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Market Analysis



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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Selling options as part of a marketing strategy

With corn planting starting in about 30 days, the western Corn Belt is currently dry and the east is extremely wet. Combined with the dryness in South America the market is noticing these less than ideal conditions and making adjustments.

Two months ago farmers were hoping for a 20-cent rally to sell some corn. Now after a 30-cent rally, many continue to hold on thinking there is more upside potential. Basis values are slightly off their highs, but considering the large futures run up, not as much as I would have expected. That is likely a sign of a lack of farmers selling.

Last week’s USDA report indicated an increase in corn exports, which is helping to reduce the massive supply from the last few years. Corn may have finally turned a corner as summer approaches. Now the market will wait to focus on the end of March report concerning planting intentions.

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Sometimes you get the extra base, sometimes you get picked off stealing in the marketing game

The market focused on Argentina’s extremely dry conditions during the week, which if it continues, could be the driest summer in the last 40 years. Consequently, the bean market saw a nice rally.

Wheat conditions are also dry in the southern plains, which is pushing prices up. However, many say wheat has “nine lives” or that “wheat is a weed” meaning that it is hard to kill. Still, there is going to be some damage, but the extent is unknown. Even so, there is significant supply in storage, so there is still some uncertainty on the wheat market direction.

The increases in both beans and wheat pulled up corn prices to levels unseen since last summer. Summer weather uncertainty is also contributing to the rally as speculators bet on potential weather problems.

The last few weeks feel like grains have turned a corner and will continue a trend higher. However, it’s important to be cautious for several reasons.

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Why is it important to have a marketing strategy?

Many are trying to estimate the expected bean production in Argentina, the third largest bean producing country. Prices could still range from below $9 to above $12 depending on weather and production issues during the next month.

As planting season approaches, corn slowly trends higher. Generally farmers aren’t selling at current values and are hoping for higher prices this summer. While dry weather this summer may trigger higher prices, normal weather would likely mean similar prices to 2017 — a limited trading range.

Last summer, during a brief weather rally, I hedged 25% of my 2018 corn crop at a $4.18 average on Dec futures. I’d like more sold, but selling at $4 (or less) is below my breakeven and I’m unsure how prices will fare through summer. As always, I want prices to go up, but there is a good chance they won’t. Therefore I want to minimize my risk.

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Should farmers be bullish or bearish on beans?

There is often conflicting information in the trades on whether farmers should be bullish or bearish. Usually there are reasons to be both. Therefore, I will often write down the reasons why the market could go up or down when developing my marketing strategy. I can then use this information to determine what I think is most likely so I can make the best trades possible given the information I know at the time.

 

Reasons to be bearish beans

• Seasonally the South American weather market is approaching an end

• U.S. carryout is the highest in 10 years and it’s still increasing due to slow exports

• World Stocks are still at high levels

• $10.20 beans has better returns than $4 corn for the average U.S. farmer leading to speculation increasing that U.S. farmers will plant more beans in 2018

• A possible trade war with either Mexico or China (or both).

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How to roll futures to capture market carry

The USDA report didn’t affect the markets much. Corn exports were up a little, while bean exports were down slightly. The South American bean crop looks average, with Brazil likely having above average yields and Argentina likely below average.

Next question: how many corn and bean acres will U.S. farmers plant in 2018? Many suspect beans will finally dethrone corn for the most acres planted. Regardless of acres planted, summer weather will have the biggest impact on prices going forward.

 

How to roll futures to capture market carry

Recently a farmer asked how I “roll” my futures to capture carry and what that looks like in my hedge account. Following provides an example of how this is done using real prices from the past few months. Questions I will answer more specifically:

  • How does the transaction in my hedge account take place?
  • How did I get paid?
  • How do I account for profits/losses on each trade?
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Generating higher prices in a low price market

The groundhog saw it’s shadow last week and it reminded me of the movie Groundhog Day. Similar to the plot of the movie the corn market is repeating itself day after day, week after week and now month after month. No one knows when or what will cause the cycle will end.

Beans, on the other hand, are primarily driven in the short-term by Argentina weather for the next few weeks.

 

Generating higher prices in a low price market

For over half a year the corn market has gone nowhere. Farmers don’t want to sell at low prices, and supply doesn’t warrant end users to pay up for corn. Consequently, prices are stuck at levels farmer dislike. Still, it’s essential for my farm operation to try and sell at higher levels. This has meant considering alternative solutions in my market strategy. And in the past year, I’ve had some success increasing profits by selling options, specifically calls and straddles.

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Finding marketing opportunities

Conflicting government information affected the markets late last month. First, the U.S. Treasury Secretary said he was hoping for a weaker dollar. Then 24 hours later, the President said he favored a stronger dollar. Exports are sensitive to exchange rates, so these conflicting statements caused some market volatility.

Constantly changing weather forecasts in South America also continue to help move markets in both directions. On Jan. 26, corn traded at its highest level since late summer and after a few wild weeks beans also increased to levels unseen in the last month. With these price increases, several grain buyers throughout the Midwest reported the most farmer selling they’ve seen in months.

