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Market Analysis



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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Will $4 corn be a reality?

Now that harvest is completed, the winter landscape begins to exert its influence. Work turns to what can be accomplished inside. Producers’ attentions are quickly turning to the 2016 growing season. Corn and soybean prices have fallen drastically compared to those seen several years ago. Many decisions will need to be made in coming months. Pricing and sourcing inputs will be critical to profitability in the next growing season. Seed corn selection is critical to matching up hybrid capabilities to the land. Cash discounts for payment by year’s end, now less than 30 days away will be part of the process.

On Nov. 22, Argentina held its runoff presidential election. With no clear winner emerging from its election in October, the top two vote getters faced each other in the runoff election. The candidates were Daniel Scioli and Mauricio Macri. Scioli was the candidate backed by outgoing president, Cristina Fernandez. Macri was the conservative opposition candidate that pledged major reforms.

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How to avoid giving away your storage

The recent market collapse was largely caused by higher than expected corn and soybean yields and carryouts. In the end, increased production in the western Corn Belt made up for lower yields in the east due to the wet spring. Also, world carryout increased because the USDA is estimating that China hasn’t used as much corn for feed as expected the last three years. None of this is bullish grain near-term or long-term.

Supply disruptions are likely the only possibility for $4 corn and $9 beans right now — for instance, a South American weather problem or a major U.S. weather event next summer. Lack of farmer selling should keep prices from a free fall, but some have suggested $3.35 corn and $8 beans as a possibility.

What should farmers do now? I continue to stress that farmers need to learn how to use futures, spreads and basis more than ever to get every penny they can out of the market.

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USDA gives bears plenty to talk about

Today’s report was bearish for corn, soybeans, and wheat. All three had an ending stocks increase that were greater than expected.

Corn production was estimated at 13.654 billion bushels, up 99 million bushels from last month. The yield was set at 169.3 bushels per acre, up from last month at 168. Corn exports were lowered 50 million bushels. The trade had expected exports to decline 25 million bushels. Corn ending stocks were pegged at 1.760 billion bushels, an increase of 199 million bushels.

Soybean production was estimated at 3.981 billion bushels. Last month it was 3.888 billion bushels. The yield was increased to 48.3, up from last month at 47.2. Ending stocks were estimated at 465 million bushels. Soybean exports were increased 40 million bushels and the crush went up 10 million bushels. The higher demand was not enough to offset higher production. Both corn and soybeans had no changes to planted and harvested acres.

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Solid basis continues through harvest

Weather was nearly perfect for harvest the entire fall season for much of Ohio. Some parts of Ohio — particularly in the northwest — had six weeks without rain, a far contrast to the spring when it rained week after week. It was a bittersweet reminder of how fickle the weather in Ohio and the Midwest can be. Rains in early October for central and south central Ohio provided a break from a wide-open harvest during September. Winter wheat in Ohio emerged rapidly following rain totals of one to two inches which fell slow and steadily, allowing for maximum soil penetration. December CBOT wheat closed October 30 at $5.22, a weekly gain of 32 cents. This was the strongest weekly gain wheat had seen in four months.

Harvest progress across Ohio and the Midwest progressed rapidly in October. U.S. harvest progress the last week of October was 75% for corn and 87% for soybeans.

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Option strategies can offer marketing flexibility

Farmers not selling is keeping prices within tight trading ranges. Now that harvest is over, it’s uncertain how long farmers will hold their grain.  Also, corn from Brazil is being shipped to poultry end users in southeast U.S., which is decreasing demand for U.S. corn.

Some people are trying to tie high basis levels to low yields/production throughout the U.S. In my opinion local basis levels are more driven by lack of farmer selling.  Remember, end users can’t control the CBOT, they can only adjust local basis levels when they need to in order to get farmers to sell.

Market action

My November bean options expired  Friday (10/23/15). November is my preferred futures month for hedging new crop before harvest.  The following are the results of two different options strategies I had in place.

On 7/22/15 I bought $10.20 Nov calls (the right to buy grain for 35 cents) for coverage on 50% of my anticipated production.  

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Buying calls is gambling

 

Markets remained range-bound last week. There was some discussion the Chinese, who control much of the world’s corn carry out, may grind some for ethanol. Generally China has avoided the food versus fuel debate, but some of their corn is from 2010 and is declining in quality. If China would increase ethanol production, it could help drive futures higher as they will look to replace their inventories.

On the weather-front, the University of Illinois just released a study showing there is practically no correlation between winter precipitation and the following summer’s rainfall. Some will continue to be concerned that El Nino will eventually become a La Nina event. The extreme weather forecasts for this El Nino didn’t happen quite as planned. So, La Nina’s potential effects will remain uncertain.

This week most farmers will finish harvest. In general, elevators across the Midwest took in less priced grain this year than last harvest, mainly because of reduced prices.

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