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November 19, 2009
Have You Ever Considered Defaulting On A Grain Delivery Contract?
Throughout the long harvest corn prices have stayed in the upper range of prices established in the late summer. The uncertainty of the quality and quantity of the crop has kept the market interested enough to offer prices in the mid to upper level of USDA’s expected price range for the year; and many farmers have forward contracted corn in anticipation of higher prices. The objective for every producer is to forward contract at a profit, and not be challenged if the market moves decidedly higher than his contracted price. That happened in 1995 and 1996 when it turned hedge-to-arrive contracts inside out to the point they were nearly declared illegal. And it recurred in 2008 when highly volatile prices created financial challenges for elevator managers leery of offering forward contracts. There is always a temptation to ignore a grain delivery contract and sell at another elevator if prices go higher. So what will be done by the grain industry to prevent the failure to deliver?
Failure to deliver is the default on a legal contract, and elevators can attempt to recover a financial penalty. However, that will not always cure the ill if grain is needed to fulfill their own contractual obligations to feedlots and processors and it creates a public relations mess. The risk begins with the battle for acres, say ag economists William Wilson and Bruce Dahl of North Dakota State University who offer several suggestions about enticing delivery of the original contracted grain.
Wilson and Dahl say the problem can begin prior to planting, when a producer would react to prices that cause him to ignore a less lucrative contract and plant a crop that would generate more cash than the previously contracted alternative. The National Grain and Feed Association has provided extensive contract language and offered arbitration services. One of its rules does give a producer an option of notifying the elevator manager that he will be unable to deliver, which stops the financial liability from increasing, but does not eliminate it.
Grain merchandisers are also implementing other strategies to secure their financial foundation in case of defaulted delivery contracts.
1) Farmers are required to prepay an amount of cash if the elevator believes there is a risk of default. Such a provision is included in the rules of the National Grain and Feed Association, the Minneapolis Grain Exchange, and the Uniform Commercial Code of the federal government. The MGEX has trading rules that call for a deposit of 10% of the contract value with additional deposits allowed if the contract value increases. Such a provision is similar to the margins that elevators must post to hold hedges for clients. Some larger grain buyers may be considering similar provisions that would help them offset their costs of exchange margins.
2) Other concepts inducing delivery are basis or minimum price contracts that would neutralize a producer against in the increases in the overall price level.
3) Another concept uses an option on a forward contract, in which the producer is guaranteed the maximum price during the contract period if the contract was fulfilled, which discouraged against switching crops prior to planting.
4) Elevators who know the producer as much as possible, including his financial affairs and farm ownership structure is in a better position to protect against a delivery default.
5) Signed contracts will also cause some producers to have second thoughts about defaulting say the economists, who add that elevators may create “no trade” lists of producers who do not perform.
6) Establishing a Master Trading Agreement between farmers and elevators would spell out definitions, expectations, and legalities, and once signed, then grain delivery contracts would be accepted by the elevator.
Summary:
With an increasing number of grain delivery contract defaults resulting from a period of grain price volatility, many elevators and other grain buyers are developing measures to increase the chance of delivery and inducing farmers to deliver the grain that had been verbally committed. Farmers are considered merchants since they are selling a product, and state and federal laws have a variety of buyer protection measures that protect elevators from the loss of expected grain delivery. Many additional efforts have been developed by elevators to protect their interests which penalize farmers who default.
Posted by Stu Ellis at 10:20 PM | Comments (0) | Permalink
November 12, 2009
Are You A Farmer, Or Are You Really A Biological Manufacturer?
So, you think you are a farmer? That is the 20th century label for your job. If you are going to survive in the 21st Century, you will need to become a biological manufacturer and implement a new set of production principles that have been used by successful industries that make foods, durable goods, and every type of widget that consumers want. In other words, change your thinking today to survive tomorrow.
Tomorrow’s farmers will use a variety of business models, which may seem foreign to you in their name, but which are not far from what you are doing everyday in your management activities. Don’t stop and instantly sell the farm, just make some modifications to convert from farming to biological manufacturing. That is what Purdue ag economists Mike Boehlje and Allan Gray suggest after evaluating several large operations that have successfully implemented some of those industrial business models. Their report looks at a variety of different concepts.
Attribute driven products. Many Cornbelt farmers may already be doing this under other names. It is the effort to grow a crop or an animal that will have a specific characteristic desired by a customer. Have you produced high oil corn, low linolenic soybeans, or other products for a processor that required product differentiation and needed identity-preserved grain? Non-GMO grain or organic vegetables contain those attributes and they are eventually branded, advertised, and packaged separately from a commodity. Margins are higher and erode less by market forces than general commodities.
Systems approach and operational procedures. Systemization is becoming more frequent in agriculture with the operation of standard operating procedures. You are controlling the biological processes of crop and livestock production, for example with a routine vaccination or fungicidal application. Precision crop farming is a larger example of employing a “system” to make your production practice a routine practice.
The systems approach also includes scheduling and process control which is nothing more than facility utilization, flow scheduling and process control. Undoubtedly you are using all of your grain storage facilities, and under normal profitability your livestock production facilities are utilized with a strict flow of animals. If you have irrigation facilities, you are controlling the growth process of your crops by turning on such a moisture control system. Fine tuning those systems will improve your manufacturing bottom line by eliminating inefficiencies.
Raw material acquisition. This role of a purchasing agent in a manufacturing plant is not much different from your selection and purchase of crop inputs. However, improved management of that process can reduce expenditures if you are obtaining more quotes from suppliers. The economists say this approach emphasizes more of a business orientation than keeping a good relationship with the local fertilizer dealer. However, they say that relationship is best defined in the contractual relationship of both parties rather than a social relationship. Another part of the materials acquisition process is the optimal selection of crop genetics, pest control materials, plant nutrients and other materials that reduces risk and increases profitability. That will come, they say, through a better understanding of the biological process of crop production.
Boehlje and Gray identify three types of technology that a biological manufacturer would find to be critical:
1) Monitoring/measuring and information technology will help you identify how well your crop is growing or what problems have occurred and how to identify those problems. It may include GPS systems, aerial imagery, weather monitoring, soil testing, and a variety of environmental factors within livestock production facilities, as well as sensors on animals and feed nutrient evaluation.
2) Biotechnology and nutritional technology is the process of manipulating the factors that affect the desirable attributes in the crop or the livestock. Combining environmental factors with mechanical technology is a process control approach that would be used in an assembly line. Your products may not move down an assembly line because they are rooted, but that doesn’t make any difference.
3) Process control technology allows you to make changes at the proper time to ensure there is no deviation from the desired goal. If the environment in a hog confinement building is adverse to profitability, then mechanical devices would be turned on the make the proper changes. If soil moisture was declining, process controls turn on your irrigation.
The Purdue researchers also apply a “sustainable closed loop system, used in manufacturing to agriculture, suggesting it is a system that livestock producers could used to recycle manure as a plant nutrient or an energy source.
Boehlje and Gray additionally say farmers have been typically independent producers who purchase inputs and sell commodities with operations financed by equity and limited debt. However, they say increasingly producers are joining with resource suppliers and expanding volume with limited capital outlay on their part, leasing land instead of owning it, and custom farming to expand their revenue from unused resources. The use of creative financing is becoming more common, along with multiple site production units, and precision agriculture to maximize time. The economists provide examples of an Indiana dairy, a Dakota livestock operation, and a South American crop enterprise operating in four countries that have employed most or all of the concepts described in their forecast of the future of farming.
Summary:
The jump from being a farmer to being a biological manufacturer may not be all that big. However, implementing many of the concepts can push many marginally profitable operations well into the black, just by looking at their daily activities from a different perspective. Finely tuned manufacturing principles can be applied to medium and larger sized agricultural enterprises and then used to increase revenue, decrease cost, and maximize profitability.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
November 11, 2009
USDA: Corn Crop Dropping, Bean Crop Rising.
Along with the market-based adage “big crops get bigger,” is the old saw that “what goes up must come down.” And with those bits of granddad philosophy the estimated size of the 2009 corn crop apparently peaked just above 13 billion bushels and deterioration problems are bringing it back down. At least that is the essence of USDA’s November Crop Report. Beans? Well, they are another story!
From October to November, USDA lowered its estimate of the corn crop from 13.018 billion bushels to 12.921 billion bushels. For soybeans, the projected size of the 2009 crop rose from the 3.250 billion bushels in October to 3.319 billion in November. The market was looking for a 12.940 billion bushel corn crop and a 3.262 billion bushel bean crop. In the November USDA Crop Production report the USDA’s statisticians trimmed 1.3 bushels per acre from the 2009 estimated yield, partially because of 5 bushel drops in the projected yields for IL and IA. However, the average yield for soybeans was raised 0.9 bushels per acre with the help of three bushel per acre hikes in the estimated yields for IN and KS.
In its Supply and Demand Estimate for November USDA did not change its estimates of feed and ethanol use between the October and November reports, however it clipped 50 million bushels from its estimate of exports, leaving total use at 12.980 billion bushels and ending stocks at 1.625 billion, a shade lower than the 1.672 billion in October. The estimated price range was tightened slightly and raised by 20¢, pushing the season average price upward to $3.55.
For soybeans, the crush was raised by 5 million bushels, exports by 25 million bushels and total use was increased to 3.195 billion. That leaves carryout at 270 million, up from the 230 million in October. USDA also added 20¢ to the average price of beans and the midpoint of the range for the season is now $9.20 per bushel.
Globally, corn production estimates were dropped, not only in the US, but also in Brazil, European Union, Russia, Venezuela, and Canada. Yields were cut in most countries, but acreage was also reduced in Brazil. Coarse grain trade, which includes corn and other feed grains, is projected to be only slightly lower because of the lower corn production, and ending stocks for corn around the world are also estimated to be lower.
Global oilseed production estimates were raised by USDA less than 1%, but helped upward by greater production in the US and South America. Production for the 2009-2010 marketing year are expected to be 1 million tons higher in Brazil because of increased acres, and a half million tons higher in Argentina because sunflower acres are being shifted to soybeans. Global oilseed stocks are forecast to grow 4% because of increased stocks in the US, Brazil, and China. Chinese soybean imports are expected to increase slightly in the new marketing year.
For the balance of the year, University of Illinois marketing specialist Darrel Good says, “Price patterns will now reflect the pace of harvest, which has accelerated rapidly over the past 10 days, the progress of South American crops, and perceptions about the strength of demand. The declining value of the U.S. dollar, higher crude oil prices, and advances in the stock market have been encouraging for demand prospects. Still, soybean prices appear to be a bit over valued in light of the large South American crop prospects. Particularly puzzling is the movement from an inverse to a small carry in the futures price structure given prospects for large supplies next spring.”
