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Market Analysis



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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Are corn yields on their way up?

The October USDA supply and demand report often has the potential to be a game changer. Game changers can also be called surprises, which in turn create violent price moves. With that report USDA has the ability to gather actual harvest data to give a much more representative report for U.S. yields. Previous reports were merely estimates based in part upon ear size and plant populations. The trade had expected corn yields to decline compared to the September report. That reduction could then easily pave the way for continuing reduced yields leading into the final production in January 2016. Instead, the corn yield was increased a half bushel with a U.S. yield at 168 bushels per acre. Now the expectation is that the corn yield will again be increasing in successive reports.

By now you may be asking, “How did they do that?” It happens when your state is in the top six and corn yields grow as the season advances.

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Get to know your marketing tools

We finished harvesting on our farm in southeast Nebraska last Wednesday. Yields were average for irrigated corn and soybeans, which was expected. However, we were pleased that dryland corn matched last year’s record production and dryland soybeans were 20% higher than the last 10-year average. Reports indicate these results (i.e. corn meeting expectations and bean yields higher than expected) are being seen across the Midwest. I expect the USDA yield estimate will be close to final numbers in the January report.

Since the much-anticipated Oct USDA production reports, end users are scaling down buyers from $3.75 Dec futures, but farmers aren’t selling at those levels, waiting for $4. I expect a tight trading range for the next few months.

There was a nice bump in the soybean market after the October report, causing some farmers to sell. Keep in mind, with the higher than expected yields, $9.25 futures produce the same gross revenue as $10 futures with lower yields.

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Soybeans slightly friendly, corn and wheat neutral

Overall the report was not a huge shocker. No big price movement took place at noon. 

USDA estimated corn production at 13.555 billion bushels, last month it was 13.585 billion bushels. The corn yield came in at 168 bushels, compared to 167.5 last month. That is a bit bearish. Traders were expecting the corn yield to be reduced. Corn ending stocks were 1.561 billion bushels, last month they were 1.592 billion bushels. Corn acres were down as expected.

Soybean production was pegged at 3.888 billion bushels while at 3.935 billion bushels last month. The soybean yield was 47.2 bushels per acre, last month it was 47.1 bushels per acre. Soybean ending stocks were 425 million bushels, down 25 million bushels from last last month. Soybean acres were cut 1.1 million acres. No surprises there. Traders the last several months have paid strong attention to soybean ending stocks. Two months ago they had expected ending stocks to drop below 370 million bushels.  

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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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