold bushels and poor export demand has kept the higher prices in check. There will likely be plenty of bushels for sale if the cash price of corn gets back to $4.00, especially with better than expected yields in many areas. At the same time reluctant farmer selling has kept movement slow at the low end of the range, thus providing support. Our own market opinion hasn’t changed much in the last 30 days and we have made no new corn recommendations during that time.

Our old crop position stands at 100% sold and to have December $4.00 call options against those sales. The main reason for buying the call options was to provide the confidence to stay sold through the major harvest WASDE reports and perhaps take more out of the market if it provided. Prior to the September/October WASDE’s, many analysts were bullish, predicting a national average yield below 160 due to the excessive rains. That looks highly unlikely at this point and so many of those same analysts are still bullish but for new and different reasons including El Nino. The point is not to drag along old crop positions on ‘spec’.

Our new crop recommendations stand at 30% sold with a working order for another 20% above the market. Call option spreads are in place to protect the position and are heavily funded by selling the December $3.50 corn puts. The position provides an immediate floor protecting bushels down to $3.50 (we see this first 65 cents down as the most likely revenue to be at risk) while allowing plenty of upside after the first 35 cent rally. To us this is the best way to get a meaningful amount of downside risk covered while still having the chance to get a better average if the supply fundamentals change between now and the end of next year’s growing season.

SOYBEANS

Soybeans had an interesting October. Although soybean futures finished lower on the month, export sales have been improving. Our strong currency puts us at a competitive disadvantage of course, however Chinese bean appetite is up again from last year. The reasons for the ongoing weakness still revolve around the record world supply. The Argentine elections are also playing a major role in the ongoing weakness since any change in the the way they report their currency could spur large Argentine exports.

IMPROVING US EXPORT SALES
US Soybean sales are taking steps in the right direction but are not yet where they need to be. The USDA recognized the slow pace in the October WASDE report by lowering their estimate from 1.725 billion down to 1.675. The running total accounts for only 60% of thE final USDA estimate which is still behind the 5-year average 10% from where it is normally at this time of year. If sales trend at the 5 year average “pace”, from now until the end of the marketing year, final export demand would drop to only 1.5 billion (175 million less than the latest USDA estimate). We keeping our own private estimate unchanged at 1.6 billion which splits that difference. The chart below shows the 2015 sales pace converging on the 5-year average, but not quite there yet.

US SUPPLY AND DEMAND
Given the anecdotal yield results across the Midwest, our own national average yield estimate is 49.0 bushels per acre. The USDA is likely to change production on the November 10th WASDE report. This will shed more light on the subject, but so far even the harder hit corn areas have reported more favorable bean yields. If yield grows the market may not be prepared for the increased carryout. This is a good reason to stay with the current recommendation and remain 100% hedged in old crop beans. The best chance for soybeans to rally in our opinion would be a South American weather event which is a roll of the dice.

RECORD WORLD SUPPLY
The world carryout is still projected to be a record this year. The Ending Stocks (left axis) have never been higher. And while total use is up, the comparison ratio of Stocks/Use (right axis) is near an all time record high as well.

ARGENTINE POLITICS PLAY A ROLE
A large portion of that record world supply is being held by Argentine farmers who have experienced a 25-30% inflation rate in recent years and a corrupt government that is under-reporting that inflation. The official exchange rate is currently 9.54 Pesos to 1 USD but the black market rate is actually 15.7 pesos to 1 USD. This is an all time record divergence which is extra important because it is an election year and change is coming. President Cristina Fernandez de Kirchner will soon step down from office and the top two Presidential candidates promise sweeping monetary reform. If steps are taken to repeal the previous policies and a floating exchange rate is established, Argentine farmers will eventually get a fair market price for their beans which will be a financial windfall for them. That could ultimately result in a large portion of their record stocks unloaded into the world market. How soon will the monetary reforms be implemented and what will the result be? Those are still unknown but we can be sure that the market is watching these developments closely for direction. This is a main reason for buying the March soybean puts as price insurance. They are an ultra-cheap form of protection for our 2016 bushels that haven’t been hedged yet and they will carry us to late February when the Federal crop insurance prices are established. Its always a possibility that no change comes out of this new president but the market chatter has been growing.

