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Market Analysis



A look at factors that have a big impact on farm profits

Beans

The Tuesday USDA report surprised many with an increase in world bean stocks, making levels the highest in history. With stocks to use rations also very high (third highest ever), conditions are not bullish and significant rallies are very unlikely.

To put this into perspective, current U.S. stock levels are more than double levels in the last 10 years. In the last 26 years, stock levels were only higher two other years — 2005 and 2006 — the last time bean prices were under $7.

The market seems poised for a long-term downward grind.

 

South America

The South American weather was ideal for corn and beans this year. Production estimates continue to increase. This news hits beans harder than corn because the South American crop is over 50% of the world’s bean production while its only 20% of corn.

 

Corn

The USDA report also showed a slight decline in feed usage and a slight increase in corn for ethanol usage.

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A lesson in “risk off hedging”

Weather forecasts are favorable for planting the next two weeks, so the market is expecting the 2017 corn will be planted easily. This news combined with positive long-term forecasts means the market is pulling back some, suggesting the possibility of another record corn crop.

Funds reduced their length in bean futures and increased shorts in corn and wheat. If the weather forecasts change, funds may change positions providing upside potential. With 75 days left in the corn weather market, I will be surprised if there isn’t at least one weather scare before July.

 

Market action

Two weeks ago I moved some of my ’17 beans from Nov futures back to Aug futures. I thought there was a strong chance I could catch the inverse, then have it turn back to a profitable carry eventually. The market is shifting to what I expected would happen. Therefore, I’m moving another 20% of my ’17 crop with a similar trade.

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Corn, soybeans, and wheat bearish

Higher corn and soybean production in Brazil is bearish. U.S. corn ending stocks unchanged, soybean ending stocks up 10 million bushels, wheat ending stocks up 30 million bushels. Watch the close in relation to noon time price activity.

Before the report corn was unchanged, soybeans down 5 cents, wheat unchanged. Shortly after the report corn was down 4 cents, soybeans down 10 cents, wheat down 4 cents.

Today producers likely have more attention than normal focused on the USDA reports at noon. It is because they are in the shop and not out in the fields. Corn planting in the U.S. is 3% complete with 3% average.

USDA 2016-17 U.S. grain and soybean ending stocks

USDA April

Average of

Range of

USDA March

2016-17

analysts’

analysts’

2016-17

end-stocks

estimates

estimates

end-stocks

estimates

estimates

Wheat

1.159

1.147

1.100-1.200

1.129

Corn

2.320

2.352

2.270-2.484

2.320

Soybeans

0.445

0.447

0.410-0.475

0.435

 

Closely watched will be U.S.

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Running the farm like a business

On Mar 31st (11AM CST) the USDA will announce the 2017 US planting intention estimates. Arguably, this report could have the biggest impact on the market in 2017. Until next Friday, there is little else to talk about.

Many are expecting estimates of 91 million corn acres and 89 million bean acres. If the report shows a more narrow range (i.e. 90 million acres each), corn prices could get a bump, while beans may slide. Right now prices favor beans over corn, so the report will show if farmers have made any adjustments based upon this.

 

Thinking of the farm as a business

A profitable farm is more complicated than planting crops and hoping they pay the bills at the end of the year. Farmers should consider their operations as a company with multiple profit centers working to a common goal. Each profit center must “pull its own weight” without drawing profits from another division.

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The difference between a speculator and a farmer

The South American harvest is expected to be a record with few shipping problems.

Expect the market to be range-bound until March 31, when U.S. planted acre estimates are published.

 

Market action

With few South American harvest concerns, I moved some of my bean hedges, which were originally placed anticipating a South American production issue similar to last year. On Oct. 5, 2016 I moved my beans hedge position:

  • 70% moved to Aug 2017 futures — 22-cent premium
  • 30% moved to Nov 2017 futures — 5-cent premium.

My rationale at the time for using Nov 2017 futures was that last October I thought we would likely have a South or North American weather scare at some point before next August. Therefore, I thought the only downside risk to the Nov/Aug spread position meant I could miss out on 25 cents of market carry. Plus, the July/Nov spread would likely go from a 20-cent inverse to a 12-cent carry — meaning another 32-cent loss.

