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Market Analysis




Trade deals, coronavirus keep markets uncertain

By Doug Tenney, Leist Mercantile

President Trump signed the USMCA or U.S., Mexico, and Canada Agreement. It has now been passed by the U.S. and Mexico, Canada has yet to ratify this agreement. The USMAC replaces NAFTA, which was a great agreement from the Clinton administration back in the 1990s. Some are calling it NAFTA 2.0. The new trade agreement replaces the 25-year NAFTA agreement. It should give the U.S. more access into those markets. Early indications suggest it will result in more automotive production in the U.S. In addition, this agreement should be beneficial for U.S. dairy farmers. Mexico, from an agricultural perspective, has been in the news in the past two months as they have purchased U.S. corn on multiple occasions.

The Phase One trade deal was signed last month by the U.S. and China. It calls for China to purchase 40 billion dollars in U.S. agricultural goods in each of the next two years.… Continue reading

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Hoping for a rally while managing risk

By Jon Scheve, Superior Feed Ingredients, LLC

For the first time in 7 weeks, March corn finished the week outside of the $3.85 to $3.90 range with a close at $3.81.

The market is being cautious with the coronavirus. After 2 weeks, the mortality rate is still around 2%, compared to the 2003 SARS outbreak which was near 10%. There is concern all over the world as many countries continue to report the spread of the virus. Some reports indicate that doctors and scientists need at least 45 days from the start of a new disease to truly understand the outbreak potential. This likely means another month of market uncertainty.

U.S. corn is competitive globally right now, which should support the current price level and could mean better prices down the road. Beans have had a difficult month, dropping nearly 90 cents. First, China hasn’t announced any major purchases since signing the Phase One trade deal.… Continue reading

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Stagnant market sets stage for straddles

By Jon Scheve, Superior Feed Ingredients, LLC

U.S. corn prices are currently competitive globally; however, the market is watching to see how the coronavirus impacts the world economy. Despite positive movement on Thursday, March corn reversed on Friday and finished between $3.85 to $3.90 for the sixth straight week.

Market action

Following details three straddle trades I’ve done recently.

 

February straddle trade:

On 11/20/19 when March corn was trading $3.80, I sold a February $3.85 straddle (selling both a $3.85 put and a $3.85 call) on 10% of my 2019 production and collecting 20 cents total of premium.

 

What does this mean?

  • If March corn is $3.85 on 1/24/20, I could keep nearly all of the 20 cents.
  • For very penny corn is below $3.85 I get less of the premium penny for penny until $3.65
  • At $3.65 or lower I lose money penny for penny on this trade.
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Will China live up to Phase One promises?

By Doug Tenney, Leist Mercantile

Jan. 15 was supposed to be a big deal for U.S. farmers with the Phase One trade deal signing between the U.S. and China. U.S. Ag Secretary Sonny Perdue called the signing, “A bonanza for U.S. agriculture.” The “tale of the tape,” would say otherwise. Decades ago, grain and other commodity prices were spit out via ticker tape, not a computer screen. Closes at the CBOT in the two days following the trade deal signing detail soybeans closing 18 cents lower while corn declined 13 cents. One summary suggests the market is unimpressed with the details of Phase One — not exactly what U.S. producers had envisioned in their 20 months of waiting for the trade war to end. During this period, it was an arena which often shouted declining prices and stressed margins. The words, “need and price,” stand out in this agreement. Bottom line, it means China will be buying based on their needs and not upon what the U.S.… Continue reading

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Setting futures goals

By Jon Scheve, Superior Feed Ingredients, LLC

Phase 1 of the China trade deal was signed, but few specifics have been provided.

Corn

March corn futures have continued to trade at some point every day within a tight range of $3.85 to $3.90 for the last 24 trading sessions.

With corn carryout tighter than levels from the past 3 years, any additional exports or yield reductions in upcoming reports could provide corn with some upside potential.

 

Beans

March beans have been more volatile over the last 24 trading sessions, trading between $9.20 and $9.60.

This year’s carryout is the second highest in the last decade. Without additional exports, upside price potential may be limited, especially if South America has good growing conditions.

