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Market Analysis



Marketing plans for the big crop looming

By Jon Scheve, Superior Feed Ingredients, LLC

The upcoming corn and soybean harvest is expected to generate the largest crop ever. Combine that with one of the largest carryouts ever and it’s panicking both farmers and end-users without enough storage. As a result, basis levels are at mid-harvest levels before we even begin, suggesting end-users are overwhelmed with grain arriving on their doorstep as farmers clear out space to make room for the crop that will be arriving in a few weeks. The market is paying to store any part of this crop for a while, which may spur some creative storage solutions.

On a positive note, corn futures seemed to bounce off the bottom by 10 cents this week, which may suggest this year’s corn low has arrived. If this turns out to be the case it would be the third year in a row for that to have happened at the end of August.

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Reviewing September trades

By Jon Scheve, Superior Feed Ingredients, LLC

Wheat values dropped 40 cents last week, the biggest weekly decrease in 2 years. Wheat had been pulling up corn prices some, so this probably contributed some to corn prices being down another 20 cents this week. While this is disappointing, both of these crops still have upside potential after the new year due to dry weather outside of the US. Global buyers may need to come shopping for US grain down the road.

Historically corn prices drop during the last week of August. This is because many end users set Aug 30 as the final day to price any deferred-priced (DP) grain in storage and farmers with these type of positions tend to wait until the last possible moment for a rally.

With no resolution to the trade war this week and an expected record soybean crop, soybean futures also lost some ground.

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What should be stored at harvest?

By Jon Scheve, Superior Feed Ingredients, LLC

There was some positive trade news last week. Mexico and the U.S. may be able to avert trade issues — which is positive for corn — and Chinese officials are coming to Washington to resume talks, which could help soybeans.

Bean futures are reacting quickly to any trade news. Many suspect if the trade dispute was resolved, beans would rally $1 per bushel. Because of that upside potential there is usually a quick surge in prices because so many fear of missing out on the potential rally.

The basis or cash market isn’t reacting as well though for beans. The west coast export facilities’ bean basis is at least 60 cents below normal levels, which is putting downward pressure on basis throughout the Midwest. This suggests a lot of beans that normally go for export need to find a new home. That has put downward pressure on the processors bids here in the Midwest.

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Buying puts

By Jon Scheve, Superior Feed Ingredients, LLC

Arguably the Aug. 10 USDA report is the biggest of the year because it provides the first estimated yields for the upcoming harvest. With population estimated counts the highest ever, and ear weight estimates lower than the past two years but still on the high side, the USDA is predicting a 178.4 average national yield.

The weather throughout the growing season has been very good for a large percentage of the Corn Belt to this point. Even if there is widespread dry weather throughout the Midwest during the last half of August, I’m not sure how much of a negative impact there would be on yields. On the other hand, I think some timely rains could still have a positive impact on yields going into harvest.

That being said, I’m not bearish corn long-term. Even if national yields would climb another 3 bushels per acre, next year’s carryout would still be lower than this year.

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Taking a look at past and present trades

By Jon Scheve, Superior Feed Ingredients, LLC

I suspect everyone is waiting for the Aug. 10 USDA report that includes estimated ear weights and yields. I think if the average national yield is 175, $4 Dec corn is likely. Then every bushel above that value decreases Dec futures by 10 cents (i.e. 180 national yield would mean Dec corn at $3.50).

Beans are still caught up in tariff issues while weather continues to be uncertain. There is a lot of risk in both directions right now.

 

Market action: Previous trade results

Three of my trades expired last Friday. As you can see below, the three trades provided me with relatively low risk potential opportunities to get added premium in a non-profitable, sideways market on some of my corn. In the end, one of the three trades added 9 cents of added premium to my ongoing “pot of premium” on 10% of my production and the other two were essentially a wash.

