EXECUTIVE SUMMARY: Another selective hedging opportunity just presented itself this week. A window for a potential turn was projected at $379-3.93 (later refined to $3.92-3.95) on the CZ15 chart back in August. The market closed on 9/14 at $3.935, and offered the opportunity to place hedges at $3.90-3.95 on 9/15 which will result in a hedging gain of 55-95 cent per bushel, or $100-150 per acre, if the new target window of $3.34-2.96 is reached. Opportunity knocked; did you answer the door?
For many of you, I expect the answer is that you didn’t hear the knock and nothing happened. Here is another classic case of decision conflict. The combines are rolling. All energy is focused on a safe harvest and answering the question about how variable the yield really is. Little time or attention is focused on the markets. So a selective hedging opportunity passed quietly without notice. Add to the mix that selling at this price is below the cost of production (COP) for many producers, so many would decline to sell at these prices even if they had the signal in hand.
Perhaps you will have time to read this now and think about it while you watch the monitors and let the remote control guide the combine, or maybe it will have to wait until there is time later. Either way, I think it is important to post it now so you get the feel for what is happening in real time, and not the benefit of some brilliant hindsight several days or months down the road. We may be wrong, but for you who are students of the process, seeing what can go wrong is an important part of the learning process as well. If it turns out that our assessments were wrong, I guarantee that I will do an autopsy to try to determine what I overlooked or misinterpreted, and I will share that with you as well.
A couple of things happened that I think are significant and noteworthy in trying to understand how and when to make selective hedging decisions. Let me be clear that I am going to briefly discuss signals from two different systems, one very objective and one more subjective. The objective system is based on quantitative technical indicators (QTIs), while the subjective system is based on other charting methods.
About four weeks ago, some of the QTIs from our corn database triggered a signal that the trend had turned down for the CZ15 contract. This happened in the $3.75-3.85 range. Up to 8/11/15, the charts and many analysts were projecting higher prices. The QTIs indicated that the right position was to be open, or long, in the market, and matched up with the charts and analysts. When the August WASDE was released, the world changed. Several QTIs triggered a sell signal. The projected rally aborted on the charts and turned down.
Using some charting methods after the close on 8/12, it was possible to make a preliminary projection for a correction to the up side and for the next leg down after the correction. The window for the correction up was 3.79-3.93 at that time, later refined to 3.92-3.95. It appears that I did not post that target window on the website, so you will have to trust me when I tell you that it was sent to the subscribers for Selective Hedging’s “alert” services on or before 8/22. The market rallied after 8/20 and then turned down again, allowing the refined projection for the upside correction. On 9/14, the market closed at 3.935 in the range we were expecting a turn, and offered an opportunity on 9/15 to sell in the 3.90-3.95 range. As soon as projections were available for the up side correction, it was also possible to make projections for the next leg down to the 3.34-2.96 range. No one knows if we will make that range, and we all hope we don’t. But many years of experience with this system tell me the downside risk is real!
No one wants to sell at $3.90 less basis when many management experts have COP pegged in the $4.50-5.50 range. So, what are the alternatives? One is to store the grain and hope for a rally, or sell the grain and replace it with calls or long futures contracts if you really believe the price will rally. A second alternative is to place a selective hedge here with plans to lift it if or when the market turns up. In both cases, the market has to rally to create an opportunity to sell above COP. So what is the difference in the two strategies? In both cases, the intent is to sell the grain later at a higher price. The difference is that the first farmer will watch the value of his inventory depreciate even more while the second farmer is protected. In addition, the selective hedging gain of 55-95 cents per bushel, or $100-150 per acre, will be added on top of the price obtained by the first strategy if the rally does develop.
The question that has been asked again and again on the farm shows for the last several weeks is what can or should a farmer be doing now that we appear to be faced with these low prices for the near term? My answer is to keep hoping for a rally, but to take advantage of the tools that are available now. Elsewhere in the discussion topics, you will find the posting that has CZ15 hedged above $5.50. There were better opportunities available earlier, but opportunity appears to have knocked again this week. Did you answer the door?
Please be careful and have a safe harvest!
Posted by Keith D. Rogers on 18 September 2015.