 

Market action – Selling beans and setting basis

 

Bean futures

The last time I sold bean futures was on 2/9/18 for the last of my 2018 production at $10.07, which was a couple months before the trade war started.… Continue reading

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USDA observations

By Jon Scheve, Superior Feed Ingredients, LLC

The Jan. 10 USDA report wasn’t as big of a market mover as some expected. Corn and beans closed only up 2 cents after the report. Following are some highlights.

 

Planted and harvested acres

A surprise was the USDA reducing planted and harvested acres slightly for 2018 as well as 2019. However, the difference in harvested acres between the 2 years was still less than a 1-million-acre reduction.

 

Yields

Probably a bigger surprise was that yields were increased by 1 bushel per acre instead of a slight reduction. The USDA announced they will resurvey 5 northern states in the spring, it seems unlikely the national yield average would increase from those unharvested acres. Therefore, a carryout reduction is still possible later this year.

 

Total production

After taking into considering the acre reduction for both crop years, there was only a slight increase of 50 million bushels in total production with the surprise yield increase.… Continue reading

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Corn neutral, soybeans bearish in Jan. 10 report

By Doug Tenney, Leist Mercantile

Corn and soybean production and yield both increased. That was a surprise. Corn and soybeans did not fall apart. Corn ending stocks were lower than expected which helped offset the higher corn production. Soybean ending stocks were unchanged, that was a surprise. Soybean stocks were larger than expected, also a surprise.

Shortly after the USDA report was released, corn was unchanged, soybeans down cents, and wheat down 1 cent. Shortly before the noon report, corn was down 3 cents, soybeans down 2 cents, and wheat down 2 cents.

The report today has long been awaited. Two numbers were heavily watched for this report, U.S. corn production, and U.S. stocks of soybeans on Dec. 1, 2019.

There are a bunch of numbers for the U.S. and world grain production. Corn supply bulls were hoping for major reductions in corn production and yields. Corn demand bears were quick to highlight the declining export demand since last May, which was 425 million bushels along with shrinking corn used for ethanol at 125 million bushels.… Continue reading

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Looking back at crop marketing in 2019

By Jon Scheve, Superior Feed Ingredients, LLC

Corn and beans remained range-bound through the holidays as everyone waits for the Jan. 10 crop report and Phase 1 completion of the trade deal. Basis has also stayed strong as farmers aren’t selling, most likely because futures are lower than what farmers would like, given the year we had.

Like nearly every farmer, I wish I would have sold more corn in the summer rally of 2019. But, as we all know, unpredictable weather conditions generated a lot of surprises and uncertainty throughout the year, which had a big impact on the market.

That’s why this week I reviewed my notes from the year to revisit market conditions and my decision-making rationale along the way. Re-evaluating past decisions can bring better perspective and help me build stronger grain marketing plans in the future. Following summarizes my insights and trade decisions.

 

March/April

The March USDA report indicated that U.S.… Continue reading

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Why are basis values so different by geographic area?

By Jon Scheve, Superior Feed Ingredients, LLC

I’ve often been asked why basis is so high in some areas but lower in others. There are many factors contributing to these variances, but it’s important to realize that basis values across the U.S. also correlate with each other.

Land values and basis values

While local yields can impact land values the most, basis values have a strong relation to those values as well. I’ve seen social media posts recently with farmers comparing basis values across the U.S., specifically that Ohio is getting +50 while parts of North Dakotas get -80. While this might frustrate some farmers, it’s important to realize that average basis values are actually “baked” into land values and cash rents. For instance, Ohio usually has a +20 basis in a normal year; but Ohio’s land costs are typically double of North Dakota’s, where -70 basis is common.

Basis values move together

When basis values in one area move in any price direction, other areas shifted similarly.… Continue reading

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A variety of factors shaping the basis

By Jon Scheve, Superior Feed Ingredients, LLC

The U.S. and China indicated last Friday they are close to completing a deal to end the 19-month trade war. Potentially, China could buy $40 billion worth of agricultural products in 2020, up 50% from $27 billion in 2017. However, which commodities and how much of each would be purchased are unclear and nothing has been signed.

The market didn’t react well to all of the unknowns in the news. Initially corn was up 8 cents and beans were up 16 cents, but by the end of the day corn was only up 3 cents and beans were up just 8 cents. Perhaps the market still remembers last month’s trade deal that ultimately fell apart. Still the news is probably more bullish than bearish for both crops.

