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Market Analysis



Does adding storage pay?

grainbins

In general, the markets tend to trade sideways in February. And, with no big surprises in the February USDA report, everyone is looking to the March 31 report for market direction, which will estimate corn versus bean acres. Summer weather will then be the big market driver after March. For a $4.50+ corn rally, there will need to be big surprises in the March report. To reach $5, weather-related conditions are likely necessary this summer. On the bright side, it will be hard for the market to trade near $3, unless we get a bumper crop like 2014 again.

 

Storage

This month I worked with a client who was interested in putting up more storage. Currently, they were able to store 50% of their crop on the farm and they wanted to store 100%. To get financing, they asked me to help them show how storage was a good investment to their banker.

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USDA offers few changes and several yawns in report

Yawn.

Today’s report was pretty boring, a few changes, nothing major. No big price movements followed this report.  Corn ending stocks were lowered 50 million bushels to 1.827 billion bushels. Corn for ethanol was increased 75 million bushels but feed demand was lowered 25 million bushels.  Ending stocks for corn were less than traders had expected. That along with higher ethanol numbers is a small positive. Soybean ending stocks stand at 385 million bushels, down 25 million bushels from January. Crush was increased by 15 million bushels while soybean exports went up 20 million bushels.  Soybean imports went up by 10 million bushels. US ending stocks at 385 million bushels would be a positive. Brazil’s soybean production was lowered by one million ton to 94.5 million tons. That decline was offset by higher production from Argentina of one million tons to 56 million tons.  Wheat ending stocks were up 5 million bushels to 692 million bushels.

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Take time to analyze your farm as a business

 

For those who have never seen the Chicago Board of Trade trading floor, your time is limited. On July 2, 2015 all futures pits in Chicago will be closed, due to a lack of use and it will save stock holders $10 million per year. Computers and electronic trading have replaced humans for 99% of futures trades. Options pits will remain open for now because 50% of the trading volume is still done as open outcry in the pits. If you don’t have time to travel to Chicago, you can always rent the movie “Trading Places” off Netflix and let Eddie Murphy and Dan Akroyd show you what the trading floor was like at it’s prime during the 80s.

 

Which way is the market going?

There was significant volatility in the grain market this week. Monday the market was down. Tuesday there was a big rally. Wednesday and Thursday swings offset each other.

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Margins continuing to tighten in 2015

Spring is just around the corner. It is hard to believe that in 70 days or so, spring planting of corn and soybeans could be underway across Ohio and the Midwest. Many producers have already made decisions regarding the mix of corn and soybeans to be planted this spring. Margins and profits per acre are under strong pressure as producers head into the spring planting season.

Gone are the profits seen in past years when money was made in a big fashion. At that time producers had the advantage of locking in lower input costs while selling revenues increased as prices moved higher due to drought conditions or strong demand. Fast forward to 2015. Corn and soybean prices have fallen sharply compared to previous years. Input prices for fertilizer and seed remain high with little retreat lower. Many analysts are calling for prices to move lower in coming months for corn and soybeans.

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Prepare to battle the bear

Corn highlights

Last week corn dipped below the 100-day moving average, which usually indicates the market will move lower going forward. However, farmers aren’t selling, so many are unsure what to expect. Corn exports are difficult due to lower priced corn coming from the Ukraine. Warm weather in the South last week was hurting feed demand, especially in the cattle markets. Ethanol plants are still strong buyers, but margins are tight.

Bean highlights

Bean prices continue to decline as the strong South America harvest begins (10% complete last week). Some reports indicate Brazil’s economic problems could cause the Brazilian currency to drop in value, which may lead to more farmers selling their beans. Export vessels are lining up; however, the number of ships waiting to load is lower than last year. This may suggest lower demand than previously estimated and fewer logistical issues, which would mean less need for load outs from the U.S.

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Selling forward with a production budget in mind

Where will corn and bean prices go?

Corn has a big technical resistance at $3.77 (100-day moving average). So far, the market has held this price as a floor. Some still estimate $4.25 as an upside target. Fundamentally, farmers haven’t been sellers much below $4, so with the board around $3.85 some end users can’t source corn without increasing basis. This could indicate a sideways trade the next few weeks with a $3.80 to $4.10 range on March corn futures.

