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Market Analysis



What should a farmer do with grain in a commercial facility?

Friday’s bean rally may be attributed to the Brazilian Central Bank propping up their currency, which will likely slow farmer selling there in the short-term. Also, dry weather in Australia is helping support wheat prices. With both beans and wheat prices higher, corn also increased. U.S. farmers aren’t selling going into harvest, which is supportive. Soybeans and corn both closed technically strong, with potential for more upside next week. However, fundamentally it may be difficult, now that harvest is in full swing.

The Chinese visited the U.S. this week and announced they would buy 500 million bushels of soybeans. The announcement was not a surprise to many in the trade as the Chinese consume 60% of the world’s soybeans. The contract details were a bit vague though. The bushels purchased have no guaranteed time frame and no letters of credit have been established. It was a great photo opportunity for all involved, but follow through with commitments will still be needed over the next several months.

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Selling calls can set up success

The Fed didn’t change interest rates last week, which helps farmers in the short-term. The dollar won’t increase in value, making it easier to export grain. Also borrowing money for operation costs won’t likely increase.

The corn market is under pressure, likely from the start of harvest. Yield results are wide-ranging, causing price volatility. Some in the industry are looking for yields to come in less than expected and help push futures back above $4. Pending how low yields could go will ultimately be the final driver of futures prices.

Some end users are concerned farmers won’t sell after harvest, which could keep prices from going lower. They are looking for dips in the market to make purchases.

Market action

The following provides detail/rationale from a recent trade on my farm operation. Providing general grain marketing strategy “best practices” is good, but I think describing real life trade examples is a great way to show farmers the benefits of having a sophisticated marketing strategy. 

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Are price swings ahead?

The trade was surprised by the USDA reducing corn yield estimates, but at the same time raising bean yield estimates. What does this mean?

Corn

Carryout for the 2015/16 crop was reduced to under 1.6 billion bushels. Many think this is bullish and corn won’t trade below $3.50. The top end of the trading range could be $4.10 in the near term. Currently, there is 1.77 billion bushels of carryout from the 2014 crop and the market is trading below $4. Assuming no large issues, it’s hard to believe prices could change much from this yield estimate adjustment.

Potential issues that could cause price swings

  • Exports are a wildcard. The U.S. dollar is very strong. If interest rates increase, it won’t be bullish for grain exports.
  • Early reports of lower than expected yield in the south seem bullish. However, the amount is minor compared to the corn in the upper Midwest, where yield estimates are largely expected to be good and harvest will start in 10 to 14 days.
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Will Sept. 11 supply and demand report be a game changer?

What do the U.S., Brazil, and Argentina all have in common? If your answer was: “soybean producers,” you would be close but missed the nail. All three had record soybean crush during the month of July. Soybeans are days from harvest taking place in a big fashion. For many parts of Ohio the dry weather for the last two weeks of August pushed soybeans to rapid maturity. Some early soybean harvest reports across the Midwest during the first week of September have yields below that of last year.

Last month the USDA crop report was pretty bearish. Traders had been expecting a neutral report for corn and expected the soybean numbers to be bullish. To put it mildly, the report was a huge surprise to the market as well as traders and producers. Many had expected corn and soybean yields to drop from previous forecasts. Instead they went up. USDA estimated U.S.

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Hope is a poor marketing strategy

The market feels like it is in free-fall and the lack of strong exports is discouraging. One silver-lining, as futures continue to drop, export demand may eventually increase. World grain supplies are still high, which could keep a cap on prices for a long time. It will likely take a supply disruption to change the course dramatically.

Rumors indicate the Chinese government may drop domestic corn subsidies and pay farmers direct instead. This may lower corn prices and make China imports more difficult. However, China will still need the same amount of grain, regardless if it is domestic or imported. So, the impact of this on the market is uncertain.

 

When will the corn low be in place?

‪In the last 40 years, the year’s low was in Sep/Oct 12% of the time (Sep three years/Oct two years) and in Nov/Dec 30% of the time. Many farmers still have old crop and are hoping for a small run up before harvest.

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What is the difference between technical and fundamental trading?

The stock market is jittery and commodities seem weak. China’s economic problems continue to plague the world. World markets are trying to determine if China’s economic issues are a short-term blip or a long-term problem. Lack of strong export numbers is also raising concerns with traders. One small positive — there were some export sales on the lows last week.