At the University of Missouri, marketing specialist Melvin Brees looked at both the crop estimates and the harvest progress report and added, “Monday’s crop progress report showed corn harvest at only 37% complete compared to the average of 82%. This suggests the possibility that additional cuts could be made to expected corn production. Soybean harvest is 64% complete compared to an average of 92%. Most in the market will continue to watch the weather and harvest progress.”
Summary:
The corn crop may be diminishing in size, while the US soybean crop continues to enlarge, as projected by the USDA’s November Crop Report. With IL and IA losing 5 bushels from their estimated corn yields, the national average yield dropped slightly, but the national soybean yield grew with the help of higher yield prospects in IN. Only minor adjustments were made in the supply and demand balance sheets, but the reduction in the corn carryout helped raise the season average price by 20¢ per bushel. Globally, corn production, trade, and carryout will all be lower for the current marketing year. But global soybean production trade and carryout will all be higher for the new marketing year, helped by bigger yields in the US and more acreage in Brazil.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
November 10, 2009
How Will Prices React To Corn Quality Issues?
USDA reported late Monday that 37% of the 2009 corn crop had been harvested, a 12 point jump in the past week, but still less than half of the five year average for this time of year. Many Cornbelt states made significant progress, including 12% in IL and NE, 23% in IN, and 16% in IA. Soybean harvest also progressed significantly, with 75% of the crop now in the bin, versus only 51% last week, but we are still behind the 92% average for the past five years. Early Tuesday (Nov. 10) USDA will release its November Crop Report, some of which may address quality issues because of the late maturing, somewhat moldy, and light test weight crop. But how will prices react as that crop comes to market?
The 2009 harvest is the slowest in recent history. While that has been a function of delayed maturity and record October rainfall, the quality of the crop is an issue of concern for Iowa State University farm management specialist Stephen Johnson. His October newsletter says damage from the freezing temperatures on immature corn may be worse than for other slow maturing crops. He says the comparative years in 1985, 1992, and 2004 all generated yields that exceeded the trend by at least 8%.
Johnson says the cool July enhanced pollination and the cool August prevented moisture stress during grain fill; and he says that is a recipe for a high yield. But the slow maturing crop was susceptible to freeze damage, something that was not the case in the other years. Thus immature corn will have a less dense kernel and subsequently, lower test weight, which could be down to 45 pounds per bushel. That is far below the 56 pounds for #1 corn or 54 pounds for #2 corn. Additionally, he said high moisture levels lower test weight and only serve to raise drying costs and shrink loss.
So where will low test weight and potentially moldy corn go to market? Johnson says much of the lower quality corn will become livestock feed and that will compete with wheat for feed use near feed lots. But he says it is hard to predict whether the light weight corn will be bearish or bullish on cash prices. On the surface, says Johnson, low quality corn does not store well, and will find its way to the market quicker than higher quality corn. Thus, cash prices could be under pressure this winter as the low quality corn is marketed.
Johnson says the processing industry will carefully scrutinize what they are receiving, and will be tough on grading the corn. He says that is where the corn germ is extracted and heat damage from high temperature drying will impact the area where the corn oil is located.
Gross revenue and profitability are also questions raised by Johnson because most farm budgets were not prepared for high costs of drying and shrink, as well as lower market prices because of quality discounts. He says yields still appear large for most of the Cornbelt, the discounts will deter many farmers from being too quick to harvest if there is going to be high drying charges. Johnson says the quality issue will be resolved in the cash market via basis adjustments, as well as higher standards for quality when loads are found with excessive amounts of moldy corn. If that is the case, Johnson urges farmers to keep in communication with lenders, input suppliers, and grain merchandisers.
Summary:
Significant progress was made toward harvest in the past week, but projections will soon be addressing the size of the crop in the wake of quality deterioration. Farmers with corn of lower quality may be shipping that to livestock feeding facilities, due to expected discounts at processing plants. The lower quality grain will be coming to the market first, and basis levels will be reflecting the lower quality.
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
November 5, 2009
Will Wheat Markets Recover In The Long Term?
Wheat producers harvested a bonanza in crop revenue the past two years, but wheat prices have been sluggish along with the US and world economy. Which of the Jekyll and Hyde personalities will wheat producers see in the next decade? Will prices be high as commodity buyers purchase acreage; will prices be low because of slack demand; or will they be somewhere in between? Let’s polish the crystal ball.
Assuming the wheat economies for the US and world remain healthy in the next ten years and demand remains strong, prices for wheat will recover from the current low levels. That is how ag economists Richard Taylor and Won Koo at North Dakota State University look at the future for wheat growers. Their forecast calls for increased wheat trade and prices over the next ten years.
To establish a baseline of wheat production, consider the fact that over the past 20 years world production has increased from 521 million tons to 612 million; with the EU the largest producer, followed by China, and the Former Soviet Union. The US produced about half of what was grown in the EU, and other significant producers included Canada, Australia, India, and Argentina, with all of those countries supplying 84% of world production. Last year world trade was 101 million tons, and that represented 17% of world production, with the US among one of the major exporters. Taylor and Koo report a dramatic change in the world wheat market in the past decade with government policies encouraging production, but the market has been impacted by the ethanol industry. During that time world export prices floated between $3 and $5, but beginning in 2007, surpluses fell to 30 year lows before a slight recovery last year.
Another dynamic in the wheat market is the increase in yields of 422% in China and 203% in India. Worldwide yields are up 128% in the past five decades. Total production has increased by 520% in India and 403% in China, and 73% in the US. The EU produced 5.2 tons per hectare in 2008, while China was at 4.71 and the US was at 3.05 tons per hectare.
Based on production trends, Taylor and Koo project world wheat trade to increase nearly 24% from the 73 million tons exported in 2008 to more than 90 million in 2018. They say, “The high wheat prices seen in 2007 and 2008 should not return because the recession lowered demand and increased production increased supply and carry-over stocks. All wheat prices are expected to return to more normal levels and slowly increase throughout the projection period.”
By 2018 US production is expected to increase 24% above the average of the past 3 years, but will be much lower than production of the late 1990’s. They expect a 52% increase in soft red wheat because of the low starting point from short acreage in 2008. Total wheat harvested is expected to increase from 51 million acres to nearly 58 million in 2018, with yields rising from 41.3 bu. to 46.8 bu. per acre. At the same time, exports and ending stocks are expected to increase.
Canadian production is expected to increase 5% over the recent production, but domestic consumption will rise along with exports and ending stocks for the next 10 years
European Union production will increase 6.7%, consumption by 5%, but exports are expected to decrease because newer member countries are not wheat exporters, but importers. EU ending stocks are expected to rise through 2018.
Australian wheat production will grow 90% through 2018 because the recent baseline was a series of droughty crops. Wheat consumption will rise 4%, and exports will rise 114% because of the recent crop failures.
Argentina will see production drop 9% from the recent average, but rise 30% over the droughty 2008 crop. Consumption will rise 16%, but exports will drop 26%, and ending stocks will rise 13%.
Importing countries across Asia will curtail their purchases nearly 50% over the next 10 years, but that is because of the shift in India from being both an importer and exporter depending on its own production and surplus stocks from year to year. China will continue to be a major importer, but is also a substantial producer of wheat.
Summary:
The future of the wheat market is largely dependent upon the economic recovery, and if the predicted income growth does not occur, then import demand for wheat will grow slower and prices will be softer. Prices are not expected to return to levels of 2006-2008, but the weak dollar will encourage foreign demand and prices should return to the $4.90 to $5.40 range. World exports will rise and African countries will be a growth market.
Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink
October 28, 2009
Will There Be Enough Corn?
With growing questions about the potential deterioration of the late crop, there are corresponding questions whether corn supplies will be ample enough to meet all of the estimated needs. Currently, USDA is projecting 4.2 billion bushels will be refined into ethanol during the new marketing year. That will put pressure on livestock producers, exporters, and may even raise corn prices paid by the ethanol industry. What is that delicate balance that must met between supply and demand?
Currently, USDA is projecting a 13.018 billion bushel corn crop as calculated in the October Crop Report. Ag economists Daniel O’Brien and Mike Woolverton at Kansas State University report that level of production with the old crop carryover would supply just over 14.7 billion bushels, a volume that would be the largest supply on record. But they are not certain that amount of corn is really available because of the threats to the new crop. They say both quality and quantity are called into question due to crop immaturity when cold weather halted growth and the damage to the crop from 2009 weather issues. They speculate that unless damage or harvest delays are extreme, the corn crop should be at near record levels.
O’Brien and Wooverton have been tracking corn use by ethanol refiners for several years. They say the 2007-2008 marketing year shipped 3.049 billion bushels of corn to ethanol plants. During the 2008-2009 marketing year that volume climbed to 3.700 billion, and now it is forecast at 4.2 billion for the current marketing year. They say livestock feed has been the dominant use of corn for the past 35 years, but those prospects have moderated because of the economic struggle in the livestock industry to balance meat supply and demand.
On the periphery is the export trade, which is quite variable, and has been since 1973. The US is currently supplying over 60% of the world’s corn needs, but demand fluctuates annually and exports have been a “wild card” at the margin, say the economists. With US and global corn crops enlarging each year, there is not always going to be a significant global need for US corn. On the other hand, ethanol use has jumped from 24% to 32% of total demand in the last three years, and even other industrial uses of corn have steadily increased.
The Kansas State researchers compared corn ending stocks with the total use and found, “total use of U.S. corn over time has been relatively more stable than has ending stocks. Also, ending stocks-to-use ratios are typically used measure of the relative scarcity of corn supplies in comparison to use, and generally been inversely related to corn market price levels over time (i.e., high ending stocks-to-use ratios have been associated with lower corn prices, and vice verse).”
O’Brien and Woolverton believe there to be an adequate supply of corn available to meet the ethanol demand in the current marketing year, but that higher export demand will be complemented by lower feed demand. But over the coming 10 years, the prospects may be different. They say USDA economists are pushing ethanol demand to 5.05 billion bushels by 2018-2019 and that assumes a steady upward production trend, with feed use climbing to 5.850 billion and exports to 2.225 billion bushels.
The Kansas State economists contend if exports grow more than anticipated then corn ending stocks will be seriously affected, even with exports growing only 5% to 10% more than expected. Such a growth rate in the current marketing year would push stocks to use from nearly 13% down to 4%. And they say the result would be high US corn prices.
Summary:
As ethanol consumption of corn rapidly grows, there will be challenges to supply enough corn if there are moderate growth rates for other uses of corn. “However, the critical issue is that in the long run the availability of supplies of corn for ethanol production are directly dependent on developments in other segments of both the corn supply – demand complex. In turn, these other sources of corn use are dependent on the broader set of domestic and foreign economic influences affecting the agricultural markets in general.”
