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Market Analysis



Neutral report, a yawner

Today’s USDA crop report looks to be dismissed and nearly soon forgotten if you believe the news stories prior to the noon release. Grains overnight were mixed with corn and wheat lower while soybeans were higher. The report today deals solely with the supply and demand report. Production numbers for 2015 will not be changed. Usage and ending stocks will be the numbers that the market, analysts, and producers will key on.

U.S. corn and wheat ending stocks were unchanged, no big surprise. Corn exports were unchanged, no big surprise. Soybean ending stocks went up 10 million bushels to 460 million bushels due to crush lowered by the same amount. This had been well expected by the trade.

Prior to the report corn was down 3 cents, soybeans up 3 cents, wheat down 3 cents. Shortly after the report release, corn was down 1 cent, soybeans down 3 cents, while wheat was down 1 cent.

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Finding weather trends

Corn continues to trade in a 20-cent range. Weather conditions appear favorable for early planting, which makes above trend-line yields possible. While some in the market estimate there is enough weather premium in Dec futures at $3.75, many think above average yields will bring $3 corn or lower.  Many farmers are hoping for a 50-cent weather driven rally to catch up on sales.  Both sides are keeping corn “stranded” in a narrow trading range.

Beans recovered nicely on Friday to stay in the current 60-cent trading range they had been in. Fundamentally the bean story isn’t bullish. There may be a $1+ per bushel weather premium factored in due to La Nina potential in August. Farmers will likely continue holding beans because many are underwater at these levels.  Beans could continue to trade sideways temporarily.

A longtime friend of this weekly newsletter sent me an article about a possible correlation of Great Lakes ice coverage and the national corn yield.  

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Running the farm as a business

A profitable farm is more complicated than planting crops and hoping they pay the bills at the end of the year. Farmers should consider their operations as a company with multiple profit centers working to a common goal. Each profit center must “pull its own weight” without drawing profits from another division. Successful farmers understand each profit center independently and how it maximizes profit for the farm operation.

There are four large divisions (some with smaller subsets):

• Land ownership

• Custom operations

• Grain storage

• Farmer.

 

Land ownership

This is where I see farmers “cheat” the most, because most farmers are very passionate about working the land. I ask all my clients, “Are you paying yourself a fair market rental price for use of your land?” Smart farmers factor that into their costs. In theory, some farmers could spend their time on the beach while hiring someone else to do the hard work of farming the land.

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USDA offers plentiful numbers for the sideways market to digest

Last month USDA held their annual outlook conference. During this conference they provide 10-year projections for U.S. grains. Typically, during the first day they provide acres estimates for U.S. grains. Then during the second day they publish additional numbers that include supply and demand estimates, including ending stocks.

There are a bunch of numbers. To highlight a few: USDA estimated 2016 corn acres at 90 million acres, up from last year’s 88 million acres. Soybeans for 2016 were projected at 82.5 million acres. This is down ever so slightly from last year’s 82.7 million acres. Wheat acres continue their trend of shrinking from previous years, projected this year to be just 51 million acres. Last year U.S. wheat acres were 54.6 million acres. One way of looking at 2016 acres is to total corn, soybeans, and wheat, the three major U.S. crops. USDA puts the total for those three at 223.5 million acres, last year that total was 225.3 million acres.

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Waiting for a price rally limits the potential for a rally

Citi Bank indicated that the Chinese economic slowdown will likely continue to burden world markets, which could eventually leading to a global recession. They lowered their world growth forecast from 2.4% to 1.6%. This might mean that crude oil prices will not likely rally, which would keep ethanol and corn prices in check.

At a recent conference, the USDA’s chief economist echoed the bank’s statements and pointed out the world’s oversupply of grain. He went on to estimate corn acres will increase by 2 million acres (near market expectations), with prices continuing to trade around $3.45. One positive note, 2016 soybean acre projections weren’t increased and cash prices are expected to be around $8.50.

Farmers constantly ask what I think prices will do. Until we see what the weather is like, I expect corn prices to stay about the same level they are today. There is too much old crop sitting in bins and farmers are delivering on “price-later” contracts, which means many end users aren’t hungry for grain.