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Capitalizing on wish orders

The Thursday USDA report, as expected, held few surprises. The bean yields in South America continue to grow and could weigh on prices down the road.

News of bird flu outbreaks concerned traders this week. It’s still uncertain how widespread the disease will be, so the market is a little shaky. A widespread outbreak would mean lower demand for corn and bean meal.

With beans more profitable than corn at current values, many wonder how planted acres will be affected. While bean acre increases are expected, estimates still range between 88 to 90 million acres. I’ve heard experts rationalize that farmers “love to plant corn,” so more acre shifts are unlikely. I agree that most farmers love planting corn, but they also love making money, so that specific rationale is a stretch.

Still many farmers can’t or won’t change their crop rotation regardless of the market. Ultimately, it will boil down to a small percent of farmers making changes to their rotation.

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Capitalizing on a sideways market

Rumors of changes to the Renewable Fuel Standard (RFS) mandate last week shook up the markets Many question if the rumor is valid, because changing the mandate would require an act of Congress, which is not a guarantee or fast process. Regardless, this rumor is viewed as “uncertainty” to the market. With corn around $3.75, downside potential seems limited to between 25 and 50 cents, with upside potential high when weather, usage and acre potential are considered.

Funds will likely want to take advantage of this upside potential and continue to buy market dips instead of selling rallies until summer weather is better known. I expect corn to trade $3.60 to $3.90 for the next few months. Excess old crop will keep prices from going too high and reduced 2017 acres will keep prices from going too low.

 

Market Action

March options expired last Friday with futures closing at $3.63.

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Capitalizing on the basis

There is a lot of unsold corn in farmers hands. Some estimates indicate only 40% to 45% of the 2016 crop is sold. With 16% carryout, there is plenty of supply available for the remaining seven marketing months. End users aren’t desperate for corn.

Despite the abundant corn supply I think corn futures have upside potential long-term. This may be caused by funds buying commodities as a hedge against inflation, reduced 2017 corn acres or a summer drought scare. If this happens, I would expect basis values to drift lower.

Basis

Due to heavy supply, basis has been disappointing lately, running lower than normal for this time frame.

  • Beans 40 to 50 cents below normal
  • Wheat 40 to 50 cents below normal
  • Corn 20 cents below normal.

In some ways the corn market is acting similar to 20 years ago. Ultimately basis fell apart as futures increased back then. It’s unclear if basis traders or farmers with HTAs will get burned in the same way this year.

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Something is not adding up with carryout and prices

This week last year versus this year:

Corn futures:

  • 2017 — $3.70
  • 2016 — $3.65

Carryout

  • 2017 — 2.3 billion bushels
  • 2016 — 1.7 billion bushels

Something doesn’t add up.

Basis has continued to slide lower and lower. Values are about 20 cents less than last year at this time, possibly adjusting to the irrational futures prices.

Another survey showed U.S. farmers plan to plant significantly more beans than corn in 2017. Acre estimates show corn and beans may be around 90.5 million each. If this happens, it would be a 4 million corn-acre reduction and a 6 million bean-acre increase.

Many “experts” say farmers “love” to plant corn and these estimates just won’t happen. I don’t think these “experts” have run the numbers, because farmers can pretty much guarantee a profit growing beans, while corn is shaky. Corn on corn farmers may be in the red at current price levels.

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Focusing on 2017 instead of 2016

The USDA report published on Thursday held few surprises. Basically we have too much corn and wheat, and most likely too many beans. Expect more sideways trading in the short-term.

South America Update

South American weather has been “normal.” Many expect record yields in Brazil and trend-line yields in Argentina. Combined yields may exceed early season predictions. Also, export paces seems strong with few logistical issues so far.

Basis

Basis levels in the U.S. are extremely low for this time of year. This signifies end users are having no problem getting the supply they need and that prices are higher than they need to encourage farmer selling.

Export

U.S. exporting is pacing above normal, which may indicate the USDA underestimated demand. It may be too soon to tell though. South America may have an impact in the upcoming months.

