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Market Focus Strategy: Plan Outline

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

 

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

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

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

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

Corn – Store and Hedge

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

Soybeans – Sell and Spread

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

Wheat – Hold and Hedge

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

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

 

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Disclaimer:

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

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

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

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

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