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
October 27, 2009
Update Your Marketing Plan For Corn And Beans
Sell or store? While fussing with the weather and drying what little corn and beans have been harvested, there is ample time to update your marketing plan. Do you store, and if so, what price will pull it out of the bin. Or do you unload your grain now to take advantage of current harvest premiums for corn as well as beans at the top of the USDA price range? To help make those decisions, let’s explore the current market dynamics.
One of the most significant market dynamics is the delay in getting crops harvested. Futures prices have frequently responded to those delays and basis levels have improved as a direct result says IL marketing specialist Darrel Good in his weekly newsletter. But he agrees with you that continued delays could translate into lower yields from crop deterioration and harvest losses.
Good says prices will be a function of demand for corn and beans and the market is currently trying to determine the extent of that demand. Important elements of that will be the speed, timing, and extent of the economic recovery here and abroad. He says when consumers have more money to spend the meat market will recover and that will imply the need for more feed. And he adds that stronger energy prices will pull ethanol higher, but commodity prices will soften if those events do not materialize.
Dynamics in the soybean market are lead by the pace of exports, which are well ahead of the 2009 record year. China is responsible for the increased business, but as South American production becomes available, the market will watch for US exports to slow. Domestic use of soybeans is at a low ebb, both in crush and consumption. While stocks are ample, the inventories at processing plants means some demand weakness.
Dynamics in the corn market have been helped by a robust economy for ethanol refiners with reasonable returns from higher oil prices and moderate corn prices. Corn exports are on pace with last year, which declined from prior years, although the USDA target is 2.15 bil. bu. Feed use of corn will be known when the December Grain Stocks report is released in early January. However, demand is known to be weak because of low livestock prices, declining livestock numbers, and increased production of distillers’ grains.
Darrel Good says there will still be price uncertainty in weeks to come, but the past several weeks of higher prices have allowed some flexibility to be aggressive in marketing at harvest time. That uncertainty is also identified by MO marketing specialist Melvin Brees in his latest marketing newsletter. But Brees believes there is a significant potential in a lower corn crop than what is currently being forecast. He cites the sluggish harvest rate but also the fact that freezing temperatures halted maturity for one-third of the corn crop, and that will result in lower test weights and poor stalk quality. The stronger market prices, which Brees calls a “counter-seasonal price rally” have been at work in both the corn and bean markets, particularly tightening up the soybean basis. Brees is not one to ignore current cash bids, saying many of them are in the upper range of the USDA’s estimated prices for the year.
The corn market still signals storage to Brees because of the nearly 20 cent spread from December to May futures. And he says when that is coupled with the expected tightening of the basis, there would be a return to storage that would be profitable. However, he warns that prices must be booked, and any unpriced corn going into storage is at risk for a decline in value if the crop remains as large as is now forecast and harvest progress picks up.
Brees says there are even profits to be made in cash sales at some locations paying nearly $4 per bushel. And he says it would be risky to hold onto the crop awaiting some definitive market signal that has indicated prices have topped. He suggests stored corn should be booked for spring delivery to lock in profitable prices and if the basis weakens as harvest progresses, Brees says a hedge to arrive contract would protect the futures portion of the price while awaiting post harvest basis improvement.
The bean market still signals sales rather than storage because there is only a 7 cent carry in the futures market from November to March, which will not pay for either commercial or on-farm storage. He says soybean storage is a speculative process of hoping prices rise above the USDA’s forecast price range. While he advocates a cash sale, he says at least lock in the strong basis with a basis contract if you believe the futures market will rise. While the market carry has increased from September, Brees interprets that as a signal that demand is beginning to weaken with the advent of the South American crop. He is opposed to carrying unpriced soybeans into the spring, and says anyone wanting to speculate in that direction should use either the futures market or call options, both of which still carry significant risks.
Summary:
The slow pace of harvest and uncertainties about crop size have provided counter-seasonal strength to corn and bean prices, along with other market dynamics. Strong ethanol demand, but moderate feed and export demand mark the corn market, which is telling farmers to store with a 20 cent carry through May 2010. Tight supplies, a strong export demand, and weaker domestic demand for soybeans are telling farmers not to store beans priced or unpriced.
Posted by Stu Ellis at 12:14 AM | Comments (1) | Permalink
October 14, 2009
If Big Crops Get Bigger, Do Small Crops Get Smaller? And How Does That Apply To 2009 Corn And Soybeans?
Market watchers will tell you that big crops get bigger, specifically when it comes to monthly production estimates by USDA’s National Agricultural Statistics Service. If there is a bumper corn crop forecast in August, it seems to get larger and larger as the monthly estimates arrive in the fall. But is that always true for corn and is there any truth in that adage for soybeans? Will the November estimates be larger than the Oct. 9 projections?
Looking at the last 30 years of crop production estimates, Purdue marketing specialist Chris Hurt examined the trends linking the August through November crop reports. He theorizes that if big crops get bigger, then small crops should trend smaller. His focus was on the change in yield from September to October, and how it related to the change from October to November and the final estimate that USDA releases in January.
For corn Hurt says, “The odds were 73% that an increase (decrease) in the October yield estimate was related to an increase (decrease) in the November estimate. For the final yield in January 76% of the time higher (lower) yields in the October report related to higher (lower) yields in the final January report.” Hurt says when there was a two bushel change up or down from September to October, there was a 92% chance the January estimate would go in the direction set from September to October. He points to the recent report that boosted the September corn estimate from 161.9 bushels to the 164.2 bushels estimated in October.
Hurt says the implications for 2009 are derived from his 30 years of monthly comparisons. Based on the trend from September to October, he says that points to a 1.4 bushel per acre increase in the November report and a .2 bushel per acre increase that would be reported in January, which would place the final yield projection at 165.8 bushels per acre.
As an aside, Hurt says such an increase would mean an additional 127 million bushels of corn, but he believes the recent frost and freeze damage across the northern Cornbelt that affected 130 million bushels would be an offset to the increase. He contends USDA would not have to revise the projected 1.672 billion bushel carryover downward as the market expected after the freeze damage. And he suggests that the recent market uptrend would not be sustainable because the larger crop offset the weather damage.
But what about soybeans; can the same be said about larger crops getting bigger? Purdue’s Chris Hurt says the tendency for soybeans is not as strong and it is harder to make predictions about large soybean crops getting larger as the fall wears on. He says, “Over the last 30 years from 1979 to 2008, 67% of the time a higher (lower) yield estimate in October was associated with a higher (lower) yield in November and 63% of the time a higher (lower) October yield estimate was associated with a higher (lower) final estimate in January.” But while that seems to be a strong relationship, Hurt says if there are only small changes in the yield from September to October, the potential for predictions withers. And this year the September to October change was only .1 bushel.
Hurt says when the national yield forecast was less than .5 bushels, the final yield was anywhere from 1.7 bushels higher to 1.7 bushels lower than in September. Thus he says, meaningful clues just are not there for the yield trend in the current soybean crop.
Summary:
The market adage seems to be true that big corn crops get bigger. When there is at least a two bushel change up or down between the crop estimates in September to October, the trend will continue in that direction. That means the 2009 corn crop will get larger and the added bushels could offset the recent loss of bushels to frost and freeze damage. However, the same cannot be said for soybeans, particularly when the change from month to month is small as it is this year. Predictions for such trends in beans are more difficult than they are in corn.
Posted by Stu Ellis at 12:34 AM | Comments (2) | Permalink
October 12, 2009
China And Your Soybean Revenue
The falling value of the US dollar against foreign currencies has again sparked the commodity market because of export potential. And with USDA raising its estimate of soybean exports to 1.3 billion bushels in the current marketing year, farm revenue will be dependent upon hungry humans and animals overseas. At least that was apparent in the Oct. 9 series of USDA reports.
USDA’s October Crop Report raised the forecast for soybean exports to 1.305 billion bushels, a record amount, in part because total production was increased to 3.250 billion bushels and a slight drop in price estimates will help spur interest of foreign buyers. The World Agricultural Supply and Demand Estimates reflected the increased interest by global importers, particularly China. With 40% of US soybeans being exported, a substantial amount of the $8 to $10 farmgate price range can be attributed to export trade.
This comes in the wake of increased world production, say USDA economists, “Global soybean production is projected higher with increases for the United States, Argentina, and Paraguay only partly offset by lower production for China. Argentina soybean production is raised 1.5 million tons to 52.5 million due to increased area as producers shift to soybeans from other crops including corn and sunflower seed. China soybean production is lowered 0.5 million tons to 14.5 million due to lower harvested area as producers shifted more area to corn.” And the economists believe global stocks of oilseeds will be increasing, “Global oilseed stocks for 2009/10 are raised 4.5 million tons to 66.0 million. Soybeans account for most of the change, with increases projected for the United States, Brazil, Argentina, and China.” Although Chinese oilseed stocks are growing, USDA’s estimates of its imports are also being increased, both for the old and new marketing year.
Along with the estimated 1.305 billion bushels of soybean exports from the US during the current marketing year, USDA also forecasts the export of 3.250 billion pounds of soybean oil and 9.600 million tons of soybean meal. Both reflect no change from the September Supply and Demand report. However, soybean oil exports would be a 47% increase over the 2008-09 marketing year, and meal exports would be an 11% increased over last year.
Argentina, which exported about 5.9 million metric tons of soybeans last year will increase that to about 9.7 million tons after its crop is harvested early next year. However, soybean meal exports will increase from 24 to 27 million metric tons. Brazil exported about 30 million metric tons last year, but that may drop to 24.5 million tons this year. At the same time, Brazilian soybean meal exports that were 13 million tons last year, are estimated at 12 million tons for the current marketing year.
As previously mentioned, China will be a major purchaser, and will buy more than one billion bushels of soybean from world suppliers, according to the latest USDA estimates. The European Union will buy over 300 million bushels, and Japan will buy about 100 million bushels of soybeans.
While US ending stocks of soybeans in August of 2010 are expected to be 230 million bushels, Brazil is expected to have more than twice that supply and Argentina will have about four times that level of carryover supplies of soybeans.
Summary:
While USDA raised its estimate of US soybean production to 3.250 billion bushels, it also raised its estimate of soybean exports to 40% of the new crop. While the larger supply will result in a slightly lower price, the falling value of the US dollar is making US commodities attractive once again to foreign buyers. China, which raises a large amount of its own soybeans, will be buying as much as one billion bushels from the US and from South America. For soybean farmers, exports will be a major part of their market price, and China will be a substantial contributor to it.
Posted by Stu Ellis at 12:24 AM | Comments (1) | Permalink
September 24, 2009
Corn, Soybeans, Store, Sell, Or What?