With harvest approaching, unsold farmers are moving old crop out of home storage, taking deferred pricing (DP) if offered. Many farmers are estimating (or wishing) national yield will be reduced in upcoming reports. These farmers think we are due for a major surprise that will bump up futures prices substantially. Some will wait to price until harvest, hoping for a rally just before. Others will just bite the bullet and sell now.

End users see all of this and are not bidding aggressively, choosing to sit back and be patient. However end users know farmers won’t sell after harvest unless the rally comes, so the basis has not completely fell apart as they get as much coverage on as they can.

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Considering corn versus beans for 2016

Pro Farmer estimates are showing a 164.3 corn national average, while the USDA was 168.8.  This wasn’t a big surprise to the trade. Many feel that the final number will be somewhere in-between. We will know in almost 30 days as harvest should be nearly to I-80.  This week harvest was as far north as Wichita, KS. Reports of dryland corn yields of 130-150 in fields that normally produce 100 are certainly going to get the attention of the markets.

However, there was a significant 15 bushel yield difference between the USDA and Pro Farmer in Indiana and Ohio.  With 8.75 million acres estimated to be harvested in these two states, this could mean a 130 million bushel (or 1% of total crop) decrease.  If this happens, carryout could be under 1.6 billion overall, which could be good for prices.

However, this assumes:

  • No additional yield increases in the western states
  • No changes to export demand (which has been called into question recently)
  • No changes to feed demand despite significant amounts of feed wheat from the rainy weather this summer, a reduction in feed demand for corn is a strong possibility.
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Boost grain marketing with futures, basis and carry

The experts weren’t expecting the USDA to raise yield estimates.  Many don’t believe the numbers, but everyone is now trading off of these new projections.  Farmers probably won’t be selling at these prices.   In the past when farmers waited futures eventually creep back up to $4 corn and $10 soybeans.  We’ll see if that strategy works again.

Some are saying this will be the highest yield posted by the USDA for the year for corn and soybeans. It has been noted that the USDA has trouble estimating crop yield in wet years. Once harvest starts in 45 days there will be a better understanding of yield potential.

The Ohio’s Country Journal did a crop tour last week in Ohio and believe the yield on corn could be 166 to 175 while the USDA pegged it at 168. Some experts were thinking Ohio was closer to 150. Read more here http://ocj.com/2015/08/2015-1-75i-71-ohio-crop-tour-summary/.

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Bearish USDA report

Bearish.

That one word wraps up today’s numbers for corn, soybeans, and wheat. Not only were the yield estimates for both corn and soybeans higher than July, they are much higher. The trade had expected production, yield, and ending stocks to be declining for corn and soybeans. They did not. USDA estimated the corn yield at 168.8 bushels per acre, up 2 bushels from July. The trade had expected ending stocks to drop about 175 million bushels. Instead, they rose 113 million bushels to 1.713 billion bushels. Corn production was estimated to be 13.686 billion bushels, up from last month’s 13.530 billion bushels. Soybean production was pegged at 3.916 billion bushels, compared to last months 3.885 billion bushels, and up 31 million bushels. The trade has been talking for weeks about soybean ending stocks moving lower. They came in at 470 million bushels, up from last months 425 million bushels. Traders had expected ending stocks to drop to 301 million bushels.

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Summer corn and soybean highs may be set

Crop prospects are improving slightly for many since early June, while the amount of exports are not, as U.S. corn and soybean export projections continue to be under pressure. The U.S. is facing stiffer competition from other exporting countries, especially Brazil and Argentina. USDA is currently projecting new crop exports of corn at 1.875 billion bushels. That number could drop as much as 200 million bushels in coming months. USDA had estimated new crop soybean exports at 1.775 billion bushels. They could decline to just 1.6 billion bushels.

China has been an active buyer of soybeans from South America in recent months. They have not been buying U.S. soybeans in great quantity this summer. U.S. soybean new crop export sales at the end of July were half of last year’s sales at this time. We should see China return to buying from the U.S., though as they do not have coverage yet in place for October, November, and December.

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Soybean marketing action

Old crop soybeans remain inverted (meaning they are valued higher in the nearby futures compared to future futures months). Translation — the markets want soybeans now, not later. Additionally, as futures drop, basis levels have been increasing (likely driven by domestic soybean meal demand).  Some think this was caused by the USDA over-estimating last year’s carryout. If true, this could lead to a drop in the carryout this coming year, which would change next year’s balance sheet. This may be bullish news.

