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Market Analysis



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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Crops looking average with pockets of damage

It appears the market is just waiting for the updated USDA corn yield estimate on 8/10/17. Once published, the market will debate why it’s incorrect. Generally the market is trading corn based upon a national yield assumption of around 165-166. With a surprise below 165, $4 corn is a possibility again. An estimate above 166, and $4 is unlikely until a future report shows significant decreased yield.

In the past two weeks I have travelled 1,500 miles around the Corn Belt.

Crop conditions — Southeast Nebraska to Minneapolis

Following highlights some observations during my drive from Beatrice, Neb. to Minneapolis, Minn.

Beatrice — Our farm’s dryland fields missed some needed rain the past few weeks. While fields with less drought-tolerant seed indicate some significant yield drag, fields with drought-tolerant seed are showing average yields. Irrigated fields are still producing well.

Council Bluffs, Iowa — The crops looked good. There were very few signs of any significant stress.

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Profiting in a sideways market

The latest crop condition estimates are the lowest since 2013 (corn down 2% and beans down 4%). Also, time is running out for the western half of Iowa to get enough rain to produce average corn yields. Forecasts shift every six hours, which contributes to farmer and market uncertainties. This week it rained in the eastern corn belt, but the west continues to struggle with heat and dryness.

These uncertainties are convincing more and more farmers that crops are all but loss, causing people to think “corn HAS to rally to $4.25-$4.50.”

It seems like a lot of people are on the same side in their thinking. This makes me nervous. So, I caution farmers to take a step back and also consider the following:

  • Rumors and threats of drought happen every year
  • Realistically, the market already knows that 25% of the Corn Belt is suffering from dry weather. It’s estimating a 165 national yield with $3.90 Dec corn.
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Grand slams vs. strike outs in marketing

There is no doubt it will be hot for the next few weeks, it’s mid-July after all. However, it’s the extent of dryness that is uncertain. Every day weather models show varying possibilities, which causes market fluctuations. Iowa, for example, is living on subsoil moisture reserves for now. This may be depleted if it doesn’t rain in a week.

The recent USDA report did not show yield adjustments, only increased acres and feed usage reductions. So, the market will be able to handle some yield reduction. The recent rally after the report may have been overdone as prices seemed to settle back down to levels from two weeks ago before the USDA acres and stocks report on June 30.

Right now the market is estimating a national yield of 167. Some are arguing it should be 165, and a few bulls are calling for 160. When you consider the extra acres the USDA reported and plug in a 164 national yield, the carryout would still be over 1.7 billion bushels.

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Selling hope to profit the farm

The market was surprised last week when the USDA increased corn acre planting estimates by 1 million. The USDA also indicated that stocks may be higher than the market was anticipating. These adjustments could really hurt the chances of a major corn rally for the rest of the year. At this point, it will take a major weather-related event in July for any substantial rally in the long-term. And, the window for a weather-related event is narrowing, usually after July 4th there is less potential left. Some weather forecasts indicate there is a possibility for hot and dry weather in the western Corn Belt, but it will need to be significant for any fireworks in the next few weeks.

Actual crop conditions are seemingly subjective based upon perspective. Bulls say crop conditions this year compared to last year are much lower. Bears say there is still too much old crop corn in storage and will help the market withstand a decrease in reduced yields.

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Report is bullish soybean, and wheat; somewhat negative corn

USDA estimates of U.S. corn acres were 90.9 million acres, soybean acres were 89.5 million acres, and wheat acres were 45.7 million acres.  June 1 corn stocks were 5.225 billion bushels, soybean stocks were 963 million bushels, and wheat stocks were 1.184 billion bushels.

Soybeans were higher due to less than expected stocks, wheat was higher due to spring wheat acres less than expected, corn was off the highs due to higher than expected stocks.

All eyes are upon USDA with two big reports, the June 30 Grain Stocks Report and the June 30 Acres Report. Grain stocks are all expected to be above those of last year. It is just a matter of how big the stocks are for corn, soybeans, and wheat. The trade was looking for corn stocks as of June 1 to be 5.123 billion bushels and compares to 4.711 billion bushels last year. Soybean stocks are estimated to be near 983 million bushels, last year they were 872 million bushels.