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Grain marketing in baseball terms

Corn continues its sideways trade since harvest. Some have suggested that a chart pattern may signal a small rally in what is still a long-term bear market. However, the rally may be limited to just a dime near term. Longer term weather will be the biggest factor.

Reports indicate U.S. corn is competitive globally (which is good), but buyers are limited. There was some bearish news last week, reports say South American feed wheat works into the U.S. Southeastern feed markets. This could displace domestic corn usage and contribute to larger carryout, ultimately keeping a lid on prices.

World stock levels are at record levels for corn, beans and wheat.  This will ultimately keep prices stable until more is known about summer weather conditions in the Northern Hemisphere. Now is the time to identify your price goals and timing.  Having your goals written down now helps reduce emotional decisions in the future.

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Too much grain, not enough demand

Goldman Sachs estimates that crude oil may trade below $20. Ethanol plants are running on extremely tight margins. ADM announced they may even sell some ethanol plants. Japan has interest rates at negative values to curb deflation. These headlines are not bullish long-term for corn and beans.  Combine this with good growing conditions in South America, the large amount of unpriced 2015 grain, and small increased carryout adjustments from the USDA report, the future of prices looks depressing.

The reality is that there is too much grain and not enough demand.  New crop prices are tied to old crop and without a supply disruption from a large-scale drought in the U.S. within the next six months (the only bullish possibility I can see that would bump up prices). I’m looking for prices to remain range bound until more is known about El Nino or La Nina.  A functioning crystal ball that could tell us what the weather will be like this summer would be great right now.

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Factors that matter in your marketing plan

Markets continued to trade sideways.  Farmers are selling at $3.70 futures and buyers are able to widen basis and still buy it. The flat price value of corn isn’t moving much.

Market action

Options Expiration

On 1/22/16 a $3.80 Feb corn option that I had sold on 12/10/15 for 8 cents expired worthless.  This is because March futures were under $3.80 on the day of expiration, I’m not required to do anything but collect the full premium of 8 cents. This trade represented 5% of my production.

Options Trade

Knowing the trade above was going to expire worthless, I sold an April $3.80 call for 8 cents on 1/22/16 to try and collect some additional premium in the future. Again representing 5% of my production.  What does this mean?

Based on May corn futures – The Option expires 3/25/16

  • Corn below $3.80 – I keep the 8 cents premium
  • Corn above $3.80 – I have to sell grain for $3.80 but keep the 8 cents premium

◦                     In other words, if this happens I sell corn for $3.80, plus an additional 16 cent premium (the 8 cent Feb call + the 8 cent April call) for a total of $3.96.

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No major surprises today from the USDA

Prior to the report grains were all 1-2 cents lower. The DOW was 80 lower, and crude oil was 30 cents lower. Following the report corn was unchanged, soybeans were up 1 cent, and wheat was unchanged.

Corn exports were lowered 50 million bushels to 1.65 billion bushels. That is not a surprise. Corn used for ethanol was increased 25 million bushels to 5.225 billion bushels. An increase in ethanol had little traction ahead of the report. However, it is not unrealistic due to weekly grinds the past month continually above the weekly amount needed to reach the yearly goal.

Soybean crush was reduced 10 million bushels to 1.88 billion bushels. That should not be a surprise as domestic crush margins have been below 50 cents in recent weeks. It compares to crush margins last year reaching over $2 a bushel a year ago. Soybean ending stocks were up 10 million bushels.

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Grain prices may not get needed boost from exports

Grain prices during the month of January did little to encourage the bulls. They are holding hard and fast to their 2015 corn as they expect $4 or more yet to come this spring. Likewise those holding 2015 soybeans would like at least $9.50. Corn basis levels remained extremely flat as well during January. A western Ohio ethanol producer reached March plus 36 during the first week of January. By the end of the month, the basis had declined 7 cents to March plus 29. If corn continues to move out of bins in February, we could see additional basis jumps pushed back to near spring planting time.