What are the markets going to do? If you ask that question, expect to hear, “They will either go up or down or stay the same.” Since that is not the answer you want to hear, instead ask the question, “What are the markets indicating, and how should that be used along with market outlook information?” That question is more appropriate and will probably get you a valid answer that is more useful. So let’s ask that question and see what the answer is.
Many marketing decisions at harvest are rooted in the need for storage, and whether the potential price later in 2010 will pay storage costs. Marketing Specialist Melvin Brees at the University of Missouri writes in his latest Decisive Marketing newsletter that USDA’s September Crop Report forecast large corn and soybean supplies, which were bigger than the August forecast and may even be larger next month. But he says the late maturing crop could be in jeopardy with frost or freeze damage. Despite the large size of the crops, Brees says there will be a large demand for the crop, and corn carryout a year from now may even be less than it was this year. Additionally, the 110 million bushel soybean carryout from the old crop may only expand to 220 million bushels with the new crop because of consumption.
Brees suggests that good marketers take a long look at whether the demand estimates will hold, because livestock producers will be unable to hold steady or expand as USDA suggests if the ethanol industry is expanding at the same time. Additionally, he wonders if there will really be an increase in corn exports while global wheat supplies are large and wheat feeding could increase. Also, he wonders if US soybean exports will be as strong as USDA suggests with the expected expansion of South American soybean production.
Price ranges projected by USDA are $3.05 to $3.65 for corn and $8.10 to $10.10 for soybeans, and Brees says supply, use, and price projections suggest they would follow a normal pattern of a lower trend into harvest following by a post harvest price recovery. Since the September USDA Crop Report December corn has had a 38 cent trading range and November beans have traded in a nearly 90 cent range fostered by threats of frost to immature crops. Such uncertainty, says Brees, creates difficulty in making store or sell marketing decisions. Consequently, he says look for clues to guide your decision.
Corn. There is a storage premium being offered by the corn market based on March futures being 13 cents higher than December futures, and May futures providing an additional 9 cents. Also cash bids suggest that seasonal basis gains could add another 10 to 20 cents per bushel if stored. Brees says the market is telling farmers to store corn, but do not store it unpriced. He says, “When the futures market offers carry it is also a weaker demand signal. Corn supplies appear to be more than adequate to meet demand. Buyers are content to not acquire corn for future needs by bidding up nearby contracts to acquire inventories. They are willing to let someone else own and store the corn. Slower than expected demand or higher production could result in increasing carryover and disappointing prices, which would limit or eliminate storage returns.”
Soybeans. There is not a storage premium being offered by the soybean market. Brees says there is only a 3 cent advantage to selling January beans instead of November beans and it will cost more than that to store them. Additionally, March soybean futures were even lower than January prices, which is certainly a sell signal, not a store signal. Currently, the harvest basis for soybeans is stronger than normal, which means it will likely not improve to provide any basis gains. Subsequently, the strong basis and lack of carry discourage storage and encourage sales. Apparently, the market sees strong supplies coming from South America next spring and does not want to bid up those prices in the wake of strong competition.
Strategy. The market is saying store corn and sell beans. Compare your cash prices with the USDA estimated price range of $3.05 to $3.65 for corn and $8.10 to $10.10 for beans. Also compare the current prices and the price range with your cost of production, and since current prices may not offer a profit, the prospects for higher prices for corn may move you out of the red and into the black. Those gains may also help with the decision to market soybeans at lower prices than you would prefer, but they may already be offering a profit.
Risks. There is a risk that weather and diseased crops could diminish the supply of corn and soybeans, which would push prices higher, and offer opportunities to lock in higher prices. Also the outside markets such as energy, currency, and the general economy could move prices up or down from current levels. Storing corn unpriced is a speculative action that could result in the loss of the premiums being offered by the futures and cash markets. Storing soybeans unpriced is also a speculative action that may diminish current profits, or could increase them if South American crops fail. Brees says speculating on higher prices can also be accomplished with futures or options positions, rather than risking your cash commodity in the bin.
Summary:
Marketing decisions are never easy, but looking at what the markets are indicating can help make the necessary decisions. The corn market currently is offering a gain from both the futures and the basis by storing. The soybean market is not offering any significant gain from futures or basis, and suggesting beans should be sold. Marketers should compare prices they are offered with USDA’s estimated price ranges to see if there are profit opportunities. Grain that is stored unpriced has a risk of losing that premium, but if the marketer is confident of higher markets, then that advantage can be captured with a futures or options position.
Posted by Stu Ellis at 12:11 AM | Comments (2) | Permalink
September 16, 2009
Global Demand And The Impact On US Crops
USDA’s September Crop Report raised the forecast for corn exports to 2.2 billion from 2.1 billion bushels which was the largest increase of any use sector for new crop corn. That level is substantially larger than the 1.850 billion bushel export record for old crop corn. It helped push total use above the 13 billion bushel mark for the first time. The same report also pushed soybean exports slightly higher to 1.280 billion compared to the August report, but that matched the old crop export demand. If global demand for US corn and soybeans is so healthy, what is happening in other grain production areas that is causing that?
If the global market is going to be strong for US grain, are other parts of the world having production problems? USDA’s World Agricultural Supply and Demand Estimates (WASDE) report projects an additional 100 million bushels being exported, pushing to the total to 2.2 billion bushels. The September WASDE report says, (corn) “Exports are raised 100 million bushels with higher projected imports for Canada and lower production in South America.”
Coarse grain supplies, which includes corn, sorghum, barley, and oats, remain steady for the 2009-2010 marketing year, except for an additional supply here in the US that offsets declines in stocks of other countries. USDA reduced its estimates of corn production in China, Brazil, Argentina, Canada, Kenya, and EU-27. Chinese corn production is lowered 2.5 million tons as yield prospects were reduced by extended summer dryness. USDA also lowered its estimates for corn production by 2 million tons in Brazil and by one million tons in Argentina. Those nations are providing more incentives to farmers to grow soybeans instead of corn, therefore planted acreage is expected to decline. Elsewhere around the world, corn production will decline this coming year in Canada, Kenya, and the EU-27.
With reduced production in many areas, coarse grain trade will increase substantially for the coming year, mostly corn. Canada and Kenya will be buying more, but Brazil and Argentina will be selling less, as will the European Union. Coarse grain feeding, compared to wheat feeding, is expected to climb 3 million tons with larger volumes here in the US and more barley feeding in the EU. Global corn ending stocks are projected to decline by 2.4 million tons in 2009-2010.
Regarding oilseeds, the US will have higher production, a higher crush, and more exports of soybean meal and soybeans. Exports are expected to increase because the soybean crop in India is down, along with exportable supplies. US exports are projected at 1.28 billion bushels as a result of declines in foreign production, which is down 1.2 million tons to 326.9 million. However global production is expected reach a record level of 243.9 million tons due to large crops in the US and a large crop expected in Brazil. Those are partly offset by reductions in the soybean crops in China, India, and Canada. Brazilian production is projected at 62 million tons, Chinese production at 15 million and India at 9 million tons. USDA says, “A late start to planting resulted in lower-than-expected area sown. Lower yields are projected due to a period of dryness in late July and early August.”
Global oilseed trade will climb slightly during the coming year to reflect increased imports by China. Global stocks are expected to climb due to higher stocks in China and the US, which are only partly offset by lower stocks in Argentina and India. China’s imports are expected to reach a record 39.8 million tons.
Summary:
Although the Federal Reserve has declared the recession to be history, there are still some demand weaknesses in the US corn and soybean crop. Corn exports are expected to be slightly higher helped by a short crop in Canada, which will be a customer, and reduced production in Brazil and Argentina which will reduce competition. China will continue to be a strong customer of US soybeans, and the short crop in India will reduce completion from that part of the world.
Posted by Stu Ellis at 12:58 AM | Comments (0) | Permalink
September 9, 2009
Will It Pay To Store 2009 Corn And Beans?
When the December 2009 corn contract was initiated by the Chicago Board of Trade, it reached a low of $3, and bounced back up above $7 last June before a long fade. Mr. Life of Contract Low is knocking on the door again, saying “I’m baaaaaack.” So what do you do with your corn, if it ever matures enough to harvest?
A minimal amount of corn is ready for harvest, and farmers with corn ready to combine are probably taking advantage of the opportunity for it to field dry as much as possible, since the Cornbelt will be consuming great volumes of propane this year to dry grain. With the added cost of drying to already high production costs, the net revenue from crops this fall will be minimal at best. So the challenge will be marketing, and the first question needing an answer is whether the crop will be stored and for how long.
Extension Marketing Specialist Darrel Good at the University of Illinois uses his current newsletter to explore the storage decision, which he says is a speculative decision in anticipation of higher prices. While futures prices are less than stable, the basis is more predictable and Good says, “A look at current new crop basis levels, then, can give some insight into the potential return to storage from basis appreciation.”
Using East Central Illinois elevators, he says the current basis is 25¢ under December futures. That is stronger than the basis of the past two years when futures prices were higher, but about the same as prices prior to the run up in 2007. He concludes that with a strong basis already, there may not be much room for improvement, particularly to cover the cost of storage. But when the carry in the market is added on, the outlook for a return to storage is brighter. Good says July futures are about 31¢ above December futures and a harvest bid was 57¢ under a July futures price, and he expects some significant strengthening of the July basis by next spring. A 15¢ basis improvement by early June, which would be parallel to this past spring, means the market is offering nearly 42¢ to store corn from harvest to next June. Will 42¢ pay the freight?
The time span from harvest to June would consume about 11¢ per bushel in interest cost, leaving 30¢ to cover the cost of storage, which would be sufficient for on-farm storage costs, if quality can be maintained, and if the crop is forward priced at this time. A delay in pricing the crop means a risk of lower futures prices and the loss of the return to storage that is now offered for corn.
Beans are a different story says Good, with harvest bids only 13¢ under November futures. That should be considered a strong basis, but the soybean market also has a lack of carry, seen by the fact that January futures are only 5¢ higher than November futures and July futures are only 8¢ higher than November futures. Good says the $9.09 cash bid is only 21¢ under July futures meaning that basis appreciation would not cover the cost of storage and interest would be more than what could be earned by storing.
Farmers believing that soybean prices will rise could own futures for less cost that owning and storing the physical commodity, since Good says selling beans at $9.09 and purchasing July futures at $9.30 would be cheaper than paying interest and storage. However, a declining futures price would result in margin calls and may present tax issues.
An alternative Good suggests is a basis contract that would allow beans to be sold for the current basis plus a portion of the futures price. Later, when the owner of the beans is satisfied with the futures price, settlement is made.