 

Basis

There has been a lot of discussion recently if basis will remain strong or if it’s time to sell.… Continue reading

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Is there room for a rally?

By Jon Scheve, Superior Feed Ingredients, LLC

After 3 weeks of declining futures levels, beans rallied 20 cents last week. Plus, China announced they will remove some soybean tariffs, which would help prices if purchases follow. Since farmers haven’t been selling much due to low future values, basis continues to get stronger. My local processor increased bids another 5 cents, totaling 35 cents since the end of October.

Some are suggesting the slow harvest pace may be bullish. However, looking back, this year’s harvest is only 1% behind last year’s pace at this point, and only 3% behind the last 5 year’s average. Even if 1% is never harvested, that only represents 44 million lost bushels, or approximately 10% of the expected carryout. With the projected carryout likely being the second highest on record, it’s too early to know if prices would improve. If export pace slows, this possible reduction may not matter.… Continue reading

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Marketing results of December options

By Jon Scheve, Superior Feed Ingredients, LLC

As corn harvest finishes in many areas, and free harvest storage time is up, farmers need to decide if they will price grain now or pay for storage and wait for a rally. Given this week’s price dip, it seems some may have already “thrown in the towel” and priced some corn in commercial storage.

On a positive note, some end users across the Corn Belt increased corn basis bids 10 to 15 cents from last week. There are also some reports of free DP (deferred pricing) being offered in areas where corn harvest is finished, and farmers aren’t motivated to sell at these lower prices.

Bean futures are struggling with no China trade deal. However, since farmers aren’t selling, basis continues to climb. My local processor increased their basis bid another 5 cents this week. That makes it a 25-cent improvement in 25 days, while my local elevator is up only 7 cents in the same time period.… Continue reading

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Market factors to watch

By Jon Scheve, Superior Feed Ingredients, LLC

Soybean basis continues to be on fire. My local processor increased their basis bid another 10 cents this week, totaling a 20-cent increase in the last 20 days. I’m seeing end users’ basis values increase in nearly all of the soybean growing areas. However, I have noticed that commercial storage locations are lagging the processors bids by quite a bit, my local elevator has only increased basis 2 cents in the last 20 days.

 

Storing and not selling

Based upon conversations with many grain traders across the U.S., farmers have sold very little of their 2019 bean production. Usually farmers store their corn at home and deliver their beans at harvest, but many this year are instead storing their beans waiting for better values. A lot of farmers still think a trade deal will happen soon and a big rally in prices will follow.… Continue reading

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Selling for cash prices means leaving money on the table

By Jon Scheve, Superior Feed Ingredients, LLC

Corn yield estimates were reduced, slightly shrinking supply, while harvested acres were unchanged in USDA’s November report.

Three weeks ago, I suggested there were demand issues within the USDA’s Feed, Ethanol and Export categories. This week’s report reduced demand in every category and with the ethanol grind and export data under-pacing USDA estimates the past couple months, this was probably justified.

The feed category will be difficult to track. I’ve suggested the large wheat supply will likely replace some corn for feed if cash corn values remain strong while cash wheat prices remain at 10-year lows. However, over the last month feed ingredient prices have increased dramatically. Normally these by-products from corn, bean and wheat processing trade at values that encourage some livestock producers to replace corn and/or bean meal in the feed ration. The prices are so high now that many of these by-products should actually be replaced with corn and bean meal.… Continue reading

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Don’t give your storage away

By Jon Scheve, Superior Feed Ingredients, LLC

The delayed and slow harvest progress has helped corn and bean prices by keeping basis levels higher than normal. A slow harvest also keeps futures prices from sliding because when sales across the scale are more gradual, there is less burden on logistics and end users can grind through more old crop before new crop is available.

Some end users are concerned there won’t be enough low-priced grain after harvest, so they’ve been aggressive with basis bids. End users know when harvest is complete and the bin doors are closed, it will take some coaxing to motivate farmers to sell.

Often farmers are too focused on cash prices and don’t pay enough attention to their storage expenses. However, if farmers want bigger premiums and profits, they need to think about grain marketing differently than conventional wisdom. This is especially true in years when grain prices are at or under breakeven points.… Continue reading

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Trading in a sideways market

By Jon Scheve, Superior Feed Ingredients, LLC

In 19 of the last 20 trading sessions, corn closed within a tight range of $3.83 to $3.98. It seems farmers are willing to make sales at $4 and end users are willing to buy at or below $3.80. I expect sideways trading until the November USDA report.