EL NINO
It is an El Nino year and the predictions are calling for it to be one of the strongest on record. While dry weather patterns have been observed in El Nino years we would point out that nothing about the weather is certain. Forecasters have a hard enough time predicting the 10-14 day outlook let alone a whole growing season. We are aware of the El Nino pattern but that will not prevent us from making diligent marketing decisions regarding our price risk.

To summarize, beans are a dynamic crop with many important variables affecting price right now. The Chinese demand has continued to grow each year which is probably the main reason soybeans aren’t sub $8.00 right now. The next three months may start the trend for 2016 since more will be known about Argentine policy and South American weather. Brazil is expected to grow a 100 million MTs of beans this year, overtaking the US as the largest soy producer in the world. If that happens, we could see more risk premium come out of our prices through the winter as the market tells US growers to plant less beans and more corn in 2016. If South America has a sub-par crop it may be off to the races again. Our new crop recommendations have us 25% sold using the May 2017 futures and long $8.00 March puts for 5 ½ cents on the other 75%. Our upside is culminated in that 75% that is unsold and we will make more sales if the price moves higher.

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Monthly Report: October 1, 2015

CORN: September was a relatively quiet month for corn. The December contract range was carved out with a low of $3.60 ½ and a high of $3.95, which was much narrower than that of June, July, and August. The funds weren’t very active and posted modest changes throughout the month, quietly lowering their net long position by less than 10k contracts. On the WASDE report, the USDA scaled back their yield estimate from 168.8 in August, down to 167.5 in September, and the market is anxiously awaiting their October estimate which will be released on Friday, October 9th.

The yield reports have been overall favorable, with a few exceptions of course. Even some of the areas that were hit with too much rain early in the year have staged a tremendous recovery. At this point there really isn’t enough evidence to dispute the current USDA yield estimate of 167.5 and so we are remaining with that for our supply and demand estimates.

The table below includes those estimates next to the latest USDA numbers. Our main difference is that we have not been nearly as optimistic on export demand as the USDA has been. The USDA believes that final corn exports will be 1.850 billion bushels, down only 25 million from 2014. We believe exports will be down to 1.700 billion. Even to achieve our estimate the current sales pace needs to improve. With a strong U.S. dollar and strong competition this will be very difficult. High prices over the past 5-7 years have created strong investments in land and infrastructure, most notably in the Black Sea region and in Brazil. This has helped production increase rapidly in those areas. The has also helped foreign competition continue to gain market share from the U.S. during our traditional “gut slot” of October through January. This is a trend that is likely to continue for the years to come.

The following chart helps show why we believe the USDA is overly optimistic on demand. Year-to-date the USDA has only sold 22% of the total government projection compared to the five year average sales of 41%. If the US maintains this pace we will actually be short about 500 million bushels from the current government estimate! So for us to lower the export demand estimate by 150 million we are assuming a major increase in the pace.

Many analysts have been quick to single out weekly sales numbers being higher than the “average” sales-per-week needed to reach the USDA demand. However, they tend to use the entire marketing year to reach that final estimate. This is simply a lazy way of looking at the data. The sales pace does not remain even throughout the year. A large portion of U.S. sales are booked by January (especially in soybeans). The chart above helps illustrate this required pace to meet the USDA estimate. Between now and January 5th for example, we would need to see corn sales average 1.493 million MTs every week to get back on pace, as opposed to looking at the entire marketing year which would require only 765,000 MTs per week. Every week that we sell less than this amount will make the likelihood of us “catching up” less likely.