Summary:
The cost of storing the crop will include both interest and storage, but there are opportunities to increase income with a stronger basis and a stronger carry in the market. While basis improvement may not earn much, the market carry plus basis improvement may be enough to more than cover the cost of storage.
Posted by Stu Ellis at 12:26 AM | Comments (0) | Permalink
September 2, 2009
A "Frost Scare" In The Soybean Market? How Do You Take Advantage Of That?
Your soybeans may be a long way from maturity. And since you have flipped the calendar to September you wonder if they will mature enough to avoid a yield loss should an early frost take its toll. You may or may not have crop insurance protection. But you have a marketing opportunity, if you want to sell the frost scare.
The market wants #2 yellow soybeans, both in quality and quantity, but an early frost makes that a near impossibility, particularly if the crop is late in maturing. Iowa State economist Stephen Johnson says most soybeans will be in the R5 stage by mid-September, when beans begin to form in the upper pods, but they are not safe against a hard freeze until the R6 stage. That is when there are full sized green beans in the pods at the top of the plant. Even then some yield loss will be recorded.
Throughout the Cornbelt the average date of the first killing freeze ranges from early October in the north to late October in the south. However Johnson says the cool temperatures of this summer have little predictive value for estimating the date of the first frost. He says the hottest summer of the last 38 was in 1983 and the first killing frost that year was six days earlier than usual. The coolest year was 1992 and the first frost was 1 day early. While the cool weather of this year may cause one to think the frost would be early, Johnson says that has kept a premium on soybean futures.
Johnson says Nebraska farmer and soybean marketing specialist Roy Smith has identified a frost scare that typically occurs in late August or early September in the bean market. Of the last 30 years of the bean market, “Smith found that the single day for “selling a frost scare in soybeans” was 9-7, or the 7th trading day of September. This date typically falls just ahead of the USDA September Crop Production Report. In 2009, the September Report will be released on Friday morning, September 11th. Thus, the 10th could be a key date for implementing a pre-harvest sales strategy for soybeans.”
How do you sell the frost scare? Johnson says if you have adequate storage, selling November futures would be one tool. Another is to buy a November put option and if the US has a good crop and the South American crop gets off to a good start, then you have a floor in the market. Johnson says forward contracts with an elevator or processor will allow cash beans to be sold, but with a wide harvest basis, use a hedge to arrive contract that allows the basis to be set at a later date. He says the use of a January or March delivery date will allow the basis to return to normal, which may provide a better return to storage.
Farmers with Crop Revenue Coverage or Revenue Assurance with the harvest price option types of crop insurance will have a floor of $8.80 for soybeans. While those covered bushels can be sold with comfort, avoid selling uncovered bushels. Johnson says the use of other futures hedges or options strategies should be used for bushels that you do not want to commit for delivery.
Summary:
The lateness of the soybean crop in maturing may cause frost to be a consideration in the marketing of the crop. The market has a tendency to rise because of a frost scare in the early part of September, and usually before the September crop report, which this year is September 11. The use of either futures, options, or cash marketing contracts can be used, depending upon whether a marketer wants to commit delivery. If revenue crop insurance is applicable, those covered bushels can also be sold.
Posted by Stu Ellis at 12:41 AM | Comments (3) | Permalink
August 13, 2009
Will Big US Corn And Soybean Crops Find Global Demand?
Nearly 13 billion bushels of corn and more than 3 billion bushels of soybeans will be produced in the US this year, according to USDA’s August Crop Report released on Wednesday. Along with the larger than earlier estimated wheat crop, those will significantly bolster the world grain supply. While US crops will have potential for export trade, will they be needed? Another report released Wednesday by the USDA gives an indication.
USDA’s World Agriculture Supply and Demand Estimates were also updated Wednesday and reconciled with the field estimates obtained by the National Agriculture Statistics Service.
Coarse grains. Globally the supply of corn and other feed grains will be 8.3 million tons higher than calculated last month, helped by US supplies and better crops in Ukraine, India, and the European Union. However, the corn crops in Mexico, Russia, South Africa, and Argentina will be smaller, and that will boost corn import and export business. USDA says Mexico and Taiwan will be buying more and the US will be exporting 3.8 million additional tons. That was also reported by USDA when it forecast corn exports would be 2.150 billion bushels, up 200 million from earlier projections. When the marketing year comes to an end in 12 months, stocks are expected to be higher, reflecting the larger corn carryout here in the US. USDA says other changes in the supply and demand of feed grains concern sorghum, barley, and oats, with production increases forecast in all. Canada has a smaller oat crop, so trade will decline and ending stocks will be lowered.
Oilseeds. Global oilseed production for the current year is forecast at a record high, despite world production being slightly lower this month than last. Chinese soybean production is expected to be slightly smaller due to lower yields from excessive moisture. On the other hand increased production in the EU and the Ukraine will offset the lower production in China. European rapeseed production will be at record high levels from better yields, and a large sunflower crop in the EU. In the US, oilseed production estimates declined slightly to 94.5 million metric tons, because of lower soybean and cottonseed production. That correlates to the 3.199 billion bushel soybean crop estimated for 2009. US soybean exports are expected to decline slightly to 1.265 billion bushels, with Argentina shipping more beans and meal to offset the US drop in oilseed trade. USDA raised its estimates of soybean and product prices in the August forecast. While soybean prices will be up 10¢ per bushel, the average price of soybean meal was raised $5 per ton, and the average price of soybean oil was raised a penny per pound.
Wheat: Global production and supplies are better than once expected, says USDA, which pushed up the world production estimate by 5 million tons, with a larger carry-in and more overall production. 2009 production grew by 2.8 million tons, with the help of larger crops in the US, EU, China, and the Ukraine. Production would have been larger, but for lower production in Russia, Argentina, Canada, and Kazakhstan. Indian production reached a record of 80.6 million metric tons. In the EU, some countries reported higher production and others reported less, with an overall gain. In both China and the Ukraine, production was raised by 1 million metric tons. The production cuts were attributed to dryness and extended July heat, as well as rain coming too late to help the Canadian wheat crop.
Global wheat exports are expected to be slightly less than prior years, but only by 600,000 tons. However, there will be significant drops in export business for Russia, India, Argentina, and Kazakhstan, and similar increases in trade for the EU and the Ukraine. Global consumption is expected to be only 2.7 million tons more, held back by reduced feeding of wheat in Europe and Canada. Ending stocks will be higher by 2.3 million tons, helped by the larger carryover from the old crop.
Summary:
Global grain and oilseed production will record numerous pluses and minuses this growing season, and as a result many countries will have to import, making opportunities for exporters, such as the US, to sell surpluses. US corn exports are expected to be 2.150 billion bushels of the new crop, and soybean exports are expected to be 1.265 billion bushels. Both are in the neighborhood of the past two years, and should help support domestic grain and soybean markets.
Posted by Stu Ellis at 12:40 AM | Comments (0) | Permalink
August 12, 2009
USDA's August 1 Crop Report
The most anticipated crop report of the production year was released earlier today by USDA’s National Agricultural Statistics Service, which forecast the second largest corn crop and fourth soybean crop on record. But USDA also said the Cornbelt was not going to produce as much as would be expected.
USDA’s first objective yield estimate, in which statisticians took field surveys, found 5% more corn than last year and 8% more soybeans compared to 2008. But USDA also said corn “Yield prospects are lower in the central Corn Belt where excessive spring moisture delayed planting and below normal temperatures slowed corn emergence and development.” Regarding soybeans, USDA said, “With the exception of Illinois, yields are forecast higher or unchanged from last year across the Corn Belt and Great Plains.” And UDSA also said ear counts were unusually high in most states, “The August 1 corn objective yield data indicate a record high number of ears per acre for the combined 10 objective yield States (Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin). Record high ear counts are forecast in all objective yield States except Illinois, Missouri, and Wisconsin.”
USDA also expressed its concern about the delay of the corn crop, particularly in Illinois, “Double-digit silking progress was evident mid-month throughout much of the Corn Belt; however, large phenological delays remained in Illinois and Indiana. In Illinois, the second largest corn-producing State, silking was 2 weeks behind the normal pace on August 2. Seven percent of this year’s corn crop was at or beyond the dough stage on July 26 and had reached 14 percent complete by August 2, slightly behind last year and 15 points behind the 5-year average. Doughing had yet to begin in Minnesota and North Dakota, leaving progress over 1 week behind normal in both States. Overall, the condition of the corn crop declined 3 points during July, with 68 percent rated good to excellent on August 2.”
Based on the corn yield and production estimates of 12.761 billion bushels, USDA revised its consumption forecasts. With the upward bump of 471 million bushels of corn from the July estimate, USDA pushed feed demand up 100 million bushels to 5.300 billion, pushed up ethanol demand by 100 million bushels to 4.200 billion, and pushed up exports 150 million to 2.150 billion bushels. The carryout was raised from 1.550 billion in July to 1.621 billion at the end of August 2010. USDA revised the national average price range down by 25¢, and reset the range to be $$3.10 to $3.90 per bushel.
Compared to the USDA report, a survey of commodity traders indicated they had been expecting a 12.554 billion bushel corn crop (in a range of 12.3 to 12.8 billion), with a national average yield of 157.1 bushels per acre. The market had also expected the new crop corn carryout to be 1.697 billion bushels.
The August report comes just two days before Friday’s deadline for signing up for the ACRE program, and many farmers had awaited the report’s estimate of state production to help determine their strategy, whether or not to sign up their 2009 crop into the irrevocable ACRE program. USDA’s Cornbelt state estimates for corn yields were:
Illinois: 175 bu.
Indiana: 163 bu.
Iowa: 185 bu.
Kansas: 143 bu.
Michigan: 140 bu.
Minnesota: 167 bu.
Missouri: 146 bu.
Nebraska: 166 bu.
North Dakota: 118 bu.
Ohio: 165 bu.
South Dakota: 141 bu.
Wisconsin: 135 bu.
Based on the soybean yield and production estimates of 3.199 billion bushels, USDA revised its consumption forecasts. With production being lowered from the July estimate of 3.260 billion to 3.199 billion bushels, USDA nudged the crush down 10 million bushels to 1.670 billion bushels, and also pushed exports down 10 million bushels to 1.265 billion bushels. The August 2010 carryout was estimated at 210 million bushels, down from the 250 million forecast in July. USDA revised the national average price range up by 10¢, and reset the range to be $8.40 to $10.40 per bushel.
The market had been expecting a 3.213 billion bushel soybean crop (in a range of 3.0 to 3.3 billion) with an average yield of 42.1 bushels per acre. New crop ending stocks in August of 2010 were expected by the market to be 212 million bushels.
USDA’s Cornbelt state estimates for soybean yields were:
Illinois: 44 bu.
Indiana: 45 bu.
Iowa: 52 bu.
