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Market Analysis



Selling for cash prices means leaving money on the table

By Jon Scheve, Superior Feed Ingredients, LLC

Corn yield estimates were reduced, slightly shrinking supply, while harvested acres were unchanged in USDA’s November report.

Three weeks ago, I suggested there were demand issues within the USDA’s Feed, Ethanol and Export categories. This week’s report reduced demand in every category and with the ethanol grind and export data under-pacing USDA estimates the past couple months, this was probably justified.

The feed category will be difficult to track. I’ve suggested the large wheat supply will likely replace some corn for feed if cash corn values remain strong while cash wheat prices remain at 10-year lows. However, over the last month feed ingredient prices have increased dramatically. Normally these by-products from corn, bean and wheat processing trade at values that encourage some livestock producers to replace corn and/or bean meal in the feed ration. The prices are so high now that many of these by-products should actually be replaced with corn and bean meal.

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Don’t give your storage away

By Jon Scheve, Superior Feed Ingredients, LLC

The delayed and slow harvest progress has helped corn and bean prices by keeping basis levels higher than normal. A slow harvest also keeps futures prices from sliding because when sales across the scale are more gradual, there is less burden on logistics and end users can grind through more old crop before new crop is available.

Some end users are concerned there won’t be enough low-priced grain after harvest, so they’ve been aggressive with basis bids. End users know when harvest is complete and the bin doors are closed, it will take some coaxing to motivate farmers to sell.

Often farmers are too focused on cash prices and don’t pay enough attention to their storage expenses. However, if farmers want bigger premiums and profits, they need to think about grain marketing differently than conventional wisdom. This is especially true in years when grain prices are at or under breakeven points.

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Trading in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC

In 19 of the last 20 trading sessions, corn closed within a tight range of $3.83 to $3.98. It seems farmers are willing to make sales at $4 and end users are willing to buy at or below $3.80. I expect sideways trading until the November USDA report.

In early September when December corn futures were trading below $3.60, $4 seemed unlikely. So, I looked for trades with upside potential near $4, even if the market didn’t go there.

 

Trade 1: Sold Straddle

On 9/5/19 when December corn was around $3.59, I sold a November $3.65 straddle (selling both a put and call) on 10% of my 2019 production collecting 21 cents.

What does this mean?

  • If Dec corn is $3.65 on 10/25/19, I could keep all 21 cents
  • For every penny corn is below $3.65 I get less premium penny for penny until $3.44
  • For every penny higher than $3.65 I get less premium penny for penny until $3.86
  • At $3.86 or higher I have to make a corn sale at $3.65 against Dec futures, but I still keep the 21 cents, so it’s like selling $3.86
  • At $3.44 or lower I begin to lose money penny for penny regardless of how low prices go and no sale is made.
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Corn must overcome demand obstacles for a price rally

By Jon Scheve, Superior Feed Ingredients, LLC

The October USDA Supply and Demand report took into account the adjusted stocks in bins estimate from the late September report. The next day, the President announced a trade deal with China could be coming in the next 5 weeks.

Since then, few details have been provided on the trade deal and some are questioning if a deal will actually be signed in the late November Chile meeting. If a deal is signed some are questioning if China will buy more ag products than pre-trade war levels. This combined with the killing frost throughout parts of the Corn Belt created more market uncertainty.

 

Wheat competition

The over-abundance of U.S. and global wheat has led to the cash price of hard red wheat being the same value as cash corn in the southern plains. This means, if prices rally, some livestock producers may replace corn with less expensive wheat, which could potentially reduce the feed category for corn by 100 to 200 million bushels.

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Corn re-ownership strategies

By Jon Scheve, Superior Feed Ingredients, LLC

Last March the corn market lost 30 cents after the USDA surprisingly increased stock levels. Last week the USDA surprised again but with a big drop in corn stock levels, resulting in a 20-cent market rally. The reason for the adjustment isn’t clear. Some think it was because last year’s yield was lower while others say more animals were on feed. Regardless, it’s keeping prices from going lower until yields are determined, which won’t be for a month or two.