Soybean prices continue to be susceptible to South American weather reports and China cancellations, which are both bearish prices right now. I still estimate beans are in a downward trend for a few weeks, if not longer.

The benefits of selling forward

Again this week a farmer told me that he doesn’t like to sell forward. His reason — it’s difficult to plan all of his future input costs right now.

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It’s taking $4 cash to open bin doors

Jon Scheve, a grain merchandise with Superior Feed Ingredients, says that ethanol plants are having to raise corn basis to get farmers to load up a truck for delivery. He says some farmers are holding on for dear life until they see prices around the $4 cash mark or higher. Hear more of his comments about cash corn and why weather in the U.S, not Brazil, is moving markets as of late.

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January report offered news for bulls and bears

Maybe the most anticipated USDA report of the year was published last week. The biggest take away in the report was carryout bushels. Carryout is the amount of unused grain from one production year to the next, which helps traders to determine if the market is trading at the correct price.

The bullish news was that corn yields and carryout were reduced, causing corn prices to close positively on the day of the report. While reduced carryout estimates are good, there is still 1.87 billion bushels of corn carryout compared to 1.2 billion last year. So, the carryout combined with outside-market pressure and increasing ethanol stocks contributed to a corn sell off the net day.

As I expected, there was little good news in the report for soybeans. The carryout is estimated at 410 million bushels (compared to the tighter 92 million last year). The market was anticipating a slight carryout drop, thus the big drop.

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Will glut of supply mean $9 soybeans (or less)?

After USDA’s January supply and demand report, the soybean markets felt a lot of downward pressure and flirted with resistance levels at the end of the week. Jon Scheve, a grain merchandiser with Superior Feed Ingredients says that downward trend may continue and really put the pressure on the bean markets at harvest time. He talks with The Ohio Ag Net’s Ty Higgins about how low the markets can go.

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The importance of setting marketing goals

The market appears to be trading sideways until the New Year when traders get back to a full week of trading. Also, many in the industry are waiting for direction from the January USDA report.

With the market volatility facing producers in 2015, there will be opportunities to maximize profits, but farmers need to be prepared to take them when they become available. How does a producer do that?

Set goals

The most important (and profitable) preparation farmers can do is determine their operation’s goals. Smart farmers determine in advance what price they need versus the price they want. Typically the questions I ask my farmer clients are:

• What price do you need and why?

• What price do you want and why?

• What price will you settle for and why?

The answers to these questions provide an outline for me and my clients for the upcoming year as well as the next few years (for many of my clients we are working through 2016 plans and looking as far out as 2017).

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Where will futures go in 2015?

Corn

Why is it so hard to predict where futures will go next year?

Largely, because, it’s impossible to predict what all U.S. farmers are going to do and what the weather will be like in the future.

  • Will farmers have time to complete fall tillage – they didn’t complete all of it last month
  • When will the fields be ready to plant – it was a late plant last year
  • What will farmers plant – many Iowa farmers are having trouble maintaining yields with corn on corn
  • What is the financial situation of farmers – there are rumors credit will be difficult for some farmers, they might plant more beans because of less input costs
  • Will the new farm program change planting intentions – farmers still don’t know which program is best for their operation yet

 

Ultimately it usually comes down to breakeven prices in the spring when the farmer has to put seed in the ground. 

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Planning for tough 2015 corn and soybean markets

Most of my clients are priced for all of their 2014 AND 2015 corn and soybean production. I’ve been urging them to be prepared for heavy supply and stagnant (if not falling) prices going into the 2014 harvest. All the experts are assuming U.S. farmers will produce about two billion bushels of corn above the 2014/2015 marketing-year demand (yearly demand averages around 12-13 billion). The market typically prefers when farmers produce only a billion bushels more than is needed, to “feel comfortable” one year to the next. Many also suspect the USDA will revise and increase last year’s total production number in the upcoming Sept. 30 report, which would put more pressure on prices to decrease.

 

This means 2015 demand needs to dramatically increase (say a 10% increase) to keep prices from falling. What could cause this to happen?

· Ethanol – It is currently already running at full capacity.

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