In bearish corn years of the past, we have seen four well-defined price cycles according to Steve Freed at ADM Investor Services. In the past, cycle lows have taken place in February, followed by cycle highs in April, cycle lows during spring planting in May, then finished by highs in July during pollination.

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When does it make sense to sell again?

Corn has moved 20 cents off the lows in the recent weeks.  We seem to be range bound yet and lots of farmer movement has been noted across the U.S.

Farmers have asked me lately when it makes sense to sell again.  There is no easy answer because of all the variables:

  • What are their breakeven costs?
  • What are their goals?
  • Where do they think the market will go?
  • How much old crop do they have left to sell?
  • How much new crop do they already have sold?

Many farmers have a breakeven point of $4.25 futures for new crop using Dec corn futures. Rallying to $4.25 Dec from the current $3.90 level would place old crop near $4. It’s important to remember that old and new crop corn are intertwined now, making it difficult for the relationship spread to change for the rest of the season.  At this point, quite a few farmers are willing to sell old crop corn before $4.

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Sideways prices

Grain prices the first two weeks of January were stellar — stellarly boring and sideways. The trend of prices moving lower last fall did not change. The past two months there has been a lot of negative news in the market. However, there was some friendly news with the Jan. 12 USDA crop report. There were many important numbers from that report in the biggest report day for the year on grains. They included final 2015 U.S. corn and soybean production and yields, U.S. winter wheat acres, quarterly grains stocks as of Dec. 1, as well as the monthly supply and demand tables and ending stocks.

Many had expected reports that day would be bearish. Funds were short grains and added to shorts the previous month. USDA estimated the final 2015 U.S. corn production at 13.601 billion bushels, down 53 million bushels from the previous report. The U.S. corn yield was 168.4 bushels per acre, down nearly one bushel from earlier estimates.

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The costs of free DP

The season’s biggest report was published last week and was mostly neutral for farmers. Basically, yields didn’t meet expectations, but neither did demand. World stocks are adequate to burdensome and with so much 2015 (and 2014) grain still unpriced, a significant rally is unlikely without a supply disruption. Factoring in 2016, which is largely unpriced, many are pessimistic for the next year.

Other potential bearish events….

  • The new bird flu in Indiana may spread to other states and lower feed demand for corn and meal.
  • Crude oil may trade even lower than its current 12-year low, affecting ethanol margins and corn demand.
  • Financial markets around the world declined, which may spill into the commodities markets.
  • Argentinian wheat is due for arrival into North Carolina ports this week, creating a rare opportunity to source grain from outside the U.S. when domestic stock levels are abundant.

The negative side of DP (Deferred Pricing) grain

“Free DP” isn’t actually free.

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Market action for 2016

grain

With the end of 2015, markets continue to trade in a very narrow range.  Unfortunately, the holiday rally many hoped for didn’t happen.

Soybeans

While the weather hasn’t been perfect in South America, rains have been timely. If this continues $8 futures could result, though $9 may be tested if conditions turn dry. Realistically, the market could respond quickly to any potential weather scare. I tell my clients to be ready with sell orders at prices they want to achieve, because any small rally could be short-lived.

Corn

The current over-abundance of corn makes a rebound to $4 unlikely anytime soon without a significant weather issue. Many farmers have large amounts of 2015 corn unpriced (and some 2014).  The $4 futures level seems to be the trigger/goal price for many but corn hasn’t been over $3.90 since July except for the 7 days in the first week of October.

Market action

The week before Christmas I became concerned with the bean market. 

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Lower exports and sluggish demand growth holding prices down

I hope, in spite of the dismal grain prices currently in front of us, that you can see the humor in many situations and keep your overall perspective cheerful for all.

Demand for U.S. grains now that we have reached 2016 continues to be boring, stagnant, and uneventful. During the last week of December 2015, the trend of soybeans exports larger than corn exports continued what was taking place throughout the fall. Corn export loadings that last week in December were 22.4 million bushels, nearly six million bushels below that of the previous week. Year to date exports from Sept. 1 were 359 million bushels. For the same period a year ago corn exports were 457 million bushels, a decrease of 21%. No one is going to be surprised by the decrease. USDA had already decreased corn exports 100 million bushels in the December Supply and Demand Report compared to the September report.