Kansas: 38 bu.
Michigan: 37 bu.
Minnesota: 40 bu.
Missouri: 40 bu.
Nebraska: 49 bu.
North Dakota: 29 bu.
Ohio: 47 bu.
South Dakota: 37 bu.
Wisconsin: 39 bu.
USDA also revised the soybean acreage in many Cornbelt states based on planting difficulties when the June 30th report was being prepared. The latest estimates are:
Illinois: 9.100 million.
Indiana: 5.500 million
Iowa: 9.800 million
Kansas: 3.600 million.
Michigan: 2.000 million.
Minnesota: 7.200 million
Missouri: 5.400 million
Nebraska: 4.700 million
North Dakota: 4.050 million
Ohio: 4.600 million
South Dakota: 4.350 million
Wisconsin: 1.640 million
Total US acres for soybeans were reset to 77.723 million, up slightly from the June estimate.
Summary:
The August 1 Crop Report from USDA forecast corn production at 12.8 billion bushels, 2% under the 2007 record crop, partially from poorer yield expectations in the Eastern Cornbelt. The national average corn yield was project at 159.5 bushels per acre. Soybean production would be the fourth highest at 3.20 billion bushels, with a 41.7 bushel per acre average. USDA also revised the soybean acreage up slightly from June.
Posted by Stu Ellis at 8:21 AM | Comments (1) | Permalink
July 29, 2009
Are Your Crops Developing As Slowly As They Are Everywhere Else?
Four months into the primary Cornbelt growing season, but do crops show four months of maturity? USDA’s weekly crop condition report indicates the majority of corn and soybeans are in good to excellent condition, but many farmers are wondering whether the crop or Jack Frost will be first at the finish line.
USDA’s July 28th Weekly Weather and Crop Bulletin indicates that crops have a lot of growing to do in a short period of time, and maturity must be reached in the next two months without concerns of weather risk and market volatility. From the “eye in the sky” view there are many states that are well behind the norm on crop development.
ILLINOIS: Corn is 53% tasseled, compared to 76% at this time in 2008 and the five year average of 93%. Current conditions are 62% in good to excellent, but 27% is rated as fair. The soybean crop is setting pods in only 9%, compared to 14% last year and 39% for the five year average. Soybean conditions are rated as 61% in good to excellent condition with 29% rated as fair. The 70ºF statewide average temperature for July has held back the oat crop, which is more than 10% delayed in turning yellow compared to average maturity, and only 10% of the alfalfa is in its third cutting, which by now would have 23% in a third cutting. Soil moisture is 94% adequate to surplus, but the cool temperatures are nearly 6º below normal, setting 2009 up as the coolest July on record.
INDIANA: 53% of the corn is silked, compared to 64% last year and 84% for the five year average. 2% is in the dough stage, compared to 16% for this typical time of year. 63% of the corn is in good to excellent condition with 28% in fair condition. 51% of the soybeans are blooming, about the same as 2008, but behind the 71% expected for this time of year. Typically 27% would be setting pods, but only 7% currently are doing that. 64% of the beans are in good to excellent condition, with 26% listed as fair. 83% of the alfalfa has had a second cutting, about average for the recent and longer term. Indiana temperatures have ranged from 4 to 11 degrees below normal, slowing growth and development of major field crops.
IOWA: The corn crop generally ahead of 2008, but behind the five year average. Specifically, 78% has tasseled, compared to the five year average of 88%, 60% of it has silked, compared to the 74% average, and 7% is in the milk stage, versus the 21% five year average. 80% of the corn is listed in good to excellent and only 15% as fair. 81% of the soybeans are blooming, which is comparable to the five year average of 84%; and 35% are setting pods, which is behind the 46% five year average. 79% of the beans are rated good to excellent. Iowa crop reporters indicated that some area of the state have not had any measurable rainfall for two weeks, but the cooler than average weekly temperatures have kept crop conditions at high levels. Topsoil moisture was rated 82% adequate and 10% surplus.
KANSAS: The sunflower crop is on schedule for emergence and blooming, with 74% in good to excellent condition. The second cutting of alfalfa is also on schedule, but the third cutting is slightly behind. Topsoil moisture is 77% adequate and subsoil is slightly better. Forage supplies are in good shape and 66% of the range and pasture are good to excellent.
MICHIGAN: The corn crop averages 55 inches, and tasseling is variable throughout the state. Corn and soybeans benefitted from moisture, but both crops are not as tall as they should be by this time. Winter wheat is rated 70% good to excellent and harvest is underway; but the oat crop is rated slightly less and is reported all headed. Recent rains were needed and, “growers welcomed much needed rainfall. Some areas of State remained dry. Most crop conditions improved with recent rainfall; however crop development remained behind normal due to cool temperatures. Growers continued to report need for warmer temperatures to advance crop development.”
MINNESOTA: Corn is beginning to enter the milk stage, which is slightly ahead of 2008, but behind the five year average. Winter wheat harvest is just beginning. Spring wheat is 24% ripe, which is behind the five year average of 61%, but none is harvested. Both the oat and barley crops are behind the five year average, as well. Less than 60% of the canola and sunflower crops are rated good to excellent. The topsoil is 43% short to very short, and moisture supplies are declining.
MISSOURI: While moisture is 81% adequate for crops, coolness prevails and temperatures were 4 to 8 degrees below normal across the state in the past week. The Missouri climatologist reported last week that July should set a record for being the coolest on record. Hay cuttings are on schedule, and pastures are rated 66% good to excellent.
NEBRASKA: Corn maturity is better than 2008, but slightly behind the five year average with 77% silked and 8% in the dough stage. Between dryland and irrigated corn, the crop is rated 79% good to excellent. Soybeans are also rated 82% good to excellent, with 75% blooming, which is comparable to the 5 year average. 24% of the beans are setting pods and that is slightly behind the 35% average for the past five years. The sorghum crop is in good shape and ahead of average. 99% of the wheat is ripe and 85% has been harvested which is slightly behind normal. Precipitation has been good with 82% of the topsoil having adequate to surplus moisture, but temperatures averaged 5 degrees below normal for the past week, some dipping into the 40’s.
NORTH DAKOTA: Better weather is being reported, “Near normal temperatures and below normal precipitation aided crop conditions in wet areas and hindered it in drier areas.
Observers in the central district reported that limited precipitation was negatively affecting crop development. However, reporters in the northeast commented that the dry, warm weather was beneficial for a variety of crops.” However, the development of the durum wheat crop, spring wheat crop, barley crop and oat crop are all slightly behind the five year average.
OHIO: The corn crop is rated72% good to excellent, but only 59% is tasseled and that is behind the 78% for the five year average. Soybeans are 66% in the good to excellent categories, but only 68% are blooming, and that is behind the 80% average for this time of year. The winter wheat is nearly all harvested, and that is on schedule. Topsoil moisture is rated 64% adequate and 25% short, which is also being reflected in conditions of the hay crop and pastures.
SOUTH DAKOTA: Cooler weather has given way to warmer temperatures, and “Warmer, drier weather helped with row crop development, harvesting of small grains and cutting of alfalfa; but insects are now becoming a hindrance for both crops and livestock.” The corn crop is 36% tasseled, compared to the five year average of 68%. The sunflower crop is on par with prior years. The winter wheat crop development is marginally behind schedule, as are barley, oats and spring wheat. Better than half of the topsoil has adequate moisture, but nearly a quarter of the topsoil and subsoil are short of moisture.
WISCONSIN: Coolness also prevails, with “Average high temperatures ranged from 76 to 80 degrees across the state. Lows averaged from 52 to 61 degrees for the week. Average temperatures were below average again, and the lack of heat units has many crops behind five-year averages.” The corn crop averages 68 inches in height, with 21% silking. 42% of the soybeans are blooming and 9% are setting pods.
Summary:
In only rare instances are 2009 crops developing in line with the five year average, and in most cases, corn and soybean crop stages are 20% behind the five year average. Many small grains are also behind in their development, but not as much. Nearly all state reports have indicated the problems stem from cooler than normal temperatures, hampering expected crop development.
Posted by Stu Ellis at 12:21 AM | Comments (2) | Permalink
July 23, 2009
Brazil May Be Consuming More And Exporting Less
Over the past 30-plus years US soybean growers, have watched their dominance in the world market slowly erode to the benefit of the Brazilian farmers. Demand for US beans typically dries up in March when Brazilian soybeans are available to the world market. Soybean production exploded in Brazil in the past several decades, surpassing that of the US. But buried deep in a new report about socioeconomic shifts occurring in Brazil is an item that will warm the hearts of soybean producers across the US.
All farmers will remember the markets of 2007 and 2008 that took corn and soybeans to historic highs, not only with the help of the weak dollar, but also with the help of growing economic power in developing countries. Such nations as China, India, Russia, and Brazil were seeing more money in the pockets of their consumers, who were demanding more and better food. It was a go-go economy, until the screeching halt midway through 2008. But with Brazil being one of the higher populated nations on the planet, and with extraordinary natural resources, its GDP was expanding at an average annual rate of 12% from 1996 to 2008. Income growth, increased urbanization, and a growing demand for food made it one of the worlds leading consumers of many types of food products, according to the latest issue of Choices magazine, an electronic publication. Constanza Valdez, a USDA economist, and two ag economists in Brazil report that rapid socioeconomic shifts are underway in Brazil and are challenging the farm sector with shifts in demands for commodities and subsequent changes in economic signals. And reading between the lines, those could have a significant importance for US agriculture.
The specialists on the Brazilian ag economy report Brazilian farmers will be challenged to sustain productive growth to meet the increasing domestic demand for food and remain a major world supplier of grains and oilseeds. And they add that the growth of the biofuels industry in Brazil, which is fueled by sugar cane, could affect the availability of grain and oilseeds for both domestic and export markets.
Currently the Brazilian economy is a train that would be hard to slow, according to recent statistics. Per capita income has increased 14% from 2004 to 2007; income distribution is moving toward equality; and in the past four years the middle class has expanded from 42% of the population to 54%. The result has been increased food consumption, based on caloric value, which puts Brazil above the average for upper middle income countries. The economists say domestic consumption of red meats and poultry will rise and require more livestock feed, and there will be increased consumption of wheat and rice. In other words the Brazilians are eating better, have more money to pay for better food, and expect their farmers to supply more and better food instead of exporting the bulk of it. Sugar will shift from a food product to a fuel feedstock, since flex fuel cars have become popular with increased wealth in the country.