Soybeans

Soybean futures values are nearly $1.80 per bushel higher this year than last year at this time.

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Developing a strong marketing strategy

Iowa State University just reported their 2017 corn and bean breakeven points. It showed that the average Iowa bean farmer can lock in 2017 crop profits with current fall market prices. That is not necessarily the case for corn. Corn on corn farmers would likely lose with today’s prices, while corn on beans are showing some profitability.

I think many farmers will take notice and plant more beans in 2017. Still, South American bean production is an unknown. If we assume a small issue in South America supply, which leads to increases for U.S. prices, the added bean acres in 2017 may be offset. However, if bean acres exceed 90 million acres and South America doesn’t have a reduced supply, then substantially lower values are a real concern.

 

Market Action

With corn prices so low, I’m always looking for ways to add additional premium to my corn prices. Rather than wait around for prices to go up, which they may not, I manufacture trades that allow me to add premium to my corn prices, while minimizing risk.

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Will tight-fisted corn sales continue?

Corn prices continue to dominate the thoughts of producers this winter. They have plenty of 2016 corn yet to sell as shown by the quarterly grain stocks report from last month. This report had Dec. 1, 2016 U.S. corn stocks at 12.6 billion bushels, up 10% from December 2015, a new Dec. 1 record. Corn has been stuck in a trading range of $3.70 to $3.40 since the end of harvest last fall. Producers continue to seek prices closer to $4 to loosen the tightly closed bin doors sealed with a thud last fall. Corn basis levels at ethanol plants across Ohio have fallen 10 to 15 cents from levels seen early last month. You can easily wonder why basis levels had declined in spite of little movement from producers. Commercials were actively selling corn hedged on inbound receipts from last fall. They were capturing basis improvement while coring and emptying bins to add to the bottom line.

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Market action for sideways prices

Soybean market commentary

Argentina weather remains good, which could mean an increase in bean yield estimates.  If this continues, global supply will be high and likely push down prices. The key will be plenty of rain through the growing season, and then dry weather during harvest. Expect volatility for the next few months, as many speculators remember last year’s events.

Corn market commentary

Corn continues to trade sideways. Farmers are selling when the market rallies, but quickly stop when the market pulls back. Two billion bushels of carryout will continue to hold this market back. It seems to be another year of boring winter trading months.

Looking forward, many wonder how many acres U.S. farmers will plant in 2017.  Some don’t believe early surveys suggesting reduced corn acres. However, farmers I talk to say that it’s difficult to not take the guaranteed profits of beans, when corn isn’t at profitable prices right now.

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More on options: Making the right call with calls

Results from a recent Farm Futures survey show farmers will plant roughly the same number of corn and bean acres — around 90.5 million acres. If true, this would be long term bearish for beans and long term relatively bullish for corn.

 

Estimating South America’s soybeans

At the start of the growing season the USDA predicted 159 million metric tons (mmt), or about 6.3 billion bean bushels, would be produced in South America (Brazil 102 mmt/Argentina 57 mmt). Considering the favorable weather conditions in Brazil, 105 mmt is possible. Argentina, on the other hand, has had excessive rain in parts and dry conditions in others, so yield estimates are wide ranging. In the last USDA report there were no production reductions, but the trade is skeptical. Currently ranges are 48 to 57 mmt. The under/over bet seems to be around 53 mmt.

If the average estimates (Brazil 105 mmt/Argentina 53 mmt) happen, the expected mmt will be missed by only 1 mmt or 40 million bushels.

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More about options

Arguably, the report last week was the third most important report of the year (after planting intentions in late March and the actual planting and stock report in late June). It showed the final yield results for 2016.

 

Corn

There were few changes to the corn bottom line. Corn still shows a 2.3 billion bushel carryout, which is 30% bigger than last year. There will need to be a substantial reduction in acres (and most likely yields too) to support a substantial rally.

 

Beans

The report shows a small reduction in the U.S. crop production, which may be seen as bullish. However, there is still a 400 million bushel carryout. Also, the USDA increased the South American crop estimates more than the US crop reduction. This is despite some flooding in Argentina, because the Brazil harvest is supposed to be a record.

