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Market Analysis



Are there reasons to be optimistic for corn prices?

By Jon Scheve, Superior Feed Ingredients, LLC

The last USDA report lowered export demand by 75 million bushels, most likely due to the anticipated large corn crops in South America and Ukraine. Unlike the U.S. though, these countries lack adequate storage, which means their corn is priced to move when it is harvested and it will compete with U.S. supply.

The USDA also reduced the ethanol grind by 25 million. The recent price set-back, could help ethanol plants’ margins and allow for the grind to remain steady going forward.

On a positive note, feed usage wasn’t reduced any further in this report. Some say the long cold winter is causing lower feed efficiency, so some expect feed demand to be adjusted higher down the road. While others in the trade think the much lower wheat prices will encourage end users to replace corn with more wheat in the rations. I’m not sure this will happen though, given wheat’s relatively good carry and strong basis most of the year will keep much of the wheat out of feed.

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Selling in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC

Argentina corn is cheaper than U.S. corn because the South American corn crop conditions are above normal. Because it’s difficult to store grain in the southern hemisphere, it’s priced to move. Wheat pulled back as well and some see wheat working into feed rations at the displacement of corn.

Winter doesn’t seem to want to end in the U.S. Currently in Minneapolis there is 3 feet of snow on the ground and it’s not expected to be above 30 degrees for another 10 days from here to Des Moines. Usually the snow is starting to melt in Minnesota by the end of March. The prolonged winter and likely flooding in northern parts of the Corn Belt is concerning some.

There are farmers who are also worried about the limited time they had for fall field work and fertilizer application. While it’s still unknown if planting will be significantly delayed, it is highly unlikely at this point to start early.

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Selling straddles

By Jon Scheve, Superior Feed Ingredients, LLC

The biggest news of last week was when Agriculture Secretary Perdue announced that China agreed to buy 10 million metric tons (about 400 million bushels) of beans Friday afternoon from the Oval office after the markets closed. Earlier in the week President Trump said China would also buy more corn too. While both statements seem positive, the market has already heard rumors and predictions before, only to be let down by smaller numbers due to a variety of reasons. It will take follow through and actual purchases to get the market excited.

March corn closed again for the 13th straight Friday within the tight trading range of $3.74 to $3.85.

 

Market action

With corn trading within a very tight range the last 3 months, including straddle trades in my grain marketing plan was a good decision for my farm operation. Since late November, I placed three straddle trades that all expired on Friday that helped me generate 13.5 cents of profit on 30% of my corn production.

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Taking a look at the February numbers

By Jon Scheve, Superior Feed Ingredients, LLC

With the government shutdown eliminating the January USDA report, all the information the market wants to trade was moved to the February report, making it one of the biggest and most anticipated report of the year.

The final 2018 corn yield of 176.4 was surprising. This was slightly lower than 2017 and 2.5 bushels lower than the December report. This was one of the biggest yield decreases from December estimates to the final results in history. Those two bushels mean over 200 million fewer bushels, which should have had a bigger positive impact on futures. However, the report also showed a drop in overall demand.

The 125-million-bushel feed demand decrease surprised me. I’ve noticed high demand for corn in feed rations recently compared to other substitute ingredients, so I was actually expecting an increase. With the USDA livestock numbers showing a 2.36% year over year production increase, if feed rations stayed the same, it should have only meant a 75-million-bushel feed demand decrease (not 125 million).

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Only YOU can prevent the spread of free DP

By Jon Scheve, Superior Feed Ingredients, LLC

Corn continued to trade sideways, closing within a tight 5-cent range for the fourth week in a row.

This week the USDA will release the long-awaited final 2018 yield results as well as the supply and demand report. I’m expecting a corn yield decrease and slight increase in demand. Hopefully, if this happens corn will start to inch higher.

The Dec corn/Nov bean ratio moved slightly in favor of planting beans. If the U.S. and China don’t iron out a new trade detail encouraging more Chinese bean imports soon, bean prices may be in trouble down the road.