Corn re-ownership strategies
I’ve described how to choose which crop should be stored at home during harvest and if farmers should pay for commercial storage. When making those storage decisions I explained that futures shouldn’t be included in the evaluation because farmers can reown grain using futures or an option strategy. While there are countless ways for farmers to re-own grain, the following shows two strategies most often used and the pros and cons of each.

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Commercial storage considerations

By Jon Scheve, Superior Feed Ingredients, LLC

On Monday the USDA will release the stocks report and tell us how much grain is still in the bins. In 7 of the last 14 years the stocks for corn were higher than estimates. The good news is that it has only happened 1 out of the last 4 years. The problem is that when the stocks are higher for corn than the estimates they tend to be pretty far off. When the stocks report is smaller than estimates the difference is usually quite small.

The bean stocks report has been erratic and hard to predict. However, with the already large carryout any change up or down is probably not as important as what the yields start to look like as harvest begins this upcoming week.

There is snow in Montana and it could work its way east. There are forecasts for cool weather working into the Dakota’s and western Minnesota over the next several days.

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What should I store at harvest?

By Jon Scheve, Superior Feed Ingredients, LLC

December corn hasn’t closed above $3.75 this past month and it’s only closed below $3.65 in 7 of the last 27 trading sessions. While frost concerns are fading, farmers are not selling, and it seems like sideways prices could continue.
Since July 30, November beans have closed between $8.55 and $9. Trade deal hopes have helped beans trade off the lows, but there will need to be additional China bean purchases going forward to keep bean prices around $9.
I have over 100% on-farm storage capacity, and I highly recommend most farmers should as well. On-farm storage capacity for 100% of your crop allows for more low-risk ways to maximize profit potential, increased flexibility and simplified harvest storage decisions.

Still, many farmers are resistant to it and ask me how they should prioritize their crops with only partial on-farm storage. The following illustrates how I would analyze which crops to store first.

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Rolling futures

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA reported the lowest ear counts in the last 7 years. Interestingly though in each of the last 6 years, final ear counts ultimately were lower than September estimates.

Ear weight estimates, on the other hand, were average compared to the last 6 years. In 4 of the last 6 years, final ear weights increased into the final January estimate as compared to September projections. They dropped in 2018 and were the same in 2014.

With this information, it seems reasonable that a national yield reduction is possible; however, widespread favorable weather over the last 4 weeks and upcoming good forecasts for the next 2 weeks may mean improved ear weights that offset some ear loss.

Many market participants still think harvested acre estimates could be trimmed by 1 to 2 million acres. However, it’s important to keep in mind that corn exports and ethanol grind have slowed.

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Marketing in unusual times

By Jon Scheve, Superior Feed Ingredients, LLC

While many farmers still doubt last month’s USDA numbers, the rest of the trade is going along with it. Export pace and ethanol grind are weakening, frost threats are declining, and 10-day forecasts are looking very good for the crops. At this point, a production surprise will be needed for a significant price rebound. Maybe a low ear weight will be identified in this week’s USDA report to give the market a boost?

Reports from elevator managers throughout the Midwest say most farmers didn’t sell very much during the recent rally, because they expected prices to go even higher. So, I’m not alone in wishing I would have sold more, but hindsight is always 20/20. Following provides details on three trades I made in the last 4 months. I’ve included my thoughts and rationale when I placed the trade to show context, as well as final outcomes.

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Kicking off the new marketing year

By Jon Scheve, Superior Feed Ingredients, LLC

College football just began and every team still has the chance to win their conference or, more importantly, find their way into one of the playoff spots. Some fans believe this is the year they will have a perfect record at the end of the season, while others are worried that their team will not even make it to a bowl game. For many, Saturday’s first game answered some questions about their team’s prospects for the season but undoubtedly some questions will linger and won’t really be known until the season has progressed.

Last weekend also marked the beginning of a new marketing year in the USDA balance sheets for the corn about to be harvested. Just like not knowing how your football teams will do this season, the corn market has a lot of time to still have a great season or maybe still disappoint the farmer.

