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Market Analysis



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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Should my hedge account show a profit or loss at the end of the year?

As harvest finishes with record yields across the Midwest, corn prices fell below $3.40. However for the week it was nearly unchanged. Many farmers have struggled to sell at profitable levels, and while higher than average yields help offset lower prices some, it hasn’t been enough. Also contributing to lower prices, funds continue to hold large short positions with little incentive to adjust.

Beans also had average or above average yields throughout the Midwest, but beans have been high all year long in relation to corn prices, which has allowed for profitable levels for most farmers. This has eased the sting of low corn prices for many farmers. Looking forward, South American weather forecasts have been favorable, but we are nearing the part of the growing year in which every new forecast can drastically change the market direction.

 

Basis

Basis values are increasing throughout the Midwest for both corn and beans.

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Straddles vs. accumulator contracts

The USDA announced a record yield resulting in a 2.5 billion bushel carryout. Therefore, I think it’s unlikely that corn will sustain a major rally until summer 2018. A soybean rally won’t help corn prices either unless there is a devastating drought in South America. If there is a 2 million- to 4 million-acre switch next year from corn acres to soybeans acres, combined with a weather scare, there may be a chance for $4.50 in the Dec ’18 futures contract.

On the flipside, the slow harvest and the already huge fund short position is keeping prices above $3.40. It’s uncertain if this can continue but it’s certainly positive that the market has still not traded below that point as of right now. Many end users missed their opportunity for $3.40 last week, it’s unclear how long end users will remain patient or if they will chase the futures market back to $3.50.

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Selling calls

The markets didn’t move much this week. Harvest pressure continues to limit corn upside potential. Beans at first looked like they may take off as harvest slowed, but on Friday, Brazil’s currency fell against the dollar. This meant a price boost for Brazilian farmers who sold some beans, putting pressure on futures prices. The 30-day forecast for South America looks good for growing beans. The market continues to search for a reason to swing either way right now.

Even though I’m hoping corn prices go up, I still think corn prices are going nowhere for a while. That’s why I sold more calls, so I can presumably collect some premium in the meantime while I wait for other opportunities down the road to sell the grain and/or more options.

 

3 – New Trades – Selling Calls

On 10/24/17 when Dec corn was near $3.50 I sold the following calls for 10% of my production each:

  • Jan $3.60 call for 10 cents – expires Dec 22
  • May $3.70 call for 19 cents – expires Apr 20
  • July $3.80 call for 19 cents – expires June 22

What does this mean?

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Benefiting from puts, calls and straddles

Corn

The market continues to be uneventful. End users want to buy $3.40 Dec futures and farmers are hoping for $3.60 to sell some excess production. Slow exports aren’t helping. Realistically farmers may need to plant 1 million to 2 million fewer acres next year to see $4 by next summer.

 

Beans

With bean harvest nearly over, farmers are hoping for reduced market pressure, which might allow for a small rally. Export pace has also been slow for beans. Unlike corn though, demand growth for beans has been increasing year over year at great rates, which could support 1 million to 2 million more bean acres next year. In fact, 2018 may be the first year in over 30 years where bean acres exceed corn. For this to happen though, prices will need to exceed $10.25 at some point before April on the Nov ’18 while Dec ‘18 corn stays below $4.

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Consider all the scenarios and make a marketing plan

Many farmers tell me they do well at picking prices. Maybe some do, but many do not. If farmers were good at predicting prices, most would have sold their 2016 crop for over $4.25 and would have their 2017 crop already sold for $4. Unfortunately, most farmers didn’t get $4.25 for their 2016 corn and few have much 2017 sold. Sadly, many farmers are fooled into thinking they are good at picking prices, when in actuality they probably have been lucky.

Some farmers have the misconception that I try to predict prices and sell at the high. Unfortunately, I don’t know when the market will be at its highest. And here’s the thing: no one else knows either.

Since I don’t know where the market will go, I need to be prepared to sell all the time. That way I can take advantage of opportunities when they become available. The key is knowing your breakeven points and selling when the market hits adequate profit levels, because that may end up being the top of the market.

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What is in your marketing tool box?