Brazil’s bean crop conditions continue to slide backwards which is slightly supportive but without a growing problem in Argentina it won’t matter. This is because last year’s drought in Argentina produced much less than was forecasted. If Argentina produces a normal crop this year it will be 40% larger than last year and offset any loss of yield in Brazil.

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The case for corn price rally potential

By Jon Scheve, Superior Feed Ingredients, LLC

The March corn futures have been range bound for the last 150 days, usually staying within a tight trading range of $3.70 to $3.90. March corn was only above $3.90 for 3 days during that time, and over the last 100 days, March corn has traded below $3.70 for only 3 days.

This lack of movement is clearly illustrated in only a 10-cent range for the closing prices of March corn on the last 8 Fridays:

1/18 – $3.81

1/11 – $3.78

1/4 – $3.83

12/28 – $3.75

12/21 – $3.78

12/14 – $3.84

12/7 – $3.85

11/30 – $3.78.

Current corn fundamentals paint a picture from a macro level that suggests realistic expectations for higher corn price potential.

 

Global position: U.S. corn is the lowest priced corn globally based on prices today. U.S. corn is about 5 cents lower than Argentina and 15 cents below the Ukraine.

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Capturing carry and paying for storage

By Jon Scheve, Superior Feed Ingredients, LLC

Due to the government shutdown this month’s USDA report, arguably one of the top three reports of the year, wasn’t published. There will likely be more market volatility until an impartial number can be released by the government again.

Many in the trade are assuming the national corn yield has decreased up to 1 bushel per acre on corn. Plus, demand is likely to be steady, which would mean a slight carryout reduction. Carryout hasn’t been this tight in 3 years and the stocks-to-use ratio, which is carryout / demand, is at a 4-year low. All of this should mean higher corn values, but the market isn’t trading those type of levels.

 

Corn verses bean acres

With Nov beans around $9.50 and Dec corn around $4, it’s not clear if as many acres will switch from beans to corn for 2019. Corn needs to buy 3 to 4 million acres from beans and that might not be as likely right now.

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Reasons to be bullish or bearish soybeans

By Jon Scheve, Superior Feed Ingredients

There are many factors that affect the futures market. It’s easy to rationalize why the market could be headed for a rally or a decline at any given time.  Last week I discussed the reasons to be bearish or bullish corn.  This week I discuss beans. 

Reasons To Be Bearish:

  • The most massive carryout in bean history – currently at 950 million bushels
  • Good weather throughout much of Brazil for most of the growing season
  • The Brazil harvest is beginning this week and will be in full swing before the end of January
  • Lack of adequate storage requires South America to move their beans shortly after harvest
  • China has not bought many US beans this year
  • The Asian Swine Flu in China could be much worse than stated and demand for soybeans could be greatly reduced
  • China claims to have found substitutes for soy in their pork diets
  • China has adequate stocks of soybeans and could wait a year to replenish their supply without buying US production
  • Last year Argentina had one of the worst droughts in 40 years.
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The pros and cons of selling straddles

By Jon Scheve, Superior Feed Ingredients, LLC

While last week’s bean trade with China was one of the largest single day trades ever, it was still significantly less than the market was hoping. The market will need at least three more trades like this to get excited. Plus, time is running out for U.S. exports before the South American harvest starts.

There were rumors China could make its first major corn purchase from the U.S. in 5 years. This could keep corn prices from dropping even if beans would continue to slide lower. The current rumored purchase size won’t likely be enough to spike prices much higher.

Recently I heard a farmer ask an analyst what they thought about selling straddles. The analyst said he didn’t recommend them and referred to them as “extreme trades.” I’m guessing he meant they should be avoided because they were full of risk.

With the prolonged sideways corn market at unprofitable prices, all grain marketing solutions need to be considered for me to stay profitable.

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Selling calls and straddles to try and create opportunity

By Jon Scheve, Superior Feed Ingredients, LLC

Nothing concrete happened during the Trump Xi meeting, so the market continues to trade sideways. Since June 15 the March ’19 corn board never closed above $4 and has only closed below $3.60 three times. Past performance is certainly not a guarantee, but it would seem possible that this range could continue for several more months.