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USDA report highlights

By Jon Scheve, Superior Feed Ingredients, LLC

 

What we probably know…

Bean acre surprise

Many were surprised bean planted acres were only 76.7 million, but it actually makes sense because bean prices failed to rally to prices most farmers could be profitable with average yields. It seems that some farmers made a wise financial decision to plant as few bean acres possible.

 

Prevent plant acres

The report showed prevent plant corn acres were 11.2 million corn acres and 4.3 million bean acres. This was the level that many in the trade were expecting over the past month. Some in the trade have tried to suggest that this means that total planted acres were on track to be 101 million acres for corn. It doesn’t appear that was actually what was going to really happen.

It’s my understanding that when applying for prevent plant corn acres, farmers could submit total corn acres equal to the most total corn acres a farmer planted in the last 3 years.

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It’s a long wait until Aug. 12

By Jon Scheve, Superior Feed Ingredients, LLC

There is a lot of uncertainty in the market right now. There are many reasons to be bullish and bearish. Below are some of the issues I see that could really impact the markets over the coming weeks and months.

 

Strong disagreement of the June USDA report continues

It’s been a month since the June USDA acreage report and many still say the corn acre estimates are inaccurate, while few seem concerned that bean acres estimates were lower than expected.

The June corn estimate was only 1 million to 2 million acres below the March intentions report. After the prolonged and widespread planting issues and flooding, it’s easy to see why many disagree with the June report. However, after digging into the numbers in late June, I expressed my concern that the USDA may have been on to something that many market participants missed.

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Markets are looking for answers

By Jon Scheve, Superior Feed Ingredients, LLC

The market has stalled because there are too many unanswered questions.

  • How many acres were actually planted?
  • How many acres will be harvested?
  • How much will the heat affect pollination?
  • How much is dry weather affecting plant development?
  • How much will it rain in August?
  • How many ethanol plants will continue to run post-harvest if there is a short crop?
  • How much export demand will ultimately be lost?
  • Will we get enough growing degree units this season?
  • When will the first frost come?

One thing I know for sure, is no one knows anything for certain about these questions. It will take several weeks before we get some answers, so I expect the market to remain range bound before the August 12 USDA report.

This much uncertainty widens price opportunity. Combine this with production issues in the eastern Corn Belt, and there should be upside potential in the market.

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Keeping a focus on beans

By Jon Scheve, Superior Feed Ingredients, LLC

It’s important to remember that recent USDA report was based upon surveys from early June. The USDA said they will resurvey the 14 Midwest corn states and provide an updated planted acre estimate on August 12th. I expect a lot of debates on potential outcomes until then.

 

Focus on beans

While most people have been discussing corn, I’ve been focused on the bean numbers. The report showed 5 million fewer bean acres planted than previously estimated, which is good for bean prices. This could mean a potential 250 million bushel decrease in carryout next year. 600 million bushels is probably needed, but it’s a great start.

 

Drop in total acres planted

Friday’s report was based upon numbers from around June 1, when corn was $4.40 and beans were below $9.20. The market was highly incentivizing farmers to plant corn not beans. The report also showed 6 million less acres of total crops being planted for the year than the March planting intentions, so at least some prevent plant acres are likely being considered.

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Basis values on the rise

By Jon Scheve, Superior Feed Ingredients, LLC

While planting progress continues across wetter parts of the Midwest this week, it still seems unlikely much more than 90% of corn acres will eventually get planted by the end of June. The market rationed demand very quickly once July corn exceeded $4.20. Questions will continue throughout summer on how many acres were actually planted and what the potential yields will be.

 

Improving basis values

The widespread uncertainty in futures prices is helping to improve basis prices around the country. End users are planning for upcoming production issues this winter by raising bids now for both new and old crop.

But it seems that farmers aren’t selling much new crop on this rally. Instead most are focused on pricing grain already moved to end users or sitting in commercial storage. Even farmers with on-farm storage are holding back some of their old crop, so they can use it against new crop sales that were already made before the rally should they not get all their acres planted or if their yields are below normal.