While the slow harvest is keeping corn prices from tanking in the short-term, the inevitable huge supply is limiting any upside potential. The latest USDA estimates haven’t helped either. While they reduced acre estimates, yields also increased. So, there was little price impact. It’s doubtful that even a South American weather scare would have much impact at this point — 2.3 billion carryout of corn bushels is just too much. I expect a sideways corn market for several months.

Soybeans, on the other hand, were handed a nice surprise by the USDA, as they lowered the upcoming carryout estimates. The USDA is often criticized in their ability to estimate soybean demand, so many think lower carryout potential is a possibility in the ‘17/18 marketing year. While the USDA’s recent track record has been shaky, exports are behind estimates this year. For a bean rally to continue, exports need to catch up.

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The dreaded margin call

The market is boring right now because there is nothing to talk about.  Corn seems to be range bound between $3.45-$3.75 until Thanksgiving and it will take an unforeseen surprise to change it.  Beans seem range bound between $9.40-$10.00 through November.  For that to change, it will take a big South American weather scare.  Everything else is probably “market noise” right now.

 

The dreaded margin call

I recently discussed the benefits of forward selling on futures to maximize flexibility and profitability in moving sales over different crop years based on market conditions.  This likely made some farmers wince, because they know this could require a margin call if the market rallies. Generally, the fear of margin call keeps many farmers from selling forward using futures.

Sadly, these farmers don’t realize they are removing an important marketing tool out of their grain marketing tool box.  Eliminating margin call is like telling a baseball player to not swing at anything in the strike zone. 

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Farmers need to use their marketing edge

Corn and soybean yields continue to exceed farmers’ expectations across the Midwest, suggesting USDA estimates may have been closer than many had thought. Prices continue to do nothing. Spreads between futures contracts have widened to levels unseen in several years for corn and even longer for beans. This and basis also dropping indicates the market wants farmers to store their crop.

I drove from Minneapolis to southeast Nebraska on Thursday and back on Monday and was surprised how little had been harvested along I-35 and I-80 for this time of year. While I hope the bottom has been hit for the season, I wonder if the full effect of harvest pressure has kicked in. Time will tell shortly.

When reading social media or listening to coffee shop talk it’s easy to be convinced that farmers are on the losing end of the market all the time. While this may be the case for some farmers, savvy farmers know they have an edge that most speculators don’t.

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Corn neutral, friendly soybeans, bearish wheat

USDA lowered last year’s soybean production more than expected. Last year’s soybean production was revised to 4.296 billion bushels. Earlier USDA had it at 4.305 billion bushels. Corn and soybean stocks were lower than expected. Wheat stocks were higher than expected.

Winter wheat production for 2017-18 was estimated at 1.269 billion bushels, slightly lower than expected.

USDA has been in the mode of providing surprises with their recent reports. They have given producers bearish news when the August and September yield estimates were higher than producers had expected.

The quarterly grains stocks as of Sept. 1 as well as all wheat and winter wheat production will be detailed today. Keep in mind that USDA could be changing corn or soybean production from 2016 with this report. They have a strong history of changing the previous years’ soybean production with this report. Many expected the price action for soybeans today to be quite volatile.

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Using straddles in a sideways market, both new and review

Corn

Corn traded within a 10-cent range this previous week, ending 1 cent lower than last week. The Dec futures low at $3.44 continues to hold as the bottom for the year so far. If this holds for another week or two, there is a chance this will be the year’s low.

Early yield reports indicate yields are as expected or better than what farmers were thinking a month ago. Prices of $4 will be difficult on the Dec or Mar futures if this yield trend continues. I’m looking for corn to be range-bound between $3.45 to $3.75 through Christmas.

 

Soybeans

Despite harvest getting into full swing this previous week, soybeans increased another 16 cents. Basis levels continue to widen to last year’s harvest levels. Spreads between contract months are still wide, indicating plenty of supply and encouraging storage. This type of market action doesn’t make sense from a fundamental point of view and could be an indication that beans might be looking at a seasonal top.

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Why store beans?

While the USDA report was bearish, the market closed like it didn’t matter. Corn lost 3 cents and beans gained 7 cents on the week. Typically corn prices don’t increase after the September report through the end of September, but we’ll see.