Right now I only have about 46% of my ’18 corn production priced on futures, so I need to develop a plan to get the rest priced. With corn prices below profitable levels for the foreseeable future, I want to manufacture trades that can help me maximize my profit potential as much as possible, while still minimizing my risk exposure. That’s why I recently did several trades that take advantage of the current sideways market to help me get some extra premium. For me this is a better strategy than waiting around hoping for a rally, because I’m not sure when or if that’s going to happen, and I have corn that needs to be sold.

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Capturing carry and paying for storage

By Jon Scheve, Superior Feed Ingredients, LLC

For the 1st time in 9 years, December corn on the last day of November traded higher than the last day of October by 3 cents. Looking forward, 7 of the last 8 years, March corn eventually traded at a higher value than where it was on the last day of November. The rally was more than 25 cents 6 of those 7 years. Following the 2012 harvest was the only year when prices didn’t rally, and after the 2015 harvest March futures only rallied 9 cents.

While obviously historical trends aren’t a guarantee, I think this suggests there is opportunity in the corn market.

 

Capturing carry and paying for storage

Last week I rolled my December futures sales to July to take advantage of the 27-cent market carry available in the market.

I bought my December futures back and immediately sold the July contract.

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Developing a marketing strategy approach

By Jon Scheve, Superior Feed Ingredients, LLC

For the last 8 years the price of December corn on the last trading day of November has always been lower than the last trading day of October. Corn closed at $3.63 on Halloween.

On the other hand, for the last 8 years January beans on the last trading day of November were higher for 3 years, lower for 3 years and the same for 2 years. January beans were $8.52 on Oct. 31.

 

My marketing strategy approach

I try to maintain a flexible marketing strategy that maximizes profit potential and minimizes risk. This means that some of my trades are most profitable if the market stays sideways, especially if there is a lot of rationale for minimal price movement in the short or long-term. Like all farmers, I’m most profitable if the market rallies above breakeven price points, and I always want that to happen.

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A look at buying put options

By Jon Scheve, Superior Feed Ingredients, LLC

The market continues to watch the actions of the President and China. It’s hard to know if there will be a trade fix at the G20 meeting in just over a week. I expect a sideways market through the holiday and leading up to the big meeting between world leaders. After the meeting, it’s still uncertain, but recent history indicates the market hits its low at the end of November and starts increasing in December.

The last two weeks I explained why I prefer to sell calls and why I avoid buying calls for my farm operation. But, what about put options?

 

What is a “put” option?

Buying a put is the right to sell grain at a desired price. Basically it allows a farmer to guarantee a floor price for their grain while leaving unlimited upside potential if the market rallies. When buying a put there is an upfront cost premium, but no risk of margin call.

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The difference between buying and selling calls

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA lowered corn yield estimates about 2 bushels per acre and decreased demand a little as well. Despite these adjustments, the report still showed a drop in next year’s carryout and the tightest stocks-to-use ratio in 4 years. This could help keep corn from drifting lower.

There was a huge carryout increase with China’s stocks, but I doubt this will have a big impact on the market. One, those stocks have been present for a long time. Two, this corn is not logistically set up for easy export.

Basis levels in the U.S. have been strong since the middle of harvest. Recent increases ranging from 10 to 15 cents have been reported throughout the Corn Belt. This would suggest that farmers are not selling and that end users are in need of corn. This could indicate upside potential in corn prices.

The USDA decreased bean yield estimates 1 bushel per acre, while export demand was updated to reflect the trade war and exports to China.

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Buying calls is gambling

By Jon Scheve, Superior Feed Ingredients, LLC

The President started tweeting about trying to work with China to end the trade war and the market rallied 30 cents. The next morning a White House advisor said there wasn’t much progress, but the market still closed the day positively. After the markets closed on that Friday, the President said there had been a lot of progress made with China trade. This topic will certainly excite the market leading up to the President meeting China’s leader at the end of November during the G-20 meeting.

 

The differences between buying and selling corn calls

Buying calls gives the buyer the right to buy grain at a certain price. There is a premium to be paid to own those calls. There is no margin call risk associated with buying a call

Selling calls can force the seller to sell grain at a certain price.