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Consider storage expenses in marketing

By Jon Scheve, Superior Feed Ingredients, LLC

I’ve noticed far fewer bad corn crop pictures and farmer complaints this year versus previous years. Most farmers are generally happy with crop conditions. Usually by mid-July at least some farmers are complaining about drought conditions and wondering why corn isn’t at $5. This could be a sign that a huge crop is nearly made or at the very least a very good crop is out there.

Some in the trade have focused discussion to ear weight as a reason why prices should increase. They say too much June heat forced corn to grow too fast, which compromised the health of the plant and the weight of the ear. If true, this could have a big impact on yield production. In the past few years though, ear weight ended up being higher than many thought, which caused underestimating national yields prematurely.

Still, in 2010 many thought there would be a record production in August, but final national yields were 10 bushels less than what was estimated.

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Speculating and hedging

By Jon Scheve, Superior Feed Ingredients, LLC

Right now many analysts and advisors are suggesting corn and beans are too cheap and prices should rally. This makes sense because U.S. corn prices are the cheapest in the world, which means exports should increase. Elevator managers that I have spoken with indicate that farmers aren’t selling at these values. The counter side to prices having to rally is farmers are sitting on A LOT of stored corn, which could be keeping prices from increasing the next couple of months.

 

Corn

Many bulls are also saying corn is growing too fast and yields will be negatively impacted. Some are predicting a 178 or lower average national yield, at which prices should rally. The counterpoint to this is weather has been widely and consistently very good. Arguably it’s the best growing conditions ever for the largest portion of the Corn Belt at one time.

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So what are you going to do now?

By Jon Scheve, Superior Feed Ingredients, LLC

The most recent USDA report showed some potential for the corn market with strong demand expected to continue. This could mean current corn prices are near a bottom. However, the great weather throughout June and early July suggests the national yield could be another record possibly exceeding 180 bushels per acre. If yields are then less than 180, a rally is likely, and if yields are higher than 180, prices will probably trend lower.

The USDA increased old crop and export usage estimates, which could have been bullish. Unfortunately, the trade war triggered the USDA to reduce future exports by more than 10%, meaning next year’s carryout could be substantially larger than current levels. This also assumed an average 48.5-bushel per acre national yield. With current weather, yields may reach 50 or even 52, which could mean sub $8 on Nov futures.

If the trade war would end soon and China continued buying U.S.

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Marketing in a trade war

By Jon Scheve, Superior Feed Ingredients, LLC

Its official, the U.S. is now in a trade war. Last week some said a last minute negotiation could stop it, but that didn’t happen. It’s uncertain if this will last a few days, weeks, months or years. No one really knows the outcome to all of this and the market doesn’t know how to react as a result.

Good weather continues throughout the Midwest. At this rate record yields are a real possibility, meaning current prices are right in line. It’s now a waiting game through the balance of the summer to see how the weather turns out.

Beans have been looking for a bottom. Technically beans are due for a rally, but the rally on Friday could have been too quick and might be followed by a re-testing of the lows. Some say tariffs will drive Nov bean prices to $8, while others say the world needs our beans and, to get around the tariffs, will ship beans to other countries first then to China making $10 Nov futures realistic.

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The gamble of lifting hedges

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA confirmed there will be slightly more bean acres planted than corn acres for the first time in over 35 years. There were 1 million more corn acres and a half million more bean acres planted than what was estimated back in the March report. This wasn’t bullish news, and was still in line with most pre-report estimates so it probably is just neutral. Now Mother Nature and political agreements (or lack of any) will be driving the market.

The President and Secretary of Agriculture continue to promise that American farmers won’t be negatively affected by tariffs. This sounds good, but there haven’t been any details provided. It seems Labor Day would be the soonest that any “help” would be made. Even then there is no guarantee that any “help” will actually be provided.

Should I be bullish or bearish? It is rarely clear if farmers should be completely bullish or bearish at any given time.