Corn

Early reports from the field suggest yields are questionable and variable. We have 20% of the corn on our farm in Nebraska harvested, and so far it’s yielding 10 to 15% below average. We expected lower yields, though, on these fields because they are on dryland and in July we missed some rains in our area. We expect at least average yields on the rest of our acres since they are irrigated fields are planted with longer season corn. It seems every year the market hears of these lower than expected yields as the harvest starts, but by the end we find that the yields are much better.

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Market volatility and my final 2016 corn positions

Market volatility has been reduced this past year for corn. This year’s low (so far) is nearly 30 cents higher than last year’s low while this year’s high was about 30 cents lower than last year. This kind of trend can be typical of abundant supply. Another sign of abundant supply is that spreads between futures contract months are wide, encouraging the market to store and hold grain.

Storing old crop corn going into harvest

Like many farmers, I still have old crop corn stored on my farm (33% of my production). Unlike most farmers in this situation my corn in storage is completely hedged with a short (sold) futures positions. Basis near my farm never rallied to the usual levels of the last 10 years. As harvest is approaching, I need to either move corn before harvest or continue to hold. Following are the questions that should be asked when making this decision.

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Which crop should you store?

Almost like clockwork this previous week, unpriced farmers sold most of their remaining grain stored at elevators that was still on DP. By some estimates the amount of corn sold could have been nearly 10% of the ’16 production. Unfortunately, this price slide in late August has become a common trend the past several years. After several days of farmers selling at disappointing levels, there was a small bounce last Thursday and increases since then.

With many DP programs behind us, it’s still uncertain if the market will now continue to trend higher. There are still farmers with unpriced grain in home storage that may need to be sold before harvest. Some elevators are letting farmers deliver old crop against new crop sales. This could help prevent further decline in prices.

There is simply too much grain in the U.S. and globally. This heavy supply will continue to weigh on prices until at least March 31 when ’18 planting intention estimates are reported.

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Sometimes it’s wise to bet against a rally

Recent crop tours have not provided enough support that USDA estimates are completely off base. This caused even more pressure on the market this week. Crop size will be debated until harvest is over and without a major surprise, the upside seems limited.

For many elevators and end users 8/31 is the last official day of the 2016 grain marketing year, many will want farmers to have their Deferred Priced (DP) grain in storage to be priced. Last year the market traded lower the entire week prior which was the lowest of the year, that is expect again this year. Some estimates suggest that 10% of the ’16 crop could be priced.

A 167 national yield average, as suggested by a recent crop tour, would likely still mean a 2 billion bushel carryout this year. At 169, as suggested by the USDA, the carryout would be just as high as last year.

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Basis, market carry and futures

The weather in Minneapolis this week continues to be cool and wet. Maple trees are already starting to show fall colors, not unusual for this time of year, but certainly a sign that harvest is approaching.

The USDA report showed yields higher than trader expectations, but there are still two weeks of weather that can have a big impact. Realistically, beans could easily trade to $8 or rally to $11. Bulls say the growth in demand for high protein crops (beans especially) have a very promising future. Bears say at some point stock piles need to be moved and processed. It’s still uncertain how much pressure will be placed on the market for the next few months.

And then there is basis, which is the lowest its been in 10 years, coinciding with the highest carryout in 10 years. Kansas City, for example, was trading -50 earlier this year when normal values should be +10.

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The combine seat as a marketing strategy

The 8/10 USDA report caught many off guard last week. Even I thought the USDA would trim back corn yield estimates more than they did. As always happens after these reports, the bulls and bears debated the accuracy of these reports. Bulls say the vegetative health maps indicate widespread problems, while bears point out that only 15% of corn is suffering from drought conditions according to the drought monitor index. Bulls say Iowa and Illinois were too dry in June, while bears say seed genetics have allowed for plants to withstand dry conditions. Since the report leaned bearish, the bulls are a bit more vocal, suggesting that the estimates are completely off base and will ultimately change by the next report.

Historically, in the last 20 years the August USDA yield estimates have been within a 4% average error of the final national yield. A 4% variance would mean a potential six-bushel decrease.

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