Regardless of this news, bean futures remain strong.

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Option strategies

Frequently farmers ask for my opinion on buying puts. While generally I’m not a big fan, purchasing puts can be a useful tool in a farmer’s toolbox. However, farmers must be careful to fully understand and consider both the advantages and disadvantages of using them. Regardless of my opinion on buying puts, I think it’s important that farmers understand all of their options when it comes to marketing their grain, so they can develop a plan that works best for them and provides the most piece of mind. Outlined below are several common put buying strategy options and the pros and cons for each scenario.

 

What is a “put” option?

Purchasing a put is the right to sell grain at a desired price. That price is called the strike price.

 

Why would farmers purchase puts?

Farmers purchase puts to guarantee a floor price for their grain. Purchasing puts allows for unlimited upside potential if the market rallies, but protects farmers if prices fall below a certain price point.

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Mixed results from big January report

The numbers from today are mixed for grains. Two surprises with soybeans today. First, soybean numbers were bullish with U.S. production at 4.307 billion bushels and the yield at 52.1 bushels per acre. Both were below trade expectations and below last month. That was the surprise. In addition, soybean ending stocks were pegged at 420 million bushels, 60 million bushels below last month. Ending stocks were also below expectations. World ending stocks for soybeans were 82.3 million tons and below expected as well as last month. The second surprise would be that Argentina soybean production was unchanged at 57 million tons with all of the rain of the past two weeks. Soybean production in Brazil increased two million tons to 104 million tons. No surprise with the Brazil number.

Before the report corn was unchanged, soybeans were down 2 cents, and wheat was up 1 cent. At 12:30 pm corn was down 2 cents, soybeans up 17 cents, and wheat was up 7 cents.

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Really, $6 beans? Probably not.

Corn

Corn pushed to the top of the trading range last week. However, with 2.3 billion corn bushels carryout (compared to 1.8 billion last year), farmers are anxious to sell, so prices pulled back by Friday. It will likely take a significant drop in corn acres next year and a weather event to see $4 by summer. Expect sideways trading for the next 80 days and it could be a tight range of $3.45 to $3.60 on the March futures.

 

Beans

Prices continue to inch lower week by week. Currently, there appears to be enough beans in the U.S. to meet demand. In South America, Brazil is on track to produce a record crop while pockets of Argentina are too wet. This may mean 100 million bushels will be lost in Argentina, but Brazil’s record crop may make up for it.

Still many speculators are betting what happened last year will happen again.

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Using the “dreaded” margin call

There may be potential dry weather issues in Brazil (two regions — Minas Gerais and Bahia). The market is adjusting to this bullish news, but keep in mind these two regions only account for about 8% of Brazil’s total bean production. It would be like if Ohio (7% of the U.S. bean production) was suffering from dry weather, while the rest of the U.S. had near perfect weather. It may affect prices slightly, but it won’t be a major threat.

Also, farmers should keep things in perspective on corn as well, while Brazil is the third largest corn producing country in the world, it still produces significantly less than the U.S. For instance, South America has two corn crop seasons that combined produce only what Illinois and Indiana produce in one year.

 

Current known vs future unknown

Often farmers get caught up in what might happen in the market. They analyze and scrutinize details and data to try and predict the future.

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Weather to dominate markets

Weather features will dominate U.S. grain markets for at least the next 60 days. Those weather features will be in both North America and South America. As the U.S. began the winter weather season last month, several items stood out. First, the Plains and the hard red winter wheat grown in that area went into dormancy among the latest dates in history. That late dormancy was a result of one of the warmest and driest record fall periods. The same dry and warm conditions seen in the U.S. Plains were also dominant in the Midwest. Harvest in Ohio took place with very few rain delays this fall. Second, the southern half of the U.S. will see relatively warm and dry conditions. It will bring concerns of potential winter kill for U.S. wheat if the winter lacks sufficient snow cover to protect the wheat plant. Third, the northern half of the U.S.

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