To summarize, we still believe a position of heavy sales (100% of expected) with basis locked is a good strategy. Our December $4.00 call options are still going to provide that upside potential however we will likely exit these prior to expiration (the current recommendation is to have orders working to sell half of the calls for 30 cents). December 2015 corn is roughly 70 cents higher today than December 2014 corn was a year ago. This is a big difference, especially considering the fact that supply is projected to be similar to 2014 levels while forward demand is severely lagging. The US Dollar has been a main culprit for this lag and since it is still 11.5% stronger than last year the outlook remains bleak. Perhaps the price stays within that $3.60 – $4.00 range from a lack of producer selling. Carryout is likely to grow if these prices stay firm to our competition and no new demand is enticed. If carryout continues to grow through either strong yields or lackluster demand, we could easily see prices in the lower $3’s by the end of the year.

December 2015 Corn compared to December 2014 Corn:

CROP INSURANCE: Federal crop insurance is starting to establish the fall price and will continue to over the month of October for both corn and soybeans. This means the crop insurance “put” will begin to expire and therefore producers will have to reexamine their risks since that price floor will no longer exist.

SOYBEANS: Soybean prices have fallen to corn prices over the course of September (see chart below). This may be in realization of a larger crop size than originally thought, or perhaps the soy demand picture is even worse than it is for corn.

Corn exports account for only 13.5% of total US corn demand. Soybean exports however, account for 46.3% of total demand. Therefore, export demand fluctuations can have a much larger impact on the price of soybeans which may be why the soy/corn ratio trend has turned lower.

Soybean Export Demand: Even with the larger sales reported in today’s weekly report, it is unlikely in our opinion for bean sales to reach the USDA’s final demand estimate. In order to reach the current USDA estimate of 1.725 billion in exports, we would need to outpace last year’s record sales pace by over 200 million bushels from now until the end of August! This is not impossible but is very unlikely in our opinion without a major fundamental change in South America. Our “window” to sell soybeans aggressively to the world is much smaller in soybeans. The following chart is the 2015 export sales pace compared to the five year average.

Over the last five years, 88% of the final exports had been booked by January 1st. To accomplish this we need to see 1.467 million bushels sold every single week until then.

The following supply and demand table compares our estimates to the USDA’s. We lowered harvested acres by 500,000, but raised yield to 49.0 bushels per acre. The production increase comes after seeing a large number of very favorable yield reports.

With heavy consideration of the strong US Dollar and the availability of South American supply, we believe soybean exports are overstated by at least 125 million bushels and so have used a conservative cut to 1.6 billion. We have left the crush demand unchanged at a record of 1.870 billion bushels however we think the market is going to have to entice that demand with lower prices. December crush margins are already fading, trading over 30 cents off the high. Without a strong crush estimate, the carryout could grow even larger. The market’s job is to make sure that doesn’t happen and finding that demand with lower bean prices may be the final answer.

Board Crush Margins:

The Brazilian Real has continued to collapse. In the chart below you can see the dramatic decline over the past several years. Since brazilian farmers are paid in their local currency but their soybeans are priced in U.S. dollars to the world buyer, they have received near record prices. This continues to encourage additional expansion of full-season corn and soybeans as well as aggressive expansion in their second season “safrina” corn crop. This has also encouraged aggressive selling by both the farmer and the commercials on the world market. This has quickly shifted the market share away from the U.S. and is a major headwind going forward.

Brazlian Real Weekly Chart:

To summarize, we see a lot of the same problems from last month still unaddressed. The demand remains poor and yield reports are confirming that this year isn’t going to be a disaster like many bulls had hoped. Emerging market currencies are still collapsing against the Dollar and making our prices less competitive in the process. A large portion of grain analysts appear to be looking for a harvest low to form since this is the day it bottomed last year. We believe there are too many negative factors that are pulling on grains for that to be a clear call right now and would remain well hedged (see hedge recommendations below). Growers continue to store corn and soybeans and wait for higher prices. Although this strategy has worked in the past, this could prove to be a very dangerous bet. The economics and global fundamentals have changed dramatically in the past 2 years…be careful.

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September 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.

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