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Marketing on what is known

By Jon Scheve, Superior Feed Ingredients, LLC

Practically everyone in the grain trading world is saying “I didn’t see that coming” after a 70-cent corn price drop over the last 30 days and a $2 per bushel drop in soybeans. I know I’m not the only one disappointed that prices are back to levels last seen in January. At least the market has come off of its lows and is only down 50 cents in corn and $1.50 for beans.

While I wish I would have sold more futures during this last rally, knowing what I know now, I’m glad I sold what I did above $4.25. At the time I sold those bushels I was worried $4.50 to $5 may be possible and that those sales would turn out to be a mistake.

It’s easy when negative and unpredictable things happen to fall into the “if only” trap, but there’s too much uncertainty to spend significant time dwelling on what should have been done.

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Selling corn before harvest

By Jon Scheve, Superior Feed Ingredients, LLC

 

The USDA increased the export demand pace for corn. Should the U.S. produce a trend line corn yield of 174 bushels per acre this year, then carryout would drop from the current level of 2.1 billion to just below 1.6 billion by next summer. If that were to happen, then corn is undervalued.

However, the nearly perfect growing conditions across 90% of the Corn Belt is keeping prices down at the moment. The corn crop is setting itself up for a 180-bushel per acre national average estimate, which would mean 500 million more bushels and a carryout over 2 billion. If that would occur then Dec corn is overvalued today.

On June 29 we will learn if the U.S. farmers planted more corn acres than estimated in the spring by the USDA. Expectations are that an increase of a half million to 1 million additional acres might have been planted.

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What price level should a farmer start marketing their grain?

By Jon Scheve, Superior Feed Ingredients, LLC

Weather forecasts are positive and crop conditions are favorable. Trade issues are still completely unknown. Dec corn has had a 25-cent trading range in the last 10 trading sessions. For the next 45 days I think weather will still be dictating prices.

Market action

Two long-standing orders for my 2018 anticipated corn production against the Dec’ 18 hit last week.

  • 5/22/15 — 5% sold at $4.25
  • 5/24/18 — 10% sold at $4.28

 

Current 2018 corn position

With these two sales, just under 40% of my ’18 anticipated production is sold at an average price of $4.22. I have additional option strategies that depending on where corn prices are in late November could add additional sales to my ’18 crop:

  • Over $4.20 — 20% more sold at $4.20
  • $3.60 to $4.20 — 10% more sold at a level between $4.20 and $4.40
  • Below $3.60 — No additional corn sold.
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Bullish, bearish or both?

By Jon Scheve, Superior Feed Ingredients, LLC

There are several reasons why someone could be bullish or bearish today. Understanding marketplace variables that could affect prices can be helpful when developing a grain marketing strategies. Following are some recent variables that could potentially impact the market.

 

Reasons to be bullish

  • Parts of the Corn Belt are a little too dry and others are a little too wet.
  • Sorghum appears to have been removed from China’s no trade list.
  • There are rumors China will be buying more ag products from the U.S. Many think it will be corn, DDG, and ethanol.
  • Wheat prices have been increasing.
  • Globally, and especially Brazil, corn growing areas outside of the US are dry.
  • Potential ethanol sales to China, as part of recent trade talks, could encourage more corn usage.
  • Corn trendline yields would mean the lowest carryout in several years.
  • Weather forecasts indicate a hot and dry June.
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Thoughts about market analyses

By Jon Scheve, Superior Feed Ingredients, LLC

Generally I think grain marketing information directed to farmers is often too broad and general to be helpful. I suspect that’s because those discussing the markets don’t want to commit too far in one direction for fear of being wrong.

That is understandable and reasonable to a point, but being too general isn’t very helpful either. To minimize general statements or broad ranges there are a few easy questions one can ask that I think provides more focused and helpful information.

 

Be more specific when using the terms “Bullish” and “Bearish”

When I hear “I’m bullish today” or ” I’m bearish right now” I don’t know what they mean because the terms are too subjective. One bullish person may think corn will rally 25 cents, while another thinks $1. Both of these thoughts are technically bullish, but they are very different estimates. Instead, a better question would be, “How bullish or bearish are you?” By being more specific, farmers can have a better perspective of potential.