On the other hand, South American meal values are dropping and considering the spread difference, imports to the U.S. would be likely.  Plus, China is buying more fall shipments from South America than the U.S. recently. Long term this is bearish.

Also, the market is having trouble estimating the yield potential, because planted acres are still uncertain. Reports indicate farmers in southern Missouri and Illinois were still planting this week. 

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Overcoming the fear of margin calls

It’s pollination week in much of the Corn Belt. In general, the weather is supportive with warm weather and adequate moisture levels. Now the focus turns to estimating the yields across the Midwest.

Interestingly Kansas and South Dakota planted the same amount of acres to corn as Indiana and Ohio according to USDA forecasts. Usually Kansas and South Dakota only have state wide yields of 135 while Indiana and Ohio experience 175.

Minnesota plants about 80% of the corn acres as Indiana and Ohio combined and some of the best corn in the Midwest is in Minnesota. Currently, it’s anybody’s guess as to how bad the east will be this year, but reports from the west are very encouraging.

All the negative news about Illinois could be offset by potential record setting yields in Iowa where they plant 10% more acres to corn than Illinois. Nebraska is the third largest producer of corn and it might be about the only state that will be near “normal” this year.

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Fast moving prices with big swings likely in coming weeks

A phone call last month was a first for me as to its ending. As I was talking with a customer mid-morning, I heard these words at a little faster pace, “Doug, I have to go. I see a groundhog I have been trying to get for months.” I think the next sound I heard was, “click”.

So far this is the summer that wasn’t. Frequent and plentiful rains during June and early July have kept growing conditions less than ideal in many areas across Ohio and the Midwest. Persistent rains falling in already drenched fields and declining crop conditions have played a large role in the price rally for corn and soybeans.

While it is difficult to translate crop conditions on a certain date into a final yield for U.S. corn and soybeans, one thing seems fairly certain: we have seen the year’s high for U.S. corn and soybean yields for this growing season.

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Futures offer marketing flexibility

Reasons to be bullish corn:

• Technical picture for corn futures is bullish

• Indiana and Ohio are clearly having production issues

• Illinois growing conditions continue to fade

• USDA has dropped planted acres and harvested acres

• Trade believes the final yield is closer to 162 than the USDA’s 166

• 2015/16 corn carryout continues to slide and is below 1.6 billion

• Europe’s corn production will be at least 10% lower this year

• Funds have moved from a large short position to a long position

• Alberta Canada is in drought and wheat is being put up for hay

• Possible ridge of high pressure moving in and potential dry August

• 90- to 100-degree days during pollination over large patches of the Corn Belt.

 

Reasons to be bearish corn:

• Minnesota and South Dakota could see yields over 200 bushels per acre this year (150-185 normal)

• Iowa largely looks good and Nebraska is improving

• Significant hay inventory could reduce need for excessive corn silage and thus more corn acres

• USDA could increase crop ratings this week based on good weather in the West

• Massive world wheat carryout, could lead to more wheat feeding around the world at the expense of corn

• Large supplies of feed grade soft wheat in the United States may replace corn in the rations in the South

• Slow new crop sales and a lack of continued Chinese corn demand

• If achieved, a national average yield of 165 will push prices back to $3.75 futures

• Goldman Sachs has expressed that prices are too high for world stock levels

• USDA estimates that prices should average $3.75

• Drier weather in West could be welcome relief to recent wet weather

• While hot next week, humid conditions could reduce heat impact on pollination

• Brazilian corn works in Southeastern U.S.

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Set a marketing game plan

Corn

USDA surprised Chicago analysts last week by reducing 2015 corn acres estimates — 200K planted but 500K harvested. This could reduce 2015 bushels by 80 to100 million, and ultimately support prices. Still questions remain:

• Will harvested acres stay low?

• Will USDA revise estimates in the future?

• Will excessive rainfall cause a drop in USDA yield estimates in July?

• With abundance of forage in the South will some silage acres be harvested for corn?

Interestingly, sorghum planted acres were up 1 million. Comparing total corn and sorghum acres between 2014 and 2015, there was no change. When the massive amount of low quality wheat is also considered (which will likely replace some corn feed), could long-term corn be a bit “overdone?”

 

Crop reports

NE — with the recent good weather, crops are looking much better than two weeks ago

KS — some progress was made on double crop soybeans last week.

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Costs and returns from holding grain

Where can corn and bean prices go from here?  Corn looks to be in a range of $3 to $4.40. The soybean range could be $8 to $10. Following are some of the market movers that could take prices higher or lower.