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Margin call in volatile markets

By Jon Scheve, Superior Feed Ingredients, LLC

Everyone I spoke with this week wants to know how high the corn market will go.

The problem is that the market needs to know how many acres won’t get planted and a better idea about what the July/August weather will be like.

Corn may have hit it’s high this week, or prices may go up several more dollars. No one knows, because last week’s 58% planting progress has NEVER been seen this late in the year. The country has never planted less than 90% of the intended acres from the March USDA intentions report.

This uncertainty has sparked the market rally and started rationing demand. This is also encouraging farmers to plant well beyond prevent plant dates and squeeze production from every possible acre.

Three weeks ago, there was widespread fear $4 would never come for 2019 corn. It seemed $4.50 December corn was out of the reach for farmers for another year.

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“Storm fronts” affecting current markets

By Jon Scheve, Superior Feed Ingredients, LLC

There are two “storm fronts” affecting markets right now.

The first was widespread rain slowing planting progress, and continued wet weather forecasted. The market might be trading 63% of the corn crop being planted in the Tuesday afternoon’s report. I’m in the camp of around 59%.

The second storm is blowing out of Washington, D.C. Another MFP payment is expected, but there are a lot of changes and rumors circling about how farmers will get paid. At one point, it was anticipated to be based on planted acres like last time, which would encourage farmers to plant as much as possible. Then Thursday it was discussed that payments would still be based upon acres with adjustments by county, but the exact details were unclear. Then on Friday rumors started circulating that prevent plant payments could somehow be included. There were many questions about the feasibility of that possibility at this point.

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What a difference a week makes!

By Jon Scheve, Superior Feed Ingredients, LLC

Monday morning corn prices took a dive, but by close on Friday, prices had rallied 40 cents. This rebound is due to widespread rainy weather forecasts through Memorial Day, making expected planting progress slow for the next 10 days. Plus, no one knows how many acres will be designated prevent plant this year. The trade seems to have targeted about 4 million acres at this point.

Last week I discussed how some farmers may consider taking prevent plant if they are eligible, because as of last week, prices were at unprofitable levels. For some, prevent plant may have been the better option financially. Despite disappointing prices, many farmers in the eastern Corn Belt were saying they still planned to plant regardless, because “that’s what they always do.” With this week’s 40 cent rebound, farmers now tell me they are considering how long after their prevent plant date they will still try to plant corn.

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How did Jon Scheve average over $4 2018 corn?

By Jon Scheve, Superior Feed Ingredients, LLC

On 4/23/19, when the corn board was in free-fall, I priced my remaining 2018 crop on futures. I didn’t set a cash price, and instead I was waiting for a higher basis. I received $3.61 against July futures on the remaining 54% of my ’18 crop I still had unpriced.

Why sell futures now?

There were several reasons.

  • I was concerned with how much corn prices had fallen already.
  • It was apparent to the market there was too much U.S. and global corn supply.
  • I’m only 10% sold for my 2019 corn and have no 2020 sales.
  • The risk of African swine fever appearing in the U.S. is always present.
  • There is unknown trade risk with China or even if NAFTA 2.0 gets signed.
  • On 4/23/19 forecasts indicated that most of the Corn Belt would have a 15-day window of good weather to plant.
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Will prevented planting play into markets?

By Jon Scheve, Superior Feed Ingredients, LLC

Friday’s USDA report confirmed what the market already knew. Near perfect growing conditions last year in the highest producing areas around the world has generated too much corn and soybean supply in the U.S and globally. Unfortunately, due to problems with the African Swine Fever in Asia and the China trade war, demand has decreased. And, it’s unlikely either will be resolved before the end of the year.

Right now, the new crop market is likely overvalued, especially if most areas are planted on time and trend line yields are produced. But the big variable now is weather. Forecasts for the Dakotas and the eastern Corn Belt show a possible break in rain this week, but more rain is expected next weekend. This may mean farmers in those areas will wait for better planting conditions or take prevent plant. The Dakotas only have until May 25, and the eastern Corn Belt until June 5, before they have to declare if they are taking prevent plant on corn.

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