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Hedge account confusion

By Jon Scheve, Superior Feed Ingredients

The first look at the ’18/’19 USDA supply and demand estimates are out.

Corn yields are predicted to be 174. If this happens, U.S. carryout would be reduced from the current 2.1 billion to 1.6 billion next year, a 20% decrease. World carryout predictions were also reduced by nearly 20% as well. Both seem to be a long term potential positive for the corn market.

Unfortunately the market didn’t react well to the bullish news. Some in the trade were suggesting that large carryout in U.S. and world wheat stocks were just too bearish and that those projections pulled corn down. Still, a weather scare over the next 60 days could shift the course for corn prices, because there is little weather premium in the market. However, if national yields approach 177+, a rally will be unlikely and prices could eventually fall well below $4 for Dec corn futures.

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Thinking of the farm as a business

Corn and bean basis has remained strong, or even slightly improved for April delivery, even with the recent futures rally. This likely indicates limited farmer selling and/or good demand. It’s been a while since we’ve seen this type of market situation, and it suggests potentially higher prices going forward.

I expect the 2018 marketing year to be much different than 2017, but I have my plan in place ready to take advantage of opportunities that become available. In order to do this effectively, it’s imperative to know my breakeven price. Several Midwest universities have published their corn and bean breakeven cost structures for various farmers across the Midwest. While I may disagree with a few line items on their budgets, their overall numbers are values that I think is a reasonable level for the average farmer to use as a goal for their own budgets.

 

Thinking of the farm as a business

I suggest that farmers look at their farm operation as a large company with multiple profit centers working to a common goal.

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Are options the answer?

The market is unsure if bean tariffs will mean anything. Even if China starts buying all of their beans from South America, the rest of the world could still buy U.S. beans. This week the Brazil bean cash offers skyrocketed off the tariff news, but when the futures came down 50 cents other world buyers started buying U.S. beans, as they were the cheapest globally. This is likely why the markets dipped and then recovered shortly after.

Reduced Argentina production is bullish, while U.S. bean stock levels are bearish. It’s still uncertain how many acres U.S. farmers will plant. I expect a roller coaster ride ahead for the bean market.

If corn demand continues to stay steady or increase, prices likely will be strong and have upside potential. If demand were to decrease, so will prices. Weather will start to be an issue in three weeks and could help determine if additional acres will be planted from the USDA estimates.

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Uncertainty in the market…

The USDA report from last week is old news, it’s all about the trade wars today. Plus, a new report from Reuters suggests the EPA secretly allowed a profitable refiner a waiver from the biofuels mandate.  All of this buzz caused significant market volatility.  Everyone is unsure what’s going to happen, so long-term effects are still unknown.

Still, the USDA report from last week found that the cure for low prices is low prices. Export pace, feed demand and ethanol grind continues to be strong for the old crop. Some farmers fed up with low corn prices were considering alternative crops with higher profits.  The recent USDA report indicated that farmers may be replacing 2 million corn and bean acres with spring wheat and cotton.  However, this survey was completed in early March when corn prices were much lower and spring wheat prices much higher. Some of the spring wheat acres end up in corn or beans.

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Profitability on straddle trades

Sometimes ideas for trades come from unlikely circumstances. While I was presenting a grain marketing seminar in February a farmer said he would never consider selling options because of the risk of large price movements. While I understand his fear, I don’t agree. Farmers’ fear of selling options can be due to many factors, including lack of education, complexities of the trades, and misunderstood risk exposure.

I asked this farmer where he thought July corn would be on 6/22/18. He first said he had no idea, and I agreed, as I don’t know either. However, I asked him to take a guess. He said since corn was around $3.80 on that day, that it would be a reasonable estimate that corn would be around $3.90 in late June. I agreed, that would be my guess as well, based upon what we knew that day. I actually came up with the following trade on the spot to illustrate my point with the farmer in the presentation.

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