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Managing a sideways market with downside protection

Weather is driving the market right now. As forecasts adjust twice a day, the market can shift direction abruptly. At this point it’s really difficult for the market to fully estimate the actual amount of stress the corn crop has sustained so far and its impact on overall future yields. Contributing to the uncertainty is the significant amount of unpriced old crop corn still in storage by many farmers, which will continue to put resistance on higher prices in the short-term.

 

Market action

Uncertain about the market direction going into summer, and with less corn than I desired to have sold for the 2017 crop, I want to make another trade. With what I know today, I expect the market to be trading sideways from here until late in November.

 

New trades I placed:

6/12/17 — Trade #1 when Sep corn futures were $3.89

  • Expected market direction — Probably sideways with some downside potential into fall
  • Trade Detail — Sold Sep $3.90 call for 19 cents
  • This trade amount = 5% of planned production
  • Expires  8/25/17 after the crop condition is well known
  • Potential Benefit: If Sep futures close at $3.90 or below on 8/25, I keep all of the 19 cent premium
  • Potential Concern: no downside protection

For every penny above $3.90 I get 1 cent less premium until $4.09 and I don’t have to sell any corn.

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Determining your breakeven

Corn

Corn showed signs of life with hot and dry weather forecasted throughout the Midwest the next two weeks. Realistically prolonged dry weather is necessary for a significant rally since subsoil moisture has been plentiful. Trend line yields are definitely still possible. Two good rains (one after Father’s Day and another after the 4th) is really all it takes to have a great crop.

The downhill slide of beans

Beans have dropped nearly $1.50 off their high earlier this year. Many traders expected beans to rally like last year, but this didn’t happen for at least two reasons.

  • Significant palm oil reductions due to El Niño last year forced China to grind more soybeans earlier this year. This caused an overabundance of soymeal sitting in storage right now. With palm oil production back to normal levels there is less demand for soy oil and with plenty of soymeal in storage there is no increased push for soybeans.
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Bullish or bearish as planting season wraps up?

Last week the USDA published the first crop conditions report for 2017. This report is really irrelevant because historically it has very little correlation to final yields. No crop is made or lost in May. Weather will now be driving the market with the most important dates being 6/15 to 7/15. As a rule, hot and dry is always a bigger concern than cold and wet. Until mid-July the market will react to the two-week weather models that adjust twice a day.

There are rumors of about 1.5 million acres being lost to prevent plant. While possible, this isn’t necessarily all that bullish unless the national yield drops below 168. Trend-line yields suggest that with normal weather throughout the Corn Belt, yields will be above 168.

Keeping perspective

Advisors often suggest that the USDA estimates are unrealistic because they would require farmers every year to produce yields that are equal to their second or third largest harvests ever.

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Being objective about the markets (in a wet planting season)

With the constant rain in Arkansas, Missouri, Indiana, southern Illinois and western Ohio, farmers are getting worried they won’t get corn planted. Some are surprised the market hasn’t responded with a rally. Prices likely haven’t increased for the following reasons. As a percent of the total U.S. production, these areas collectively don’t produce a lot of corn. These areas only account for about 10% of total acres and not every acre is a loss. The trade learned in 2015 that heavy rains throughout the Corn Belt may drown some areas, but other areas will thrive and see increased production.

Last year many farmers in these areas finished planting the last week of May and the first week of June and still had a reasonable sized crop. It’s important to remember the entire Corn Belt will never have perfect conditions. There will always be areas affected not only negatively, but positively as well.

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Don’t give away your risk premiums with specialty crops

Last week many speculated as many as 2 million wheat acres were damaged after cold weather struck much of the Midwest. While this caused a nice wheat futures rally Monday, it was short-lived because this represents only about 100 million bushels, or 10% of forecasted total wheat carryout. This is likely not a big enough issue to change prices long-term.

Even with the cold weather and threats of replant, corn prices can’t build any momentum. With 2.3 billion bushels of carryout and farmers sitting on too much unpriced stored corn, traders are starting to realize a production issue is necessary for any substantial rally. For the week, corn was up only about a nickel and for the past four months the range has been less than 30 cents.

Despite being frustrated with current prices, I have plans and orders in place if there is a quick price surge and a profitable opportunity presents itself.

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