Market Thoughts 02.28.21
***What Matters When You Market II – Reminder to Save the Date, June 24th, 2021 – Knight’s Lodge, Riverdale, ND***
***Lighthouse Labs Algo Update will be sent out shortly***
March corn gained 12’6 to close at 555’4 this week, a new high weekly close for corn but still well below the daily high of 574’2 from early February. March soybeans gained 28’0 to close the week at 1405’2. Beans finally took out their January highs on Thursday with the March contract trading up to 1443, before promptly falling 63 cents and then recovering a bit to close out the week. March spring wheat gained 2’2 and finished at 631’0. That contract did manage to trade up to 648 on Wednesday, highest level since early January, before selling off sharply to close out the week.
It was another interesting week as the first three days saw sharp advances across all the grains before an oilseed-led selloff on Thursday/Friday. Late week pressure seemed to center on ethanol run rates (plummeted even more than expected as plants slowed down and resold nat gas allocations) and marketing year lows for corn and bean export sales. Beans finally had some cancellations from China show up. Further cancellations will certainly be headwinds but otherwise the overall fundamental case seems strong. Commodity bull market stories have expanded well beyond just Ags with mainstream press now routinely noting price surges, supply chain issues, etc. across a host of commodities. Lumber is at record highs and even crude has rallied sharply despite demand still far from pre-Covid levels. South American weather is not bearish, the Ag Forum numbers were supportive and 2021 U.S. crop potential is an unknown.
We’ve been talking for months about the current seasonal pattern grains, that it would likely extend through early March and give us the highly desirable scenario of being able to insure crops at a profit. Incredibly, that managed to happen with insurance prices (if our math is right) at 458 for corn and 1187 for beans. Two things to note here. First, talk with your insurance agent but it likely makes sense to buy up coverage, especially for beans. Given the weather debacles we’ve had the last two years, it’s not too tough to imagine another poor weather outcome. But buying up coverage also helps in the event of a major decline by harvest, something that has happened roughly half the time that prices have been this high in the spring.
And second, it likely makes sense to build a put option position at the same time.
New crop prices are high enough to maximize acres across the Corn Belt as everyone is looking at solid profits with price levels not seen in nearly a decade. The story becomes new crop weather and demand/inflation. The balance sheets for both crops can’t handle disruptions on those fronts and if something emerges, the potential for a sharp rally is much greater than it has been in several years. On the other hand, a 2014-type scenario with ideal growing conditions or 2008 with broad outside market factors (and good yields) and there is considerable downside risk.
Now that we’ve wrapped up our 2010/2011 comparison (with the market performing remarkably similar to that year from August until now), we like the similarities to 2008 going forward. That year had similar high prices, prices rallied further into early summer and then absolutely collapsed into harvest.
If you’re crop insured to a profit, you likely have at least some margin to spend on put options. Put options don’t change anything you’d do with cash marketing - if the market rallies you can simply sell more crop at any point. Rather, they ensure you have a floor price somewhere near today’s attractive levels. And with high crop insurance prices, Puts plus crop insurance coverage represent the most number of potential favorable outcomes: If Fall Price rallies and you get a crop, it can be sold at the higher price. If Fall Price rallies and you don’t get a crop, the indemnity payment based off the higher fall prices doesn’t go to covering hedge contracts. If Fall Price drops and you get a crop, Put Options protect the price. And if Fall Price drops and you don’t get a crop, you potentially have both a crop insurance indemnity payment and value in the put option position.
In 2008, beans traded over 1600 in June before falling below 900 by harvest…