For Brazil, the bottom line will be the need to produce 7% more grain and 43% more oilseeds to meet the domestic and foreign demand, not including the demand for biofuels. While Brazilian food output has expanded fourfold since the 1970’s, future growth will slow unless there are solutions to the financial constraints for farmers, the food supply chain, and environmental issues. Additionally, the expansion of biofuels will eat into the volume of commodities that Brazil exports. The economists say, “Demand for soybeans as a raw material for biodiesel will likely increase use of Brazil’s excess crushing capacity and dampen the recent boom in soybean exports. Planned increases to Brazil’s biodiesel mandate from the current 3% of transportation fuel would likely reduce soybean oil exports.”
The Brazilian specialists conclude that Brazil will be able to meet the challenges for domestic markets, but its export potential will depend on its policy toward the expansion of the biofuels industry.
Summary:
For several decades Brazil has nibbled away at the US dominance of global soybean trade. However, economic advances in that nation have allowed domestic demand for food and fuel to increase to the point that more of Brazils agricultural production will be used domestically, and there will be less available for export.
Posted by Stu Ellis at 12:17 AM | Comments (1) | Permalink
July 22, 2009
Wheat Market Speculation: A Congressional Issue, Or Simply Revising The Delivery Contract?
Maybe you are a Sherlock Holmes aficionado, or a modern day CSI fan. If you do well with “who done its” and other brain teasers, your sleuthing expertise is needed to solve the whys and wherefores about alleged speculation in the wheat market. Some big names have lined up on either side of the issue, and whether you want to investigate the issue or just want to be a juror, you might find the facts of the case closely connected with your marketing plan.
The US Senate’s Permanent Subcommittee on Investigations, no less, convened Tuesday to listen to witnesses praise and criticize the Committee’s findings of “Excessive Speculation in the Wheat Market.” The report alleges that “commodity index traders made such large purchases of Chicago Wheat Futures that they pushed up futures prices, disrupted the normal relationship between futures prices and cash prices for wheat, and caused farmers, grain elevators, grain processors, consumers and others to experience significant unwarranted costs and price risks.” Committee Chairman Senator Carl Levin said speculative money overwhelmed the market and federal regulators failed to control the problem; and he called for stronger action by the Commodity Futures Trading Commission (CFTC) to place a 5,000 limit on the number of contracts a trader can hold, deny waivers of that limit, and investigate index trading in other markets.
During the hearing, various witnesses took these positions:
• CFTC Chairman Gary Gensler said there had been volatility in the market, it should be free of excessive speculation, and the CFTC looked forward to solving the issues raised by the Senate Committee.
• Chairman Thomas Coyle of the National Grain and Feed Association said increased capital flowing into the market has reduced the effectiveness of hedging by grain elevators, but he did not want increases in regulations to the point of interfering with the market.
• Steven Strongin, Managing Director of Goldman Sachs, said index fund investors provide long term liquidity to the market, and the problem with convergence of wheat futures and cash was a function of the delivery mechanism, not caused by investors.
• Vice Chairman Charles Carey of the Chicago Mercantile Exchange said the CME was committed to solving the convergence issue and consulted with many economists before making delivery contract changes designed to resolve structural problems.
University of Illinois agricultural economists Scott Irwin, Darrel Good, Philip Garcia, and Eugene Kunda also read the Senate Committees report and said, “We find the …evidence neither “significant” nor “persuasive.” And they said the Senate staff dismissed all of the work the CME had done to address the issue of poor convergence of cash and futures by restructuring the delivery contracts for soft red wheat as well as the fact that academic analysis of the problem found that the convergence issue had nothing to do with index trading. The ag economists said the most serious problem with the Senate findings was to equate the flow of index money into the wheat market with actual demand for wheat. They said investors buy and sell contracts without demand for the physical commodity. The Illinois economists said futures for wheat and other commodities rose during the period in question when index funds held large positions in the market, but using accepted economic principles there was little evidence those positions impacted the price movement in the futures market. And they said the Senate Committee report ignored the academic research that indicated index funds were not responsible for the run up in prices, particularly in the wheat market.
The economists said there is persuasive evidence that current delivery markets for wheat are outside of the commercial flow of grain, and when changes were made in the corn and soybean delivery points the magnitude of commercial activity increase sharply. But they said wheat delivery markets are out of position and that causes poor basis and convergence performance, an issue recently addressed by the CME to add delivery locations. They concluded that, “By ignoring this central problem with the CBOT wheat futures contract, the Subcommittee points in the wrong direction in trying to fix problems with the contract. Index funds are a side-show compared to the real problems with the contract.”
Summary:
The lack of convergence between cash and futures has been a problem for the CBOT wheat contract. But has the problem resulted from large positions held by index futures traders or has the problem resulted from contract delivery points being out of the flow of the commercial wheat market? A Senate Committee investigation contends the problem stems from the former and wants more regulation of index traders. Agricultural economists say the problem stems from the latter and changes made by the CBOT and the CME staff are steps toward resolving the issue.
Posted by Stu Ellis at 12:31 AM | Comments (2) | Permalink
July 14, 2009
Make Sure Your Soybean Marketing Plan Compensates For The Current Market Dynamics
Planting was stretched out, and so will harvest be quite elongated, but the US soybean crop is still expected to be a record in size, and will supply a large demand base. Using a trend line yield, the 77.5 million acres of soybeans should produce 3.26 billion bushels, and subsequently lower the price forecast for the new crop. The larger US crop will also bolster world production, pushing global ending stocks for the old crop that was at a five year low to comfortable levels. So if you are tweaking your marketing plan for soybeans, there are some significant factors that need to be addressed.
If you have soybeans to sell in the 2009-2010 marketing year, you won’t be alone. Using the National Agricultural Statistics Service numbers, USDA economists report the US is growing its largest soybean crop and there is more acreage in the major soybean producing states this year compared to last year, except IA and NE, where corn acreage grew substantially. KS and ND have record high soybean acreage. The challenge will be in the maturity of the crop because of late planting in many states, which has delayed blooming and pod fill to days with lesser daylight. Currently, two-thirds of the acreage is good to excellent with good soil moisture reserves.
Of the soybeans to be produced this year, nearly one-third, 1.275 billion bushels, will be exported, and slightly more, 1.68 billion will be crushed. At the end of the current marketing year next month, the old crop will have a 110 million bushel carryover that will be available for use in the next marketing year until the new crop is available. The market’s comfort with the supply has been a reason for the $2.50 decline in value of cash beans, and a reason for USDA cutting its range for the season average price to $8.30 to $10.30 per bushel. Fall cash bids are currently in the lower quarter of that range.
While global demand is high, domestic demand is sluggish. It is the same for soybean oil, as prices continue to erode. Although biodiesel has been a mainstay of the soybean oil market, biodiesel exports are only 10% of what they were a year ago. The change resulted from the EU decision to place a countervailing duty on biodiesel imports from the US. That meant soybean oil was in lesser demand to make biodiesel, and the current rate is only half of what it was a year ago. The outlook for the new marketing year is much the same, but there is expected to be a robust export market for soybean oil until South American crops come into play. The USDA economists believe Brazilian and Argentine soybean oil will be used primarily in their domestic markets, leaving a larger global demand to be filled by US soybean oil.
Soybean exports of the old crop continue at a record pace, and the Economics Research Service says shipments are not letting up after setting all times highs the past several months. Old crop soybean exports should reach a record of 1.26 billion bushels. The export demand has left stocks rather tight, and helped old crop prices climb to highs in mid-June, but moderate once the market was comfortable with available stocks.
With the higher acreage for the new soybean crop, acreage correspondingly declined for minor oilseeds, including canola, flaxseed, peanuts, safflower, and sunflower. Crop progress has been slow for them, as well, in part by a wet spring and cool weather where many are produced in the Red River Valley. Yield potential is expected to be limited.
In the global market, stocks are at a five year low, drawn down by exports recorded by the US, Brazil, and Argentina. However the new crop in the US is expected to replenish global stocks. Soybean imports globally are down around the world, except for China which has a surprisingly strong demand for soybeans, and many are being stockpiled.
Summary:
The US soybean market has been driven by a strong export business in recent months, with China being the primary buyer for its purpose of stockpiling. As a result, global soybean stocks are down in the US, Brazil, and Argentina, but the new crop in the US will raise the available supply beginning with the US harvest. When the South American harvest begins, beans and meal should come on to the market, but Brazil and Argentina are using increasing amounts of their own soybean oil. The US has a large supply of surplus soybean oil, in part because of lesser volumes being converted to biodiesel because of European trade policies that cut US exports of biodiesel by 90%. Soybeans will be the major player in the overall oilseeds market this year because of reduced acreage and poor crop development for minor oilseeds.
Posted by Stu Ellis at 12:15 AM | Comments (1) | Permalink
July 1, 2009
Where Did All Of This Corn Come From?
Call it “bloody Tuesday,” because of the USDA acreage and grain stocks reports that caught many farmers and commodity traders by surprise. The June Planted Acreage Report indicated more than 87 million acres of corn, a one million jump from last year and a two million jump from the March Planting Intentions Report. In concert with increased corn production, USDA found more corn stocks on hand than had been calculated, so with the country awash in corn, it is no wonder DEC corn settled down the 30 cent daily limit and lost 92 cents for the month. Where did all of this corn come from?
USDA’s Planted Acreage Report forecasts 87.035 million acres of corn in 2009, up from 85.982 million last year.
IL is up 200,000 acres to 12.3 million acres
IN was steady at 5.700 million acres
IA is up 400,000 to 13.700 million acres
KS acreage declined 50 thousand to 3.800 million
MI was steady at 2.400 million acres
MN was steady at 7.700 million acres
MO is up 300,000 acres to 3.100 million
NE is up 600,000 acres to 9.400 million
ND acreage declined 650,000 to 1.900 million
OH acreage is up 100,000 to 3.400 million
SD acreage is up 250,000 to 5.000 million acres
Those Cornbelt states were responsible for 1.750 million additional acres. However, there were some significant changes compared to the March Planting Intentions report, says University of Illinois marketing specialist Darrel Good, “Acreage exceeded intentions by 100,000 in Illinois, Michigan, Minnesota, Ohio, Pennsylvania, and South Dakota. Acreage is 400,000 less than intentions in North Dakota.” In all, the planted acreage exceeded the intentions report by 2.049 million acres. That was a surprise to many, given the volume of delayed plantings from Missouri to Ohio. In fact, University of Missouri marketing specialist Melvin Brees says, “Surprisingly, especially for those located in the northern counties, corn acreage is up 300 thousand acres and soybean plantings are up 200 thousand acres in Missouri from last year. This is partially explained by a 450 thousand acres decrease in wheat acreage, but surprising given the planting delays and some fields still not planted in North Missouri.”
So how much corn will we produce with such abundant acreage? Good says, “If the U.S. average yield is near the adjusted trend of 153.4 bushels projected by the USDA earlier this month, the 2009 crop would total 12.288 billion bushels, 353 million larger than the early month projection.”