In early September when December corn futures were trading below $3.60, $4 seemed unlikely. So, I looked for trades with upside potential near $4, even if the market didn’t go there.

 

Trade 1: Sold Straddle

On 9/5/19 when December corn was around $3.59, I sold a November $3.65 straddle (selling both a put and call) on 10% of my 2019 production collecting 21 cents.

What does this mean?

  • If Dec corn is $3.65 on 10/25/19, I could keep all 21 cents
  • For every penny corn is below $3.65 I get less premium penny for penny until $3.44
  • For every penny higher than $3.65 I get less premium penny for penny until $3.86
  • At $3.86 or higher I have to make a corn sale at $3.65 against Dec futures, but I still keep the 21 cents, so it’s like selling $3.86
  • At $3.44 or lower I begin to lose money penny for penny regardless of how low prices go and no sale is made.
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Corn must overcome demand obstacles for a price rally

By Jon Scheve, Superior Feed Ingredients, LLC

The October USDA Supply and Demand report took into account the adjusted stocks in bins estimate from the late September report. The next day, the President announced a trade deal with China could be coming in the next 5 weeks.

Since then, few details have been provided on the trade deal and some are questioning if a deal will actually be signed in the late November Chile meeting. If a deal is signed some are questioning if China will buy more ag products than pre-trade war levels. This combined with the killing frost throughout parts of the Corn Belt created more market uncertainty.

 

Wheat competition

The over-abundance of U.S. and global wheat has led to the cash price of hard red wheat being the same value as cash corn in the southern plains. This means, if prices rally, some livestock producers may replace corn with less expensive wheat, which could potentially reduce the feed category for corn by 100 to 200 million bushels.… Continue reading

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Corn re-ownership strategies

By Jon Scheve, Superior Feed Ingredients, LLC

Last March the corn market lost 30 cents after the USDA surprisingly increased stock levels. Last week the USDA surprised again but with a big drop in corn stock levels, resulting in a 20-cent market rally. The reason for the adjustment isn’t clear. Some think it was because last year’s yield was lower while others say more animals were on feed. Regardless, it’s keeping prices from going lower until yields are determined, which won’t be for a month or two.

Corn re-ownership strategies
I’ve described how to choose which crop should be stored at home during harvest and if farmers should pay for commercial storage. When making those storage decisions I explained that futures shouldn’t be included in the evaluation because farmers can reown grain using futures or an option strategy. While there are countless ways for farmers to re-own grain, the following shows two strategies most often used and the pros and cons of each.… Continue reading

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Commercial storage considerations

By Jon Scheve, Superior Feed Ingredients, LLC

On Monday the USDA will release the stocks report and tell us how much grain is still in the bins. In 7 of the last 14 years the stocks for corn were higher than estimates. The good news is that it has only happened 1 out of the last 4 years. The problem is that when the stocks are higher for corn than the estimates they tend to be pretty far off. When the stocks report is smaller than estimates the difference is usually quite small.

The bean stocks report has been erratic and hard to predict. However, with the already large carryout any change up or down is probably not as important as what the yields start to look like as harvest begins this upcoming week.

There is snow in Montana and it could work its way east. There are forecasts for cool weather working into the Dakota’s and western Minnesota over the next several days.… Continue reading

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What should I store at harvest?

By Jon Scheve, Superior Feed Ingredients, LLC

December corn hasn’t closed above $3.75 this past month and it’s only closed below $3.65 in 7 of the last 27 trading sessions. While frost concerns are fading, farmers are not selling, and it seems like sideways prices could continue.
Since July 30, November beans have closed between $8.55 and $9. Trade deal hopes have helped beans trade off the lows, but there will need to be additional China bean purchases going forward to keep bean prices around $9.
I have over 100% on-farm storage capacity, and I highly recommend most farmers should as well. On-farm storage capacity for 100% of your crop allows for more low-risk ways to maximize profit potential, increased flexibility and simplified harvest storage decisions.

Still, many farmers are resistant to it and ask me how they should prioritize their crops with only partial on-farm storage. The following illustrates how I would analyze which crops to store first.… Continue reading

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