 

Reasons to be bullish corn:

• Too much rain — nitrogen losses will hurt yield, a possible repeat of 1993

• Root systems could be shallow and any adverse weather later in the season may hurt stand

• Acres for new crop may be reduced because of prevent plant

• U.S. dollar has not continued to rally, leads to being bullish exports

• Southeastern corn crop is dry and yields have been reduced.

 

Reasons to be bearish corn:

• Rain makes grain — 74% of corn belt is rated good to excellent

• Corn planted on time, shouldn’t be any reductions to planted acres

• Wheat crop has lots of quality issues, some wheat might be forced into feed channels displacing corn

• Carryout on 2014 is still burdensome

• Farmers running out of time to sell before new crop

• Several vessels of DDG cancelled to China

• Lack of new crop farmers selling could put pressure on any future rallies

• Lack of additional export sales could increase old crop carryout

• Bird flu may hurt feed sales by 50 million bushels, adding to carryout

• Green grass in the south could hurt feed usage and increase corn carryout

• Economic problems continue to plague Greece and the EU

• World stock levels are record high, which is burdensome.

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Dollar drivers

A number of recent trading sessions have been marked by a frustrating pattern. Overnight, grains will start a brave little rally based on fundamental production worries like rained-out planting or flooded, sprouting wheat. At 7:00 a.m., they’ll be gaining a few cents to counteract the brutish losses of previous days, and then — wham! Something will happen to douse the bullish optimism and drive prices back down.

That something has been a skyrocketing U.S. dollar index. The dollar index itself is just a number with no units, derived from a mathematical calculation to describe the value, at any point in time, of a complex idea — that the paper printed by the government of the largest economy on Earth represents that economy’s overall worth, can be traded efficiently for goods and services, and will always be honored by that government.

The grain futures contracts used to track the value of corn, soybeans and wheat are denominated in U.S.

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Hedging to maximize farm profitability with tight margins

Soybeans

Due to heavy rain, 6 million soybean acres in Kansas and Missouri are not yet planted. How many acres might end up in prevent plant? Two million acres, or about 100 million bushels, while significant would probably not have that large of an effect on the market. Even if none of these acres are planted, the 2015 carryout will still be higher than 2014.

Total planted acres estimates are still uncertain. USDA estimates 84 million while others forecast 87 million. Prevent plant acres will also influence the market. With so many unanswered questions, $8 to $10 is likely the range for now.

 

Corn

Social media and news reports make it sound like flooding is widespread throughout the Midwest, which is contradicting USDA weekly reports of 75% good to excellent corn crop overall. Many farmers, who initially reported yellow/uneven corn, are now seeing the warm weather and nitrogen take effect and corn appearances are improving.

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Soybean basis selling strategy

There was a small rally for the week in corn and beans.  While nice to see, it was probably caused mostly by a drop in the value of the dollar. Speculators bought grain to cover their short positions and pocketed a little profit. A few small bad weather pockets (i.e. frost in Manitoba, heavy Midwest rains, etc.) may have also contributed, but it was minimally.

I don’t expect this rally to go far, considering the surplus grain stored on farms.  Look for $3.80 on the July and $4 on the Dec to be met with eager farmers selling.  Soybeans may get to $9.40-$9.50 on the Nov, but farmers will start selling at those prices.

Is it too wet and cold?

This week a grain elevator colleague wrote the following in his enewsletter to customers:

“Historically speaking, when 70% of the corn crop is planted by May 15, the worst crop has been only 1.4% below trend.

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Tips for sleeping well when markets are a nightmare

The EPA released their ethanol and bio-fuel requirements last week and the estimates were close to expected results, so the market changed very little. Nothing else big happened, which made the market a little painful to watch as it generally drifted lower. Curious, I reviewed what I wrote a year ago to see if I could gain any insight. Interestingly, nearly every bullet point I wrote last year this week is relevant today except:

  • Prices are $1/bu less
  • Instead of last year’s PED virus, this year we have the bird flu.

No two marketing years are exactly the same, but it does seem that history may be repeating itself….

 

Here is my Market Commentary for May 30, 2014

 

Corn

The planting progress compared to the last five years is on schedule and weather conditions across the Midwest have been good this week. The following are trends to keep an eye on:

• End users have good coverage on through June-July, so don’t expect a rush to purchase August/September. 

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