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Unprofitable grain prices continue

Grain prices continue to be low, stressful, and unprofitable for Ohio and U.S. producers. While March CBOT corn last summer on July 13 had reached $4.62, it has spent little time above the $4 since October. It then fell to $3.64 mid-November. Corn basis levels continue to be historic and record setting. Producers in Ohio are experiencing those levels due to the state seeing demand exceed production. Ethanol plants are a constant demand that appear to be committed to remain in production for the long term. In addition, the weather extremes seen in western and northwest Ohio last summer pulled down corn production for Ohio. Feed plants in those areas will work hard to source their corn as they will be in strong competition with the ethanol plants long into the summer.

While the year is new and fresh, the harsh reality of lower grain prices is old and stale. Grain producers long for much better prices for corn and soybeans.

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Storage and casinos

Last week the Argentina government allowed the peso to float versus the dollar and other world currency, causing the value to fall nearly 40%. This meant Argentinian farmers saw their stored beans increase substantially in value overnight. Eventually these farmers should be big sellers, as they are sitting on a large portion of the worlds’ bean supply. But when? It’s unlikely they will sell right away. Many farmers will wait to understand how the devaluation will affect inputs next year against current prices. Long-term, I expect this devaluation to limit upside potential in the bean market.

On a the flip-side of the market, there are some dry weather concerns creeping into Brazil. Precipitation forecasts are varied, which may cause volatility in the market. Combine this with speculators evening out their positions at the end of the year, there may be opportunities for farmers to catch up on sales in the next two weeks.

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Selling when a rally is unlikely

This week several unknowns caused market volatility.

  • Concern over the biofuel mandate and potential legal challenges regarding blender credits caused bean prices to drop.
  • Uncertainty over Argentina’s agricultural policy now with the new government in power.
  • Will export taxes be completely lifted on corn and wheat in Argentina?
  • How fast will the Argentinean bean export tax reduction be implemented?
  • Will the U.S. Fed raise interest rates on the 16th?

This week an analyst in Chicago suggested that U.S bean carryout won’t shrink much this year, and with normal yields around 45bu/ac in 2016, a rally is unlikely. Basically saying there is substantial downside risk left in the bean market.

After a 10 cent trading range this week, corn finished similar to last week.  Everyone wants to know how many acres farmers will plant next year.  USDA estimates 90.5 million acres.  Generally speaking, without a weather-related issue corn isn’t expected to be bullish long-term.

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Use strategy to capture market opportunity

Fundamentally, this market doesn’t have a lot of upside unless South America turns dry. It appears some farmers are taking advantage of these rallies to catch up on sales, but many farmers are still uncertain. This is why a marketing plan is so helpful. It can help take the uncertainty out of decision-making.

Soybeans

Beans showed some life after the new Argentina President announced his soybean export policy. Most likely, the soybean export tax will gradually disappear over a number of years. This may be bullish near-term as South American farmers will be rewarded for holding beans until taxes lower. However, long-term this may keep a lid on prices for several years.

Corn

Corn continues to trade in a 10 cent trading range. There isn’t much demand in the world for corn right now.

Marketing strategy – Capturing opportunities

This summer some of my new clients began selling grain on rallies.

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Little excitement in today’s USDA numbers

Conclusion, boring report. Santa, back to work.

Today’s report was vanilla and boring. No big changes that sparked huge price movement in either direction. Shortly before the report corn was up 3 cents, soybeans up 1 cent, with wheat up 8 cents. At 12:15 corn was unchanged, soybeans were down 3 cents, and wheat was up 6 cents.

If you were looking for drastic changes today, you were certainly disappointed.

The question is: Will this USDA report day be bearish, with Santa bringing lumps of coal for grain producers? Or will it be bullish, with Santa bringing lots of presents of higher prices?  

There certainly are lots of news tidbits that have been floating around for weeks. They would include Argentina and its election, China, weather in South America, U.S. production reports, and U.S. grain exports to include just a few.

Corn ending stocks were 1.785 billion bushels, up 25 million bushels from November.

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