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Market Analysis



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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A look at corn basis values

By Jon Scheve, Superior Feed Ingredients, LLC

The futures market continues to face an uphill battle with demand while the USDA’s reported supply indicates carryout could be back to burdensome levels. This is keeping a lid on futures prices.

 

Corn basis values

Right now, farmers are unhappy with cash prices, so they aren’t selling. This is making basis stronger. End users can’t control futures prices any more than farmers. The only way an end user can control how much supply they can source is to adjust basis. When supply is easy to source (i.e. harvest time), they’ll lower the basis bid. When it’s difficult meeting demand (i.e. planting time), they will increase it.

The basis market can be as complex as the futures market for two big reasons. One, there are many companies trading grain by basis and moving product by vessel, barge, rail or truck from one basis market to another looking for inefficiencies in the cash market and trying to maximize profits from it.

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Grim numbers and rebound potential

By Jon Scheve, Superior Feed Ingredients, LLC

Last week’s USDA report provided estimates for grain supply and the upcoming planted acres based upon March 1 information.

Corn: Stored grain increases 270 million bushels more than anticipated

This was the biggest surprise and sparked a lot of debate on Friday. Some wondered if the market already realized some of this, noting the decreased feed demand in the last report. Others wondered if last year’s corn yield forecasts were too low in the February report. A few thought that farmers stored more 2017 crop than originally estimated. Based upon conversations I have had with farmers across the Corn Belt I would guess the yield was slightly better last year than what was estimated in February.

This number doesn’t account for the stored corn lost due to recent flooding throughout the Midwest. If the U.S. produces 15 billion corn bushels per year, it’s reasonable to assume a half percent (75 million bushels) of production could have been lost to flooding and will eventually need to be a considered.

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How has flooding impacted grain markets?

By Jon Scheve, Superior Feed Ingredients, LLC

It would seem that the market hasn’t really reacted to the massive flooding throughout the Midwest. This is likely because the amount grain affected, currently estimated at $500 million in Nebraska alone, is relatively small. While that sounds large, the total U.S. corn crop is valued at about $60 billion and the bean crop at $40 billion. So, losses may only total about 1% of the crop across the entire Midwest.

About 13% of ethanol production was estimated to have been halted last week. But that demand is small, 2 million bushels per day, relative to the estimates of what have been lost so far of maybe 250 million bushels of corn. However, if those plants stay off line for more than a couple months then the issue could become a bigger problem. Unfortunately, that lack of demand can’t be made up. It’s lost forever because most plants were running at near full capacity.

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The challenges of still having unsold 2017 corn

By Jon Scheve, Superior Feed Ingredients, LLC

Wheat’s massive drop was most likely the cause for the decline in corn and beans the past couple of weeks. Large hedge funds often have positions in all three commodities, so if they were selling one, they might be selling all three.

In the last 30 days, wheat, corn, and beans had significant decreases with moderate rebounds last week:

  • Wheat decreased $1 per bushel then recovered 20 cents
  • Corn decreased 25 cents per bushel then recovered 14 cents
  • Beans decreased 45 cents per bushel then recovered 20 cents

This week’s recovery could make technical traders think prices have found a low. If so, they may consider re-ownership or short covering of recent sales in the futures market, which could help prices trend higher.

 

I’ve noticed a few analysts and advisors who still have 10% to 25% of their 2017 corn unpriced. One advisor was suggesting that farmers price remaining ‘17 unsold corn if July ’19 futures hit $4.

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Are there reasons to be optimistic for corn prices?

By Jon Scheve, Superior Feed Ingredients, LLC

The last USDA report lowered export demand by 75 million bushels, most likely due to the anticipated large corn crops in South America and Ukraine. Unlike the U.S. though, these countries lack adequate storage, which means their corn is priced to move when it is harvested and it will compete with U.S. supply.

The USDA also reduced the ethanol grind by 25 million. The recent price set-back, could help ethanol plants’ margins and allow for the grind to remain steady going forward.

On a positive note, feed usage wasn’t reduced any further in this report. Some say the long cold winter is causing lower feed efficiency, so some expect feed demand to be adjusted higher down the road. While others in the trade think the much lower wheat prices will encourage end users to replace corn with more wheat in the rations. I’m not sure this will happen though, given wheat’s relatively good carry and strong basis most of the year will keep much of the wheat out of feed.

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Selling in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC

Argentina corn is cheaper than U.S. corn because the South American corn crop conditions are above normal. Because it’s difficult to store grain in the southern hemisphere, it’s priced to move. Wheat pulled back as well and some see wheat working into feed rations at the displacement of corn.

Winter doesn’t seem to want to end in the U.S. Currently in Minneapolis there is 3 feet of snow on the ground and it’s not expected to be above 30 degrees for another 10 days from here to Des Moines. Usually the snow is starting to melt in Minnesota by the end of March. The prolonged winter and likely flooding in northern parts of the Corn Belt is concerning some.

There are farmers who are also worried about the limited time they had for fall field work and fertilizer application. While it’s still unknown if planting will be significantly delayed, it is highly unlikely at this point to start early.

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Selling straddles

By Jon Scheve, Superior Feed Ingredients, LLC

The biggest news of last week was when Agriculture Secretary Perdue announced that China agreed to buy 10 million metric tons (about 400 million bushels) of beans Friday afternoon from the Oval office after the markets closed. Earlier in the week President Trump said China would also buy more corn too. While both statements seem positive, the market has already heard rumors and predictions before, only to be let down by smaller numbers due to a variety of reasons. It will take follow through and actual purchases to get the market excited.

March corn closed again for the 13th straight Friday within the tight trading range of $3.74 to $3.85.

 

Market action

With corn trading within a very tight range the last 3 months, including straddle trades in my grain marketing plan was a good decision for my farm operation. Since late November, I placed three straddle trades that all expired on Friday that helped me generate 13.5 cents of profit on 30% of my corn production.

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