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Straddles offer alternative solutions in a scary market

By Jon Scheve, Superior Feed Ingredients, LLC

After spending 5 days in Nebraska driving the combine, I returned back to Minneapolis along I-80 and I-35 Wednesday. There was a lot of progress in Iowa during that time frame. It looked like their harvest went from about 33% to 75% complete in less than a week. I even saw a little fall field work completed in southern Minnesota.

On a recent trade I managed to collect 18 cents of profit that I can add to my “pot of premium” on a later trade. Following are the details:

 

Sold straddle

On 8/30/18 when Dec corn was around $3.58, I sold a November $3.70 straddle (selling both a put and call) and collected just over 23 cents total on 10% of my 2018 production.

 

What does this mean?

  • If Dec corn is $3.70 on 10/26/18, I keep all of the 23 cents
  • For every penny corn is below $3.70 I get less premium penny for penny until $3.47.
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Did I consider all the possible expenses in storing beans?

By Jon Scheve, Superior Feed Ingredients, LLC

The October USDA report showed a yield reduction due to a lower plant population, which caught the market off guard. However, with the increased carryout from the stocks report two weeks ago, the U.S. and world carryout for this upcoming year are higher than what was predicted last month by the USDA. The slow pace of harvest is certainly helpful for the market as it will allow extra time to grind through more of the current production and allow for more storage of the crop still standing in the field.

The USDA report increased both last year’s yield by .2 bushel per acre acre and this year’s yield by .3 bushel per acre, but then offset these increases with a reduction of upcoming harvested acres. There is little bullish news for beans right now. The most recent stock report showed more stored beans than previously anticipated and the upcoming carryout will likely be double last year and 50% higher than the highest carryout ever recorded.

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Collecting soybean carry

By Jon Scheve, Superior Feed Ingredients, LLC

Corn and beans rallied last week because rain swept through the Midwest slowing harvest. In select areas where harvest is behind, processors are bidding up for grain. It’s unlikely these basis bumps will last long, but some lucky farmers who managed to harvest some grain early could benefit.

The slow harvest progress may help corn from sliding all the way back to lows from two weeks ago. I doubt beans will be as lucky. There are just too many in the fields and as they get harvested it could be too much for the market to deal with.

 

Collecting bean carry

On 8/30 the November to July bean spread was a 49-cent premium. With all of my bean sales hedged against November futures, I was concerned about the current low basis levels. Since I can store all of my 2018 harvested beans and I have all of my beans sold, I moved my sales forward to capture the 49-cent carry.

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Hoping for a rally but preparing if there’s not

By Jon Scheve, Superior Feed Ingredients, Inc.

I travelled from Minneapolis along I-35 to Des Moines and west on I-80 to Lincoln last week. I was amazed at how few acres had been harvested for a crop that was supposed to be so far along. I saw nothing harvested until I was near Ames, Iowa and even then only about a dozen combines running between Des Moines and Lincoln. It seemed that what had been harvested was evenly split between corn and beans.

The trade issues continue to hurt beans and expected yields are very high, which will lead to a large carryout. Last week, futures rallied on the hope that exports will be higher than the USDA is forecasting. Some speculators are buying in their profitable short positions to reduce risk. Consequently basis at processing plants dropped, and there is still very weak basis around the country, which to me suggests that the upside for bean futures is still not there.

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Consider market carry when making basis comparisons

Wheat futures continued their collapse in early September, down 16% in value since August. In the last 3 months, corn is down 12% and beans 20%.

A record harvest is expected and many farmers are sitting on a lot of unpriced old crop. This in turn is creating logistical problems everywhere. Without a huge surprise yield reduction in the USDA report this week or a trade fix with China, the market will probably stay at these low values through harvest.

 

Understanding market carry’s relationship to basis values

I recently reviewed if there was a better basis opportunity to sell my 2017 corn earlier this year. My explanation confused a few people. Here is recap of that review:

I had the opportunity to set the basis at -.21 the Sep instead of the -.43 the Dec that is posted today. However, if we apply the value of the spread at 15 cents to the Sep basis we find that -.21 the Sep is/was actually -.36 the Dec.

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