 

Beans — 2018 sales

With the strong rally, I hedged some 2018 beans. On 1/22/18 I sold Aug futures at $10.06 and on 1/25/18 I sold more Aug futures at $10.20. Each of these sales represent 25% of my 2018 crop, so that makes me about 50% sold for 2018 with an average price of $10.13.

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Does market volatility matter?

Bean prices bounced off the recent trading lows this week. While this was positive for farmers, there still remain several unknowns. Dry weather throughout the Midwest has many in the trade concerned and wondering what summer time weather will be like and if yields will suffer. Also, it’s uncertain how many acres farmers will plant this spring. This may ultimately mean some speculators will exit their short positions with some profit now and look for other opportunities down the road.

With farmers generally not selling, basis and short-term corn spreads have narrowed throughout the Midwest until late this week. Then the corn market moved to the top of a narrow 10-cent trading range, which encouraged some farmers to sell some of their grain. I expect small fluctuations like this to continue in the short-term but I’m not expecting there will be a big rally unless something catches the market completely off guard.

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The benefits of selling options explained

Last week’s USDA report showed an increase of just over one bushel per acre in the average yield to 176.6 bushels per acre. Despite a slight decrease in the harvested acres in the report, there will likely need to be a supply disruption sometime in the next eight months for a significant rally to happen. It will probably need to be either a weather issue in Brazil over the next three months or in the U.S. this summer. Even a two million acre decrease in planted corn acres won’t likely be enough to get nearby corn back above $4 at this point. It will take five bushels below trend line yields too.

There is considerable fear that corn could slide down further over the next few months. While I think corn could test $3.30, I doubt farmers will sell that low which might help keep prices from staying at those values for long.

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Bouncing back from a worst case marketing scenario

While it’s a new year, there is nothing new for corn prices. A sideways market for the next three months seems likely.

There are indications that farmers would be willing to start selling as futures approach $3.60 to $3.70, but many seem to be refusing to sell below $3.50. On the flip side, end users indicate they don’t have much coverage and will buy during any market dips.

Bean prices are now largely driven by rain in South America. As the South American mid-summer approaches, they have had perfect growing conditions so far; however, mid-February is when moisture levels are most critical. Add to that, exports here are not pacing as planned to meet USDA estimates, and higher prices than the current upper $9s might be difficult.

 

Options — Straddle — Beans

As a part of my marketing strategy, I always understand all possible outcomes of each trade I do, and I make sure I’m willing to accept all potential scenarios.

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Setting basis on beans

Largely due to great weather in South America, soybeans have steadily declined every day since their high on Dec. 5 losing nearly 65 cents. However, there is still plenty of time left in South America’s growing season. If there is a weather issue, $10 is possible again, if good weather continues, sub $9 could be likely.

 

Setting basis on beans

Many farmers just concentrate on the cash value of their crop when selling, without realizing the three major variables that make up that price — futures, basis and carry. All three of these variables actually move independently of each other, and the most profitable marketing plans take into consideration each separately to maximize profit potential. Basis is often discussed as something farmers should be considering when selling their grain, but often the practical applications and detail in understanding how to actually do that is not provided. That’s a shame, because having a basis strategy as a part of a farmer’s overall marketing plan is important in optimizing profit and minimizing farm operation risk.

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Understanding how to capture market carry

This week the USDA report and the markets were uneventful. Farmers aren’t selling and corn export demand is pacing slow. Good weather conditions in South America eroded bean market premium.

 

Understanding how to capture market carry

I recently attended a grain marketing conference where the presenter discussed ideas for farmers to be more profitable in the current marketing environment. One suggestion mentioned was to sell the market carry (i.e. when the further future month is higher than the current future month). This is a popular recommendation trending right now, but it’s been something I’ve been advocating for years. It’s a relatively low risk opportunity for farmers to pick up additional premium and add profits to their bottom line. I think all farmers should be doing this.

However, this strategy is often casually mentioned as something farmers should be doing with minimal detail and explanation. But in my experience, many farmers don’t really understand how to capture market carry effectively and the upfront planning and logistics required.

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Don’t give your storage away

The markets continue to go nowhere. Corn exports are pacing slower than what USDA is forecasting but farmers aren’t selling. Beans earlier seemingly had upside potential due to South American weather, but couldn’t sustain it. Beans still have some potential in the short term if there is a weather scare in South America, but no one knows how much at this point.

All too 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. Following illustrates mistakes many farmers make who don’t have 100% on-farm storage capacity.

Often farmers make their first and maybe only sale before harvest for December or January delivery to capture some market carry premium while at the same time allowing them to core their bins during the winter.

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Capturing market carry

With too much supply in the U.S. and around the world, corn isn’t likely to move in the short-term without a big event.

With 30 to 45 days of the major soybean producing areas of South American growing season left, there is still a lot of weather premium potential left in beans right now.

 

Capturing market carry

After Dec options expired on 11/24/17, it left me short several Dec future contract positions. Since Dec futures go off the Board of Trade soon, I have to move them to a future contract month. I want to make sure I maximize my market carry opportunities with these trades, but also consider practicalities, like when I will have to core my bins centers out. I selected March ’18 futures.

Unfortunately many farmers don’t take full advantage of market carry. This is a shame, because it’s a relatively easy, low risk way to add profit to a farm operation.

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