USDA notes the 87 million acres of corn will be the second largest crop planted, but USDA is als quick to say that 97% of the intended acreage had been planted at the time the surveyors tallied their estimates, but the 10 year average is only 98%. “The return of dry, warm weather in late May allowed producers to make rapid planting progress in the Corn Belt and Great Plains, and by May 31, corn planting was 93 percent complete compared with the average of 97 percent. Growers in Illinois, Michigan, North Dakota, Ohio, and South Dakota planted over two-thirds of their intended corn acreage between May 10 and May 31. However, planting progress in Indiana, Illinois, and North Dakota still lagged behind the average pace by 17, 16, and 13 points, respectively.”
While corn production will be more than most folks had imagined, given the wet spring weather and all of the unplanted, or just planted, acres, there is also a considerable volume of corn in storage. USDA’s quarterly grain stocks report put corn on June 1 at 4.266 billion bushels, which is 238 million larger than stocks of year ago levels, and more stocks than traders had guessed. Good says, “Stocks were about 185 million larger than if third quarter domestic consumption had been at the rate projected by the USDA.” With more on hand than anticipated, Good says USDA’s July Supply and Demand Report will possibly raise the corn carryout at the end of August 2010.
Summary:
Cornbelt states have reported that 1.75 million more acres of corn were planted than last year, which contributed to the national 87 million acres of corn The USDA Planted Acreage Report found more corn being planted than what farmers indicated would be planted in the March Planting Intentions Report. Additionally, corn consumption has been less than expected, contributing to larger than normal stocks on hand, and larger carryout this year and next.
Posted by Stu Ellis at 1:23 AM | Comments (1) | Permalink
June 23, 2009
Why Is The Market Dropping? I Am Not Even Done Planting!
The uptrends in corn and soybean prices have been broken, causing many farmers to wonder if the market is satisfied with the potential for the new crop. The calendar says it is still June, and USDA says only 70% of the corn is good to excellent and 9% of the soybeans have yet to be planted. If that perspective is “good enough,” how should an uncertain crop be marketed?
We are a week away from the June 30th USDA Planted Acreage report, and University of Illinois Marketing Specialist Darrel Good says, “The June estimates this year may contain more than the usual amount of producer intentions since considerable unplanted acreage still remains in the wettest areas of the eastern Cornbelt.” In fact, Illinois is only 79% complete in soybean planting, Missouri is 75% finished, Kentucky is 74% done, and Tennessee is 69% complete. USDA says Indiana is up to 90% planted, and Ohio is apparently finished, but 5% of the beans have not yet emerged, as indicated in the June 21st weekly crop and weather report.
Since the June 2nd high, the December corn contract has lost nearly 70 cents over the past 14 trading periods. Additionally, the November soybean contract has lost more than $1 in the past seven trading periods. Good says, “With the most critical part of the growing season yet to come, the recent sharp price declines suggest the market does not have significant concerns about yields at this time.”
If thousands of planters still have seed in the boxes, and the July calendar begins next week, what is the market concerned about, and how does someone manage their price risk? University of Missouri Marketing Specialist Melvin Brees suggests the market will take some direction from the June 30 Acreage report, and there may be less corn than the 85 million acres projected in the March Planting Intentions report. He says the stronger energy market and tighter world supplies will create demand, but slower feed use and herd liquidation could soften the demand a bit. Brees does see some current sales opportunities:
1) New crop prices have been near the highs for the calendar year, and while not at the point of the 2008 prices, they represent a significant recovery from spring lows. They would even be considered historic highs, were it not for the 2008 high prices.
2) New crop prices are in the upper part of the USDA price range, which tops at $4.70 for corn and $11 for beans.
3) There may be upside potential, but recent bullish news was discounted by the market, and there is uncertainty how the market will react to the Acreage report next week.
4) There is downside risk, since prices were much lower earlier in the year and there have been significant price declines in the past few days.
5) Seasonal prices often turn lower after peaking in June or July, and that trend may have begun with the recent market weakness.
6) Fall cash bids reflect average harvest basis, indicating that basis weakness could develop when harvest begins.
7) Prices currently offer a favorable return, where crops are in good condition and not damaged or delayed in maturity.
Brees says there are also some current signals in the market that are negative. Those include the failure to reach new highs, a break in the uptrend, the carry in the corn market and the inverted bean market, plus the higher dollar and the poor general economy. As a result, Brees says there are a number of market signals that suggest making or adding to sales.
Summary:
Recent weakness in the corn and soybean markets point to a possible change of price direction for corn and soybeans, which may push many farmers to sell a portion of the new crop and protect their price risk. This is happening despite the fact the corn crop is widely variable and many soybeans have yet to be planted. But the market may be satisfied with the way the crop is progressing due to the weaker demand compared to the past two years.
Posted by Stu Ellis at 1:37 AM | Comments (2) | Permalink
June 17, 2009
Water Is Standing In Many Cornbelt Fields.
It is mid-June and throughout the Cornbelt corn is waist to shoulder high with early planted fields beginning to reveal tassels. Soybeans are all ankle to knee high and early planted beans are beginning to bloom. In a typical year those all might be true, but 2009 is not typical and those descriptions of corn and soybean fields are little more than pipedreams in many regions. A complete assessment will be an important element in many marketing plans.
USDA’s Weekly Crop Progress Report indicates the Cornbelt is not short of water this spring. In fact, surplus water has hampered crop development in some regions of the Eastern Cornbelt.
ILLINOIS: Continued cool, wet weather permitted only 3 days of field work. Most of the precipitation was received early in the week, which allowed producers the opportunity to start wrapping up corn planting, with soybeans not that far behind. Some fields are uneven and turning yellow due to the excess rainfall. The average height of corn is 10 inches, compared to 11 inches in 2008 and 25 inches for the five-year average. Only half of the soybeans have emerged, compared to the five year average of 86%. Topsoil moisture is 40% surplus and 59% adequate.
INDIANA: Farmers were making good progress with field work until more rain fell across the state mid-week. Heavy rain showers left standing water in many crop fields around the state, which puts farmers further behind with planting, spraying, and side dressing corn with nitrogen. Producers in some central and southern areas have now begun taking prevented planting payments on some acreage that was intended to be corn or are switching to soybeans. Only 3 days were suitable for fieldwork last week, in part because the topsoil moisture is 39% in surplus. 16% of the soybeans have not yet been planted, compared to a 7% average for this time of year.
IOWA: Even with flooding problems in the Southeast, most of the State’s corn and soybean fields made good progress. 100% of the corn has been planted and 99% is emerged with 78% in good to excellent condition. Soybeans are 97% planted and 92% emerged, with 75% in good to excellent condition. Iowa again received widespread rainfall along with cooler temperatures last week. While Northwest producers rejoiced, the Southeast is again under flood watch as rain continued to saturate the region. Currently 74% of the topsoil has adequate moisture and 24% is in surplus.
KANSAS: 80% of the wheat is turning color, slightly behind the 87% average, and 9% is ripe, well behind the 41% average. 24% has light insect infestation and 36% has light disease infestation. 49% of the sorghum has emerged, which is about average. The topsoil moisture is 77% adequate and 12% in surplus.
MICHIGAN: The average corn height is 6 in. Although added moisture expected to improve emergence where conditions less than ideal for planting; additional rainfall kept farmers out of fields. Crop development continued to be delayed by cooler than normal temperatures. Growers continued to hope for warmer temperatures to spur crop development. Growers spraying and side-dressing crops as weather permitted. Soybean planting nearly complete. Nitrogen side-dressing of corn occurred. Topsoil is 80% adequate and 15% in surplus.
MINNESOTA: Corn averages 9 in. in height, compared to the 11 in. average; and soybeans are 3in. tall, compared to the 4 in. average. Crop growth and development was slowed by a cool, damp start to the week; however, more seasonal weather returned by week's end. Producers generally reported a need for warmer weather. The number of growing degree days, since May
4th, was below normal for all reporting stations. The percentage of small grains and row crops rated good to excellent was generally unchanged compared to last week despite rain falling across much of the state. Only 4 days were suitable for field work, with 60% of the topsoil having adequate moisture and 6% in surplus.
MISSOURI: Wet weather continues with an average of 2 in. of rain across the state and 39% of the topsoil having surplus moisture, with 60% in the adequate category. 93% of spring tillage is complete, compared to 96% of normal.
NEBRASKA: Corn is rated 82% in good to excellent condition, and soybeans are 80% good to excellent. 96% of the sorghum has been planted and 73% has emerged. Winter wheat is 74% good to excellent and 93% has headed. The wet week only allowed 2 days of field work, but only 5% of soils have surplus moisture, with 81% listed adequate. Flooding, hail and severe storms in parts of Nebraska have resulted in crop damage. Winter wheat harvest is likely to start at the end of the month in the Southeast and by mid July in the Panhandle.
NORTH DAKOTA: Mostly below normal precipitation last week allowed producers to finish a majority of their seeding. As seeding neared completion, spraying crops was the most widely reported activity in fields across the state. Nearly 6 days were suitable for field work and only 15% of the topsoil has surplus moisture. 91% of the Durum crop has emerged, about on average, but only 10% of the spring wheat has jointed, well below the 51% average. The barley crop is also behind in development.
OHIO: 97% of the corn has emerged and is rated 77% in good to excellent condition. 97% of the soybeans have been planted, about on average, and 74% are in good to excellent condition. Only 4 days were suitable for field work because of continuing moisture, which has left 24% of the topsoil with surplus water. 74% of the winter wheat is in good to excellent condition and 25% is turning color, slightly behind the 40% average for this time of year.
SOUTH DAKOTA: The average height of corn is 6 in. slightly behind the 9 in. average for this time of year and 51% has been sprayed or cultivated at least once. 54% of the sorghum has emerged, ahead of the average. 93% of the winter wheat is in the boot stage, about average; and 58% of the spring wheat is in the boot state, slightly below average. Cool temperatures and moisture were the weather theme for the past week, with most of the state receiving a nice shower throughout the week. 3 days were suitable for fieldwork, and only 6% of the topsoil has surplus moisture.
WISCONSIN: 14% of the corn has not yet emerged, but the 86% that has is about 7 in. tall. 96% of the soybeans have been planted and 80% have emerged. Some timely rains fell across the state but temperatures remained cool. Growers were anticipating sunshine and warmer temperatures to help kick-start the growth of many of their crops. 76% of the topsoil has adequate moisture and only 9% is in surplus.
Summary:
The Cornbelt has plenty of moisture. Nearly every state reported significant percentages of topsoil with surplus moisture, however farmers that were able to get planted early have seen good crop development with very little stress. Significant areas in the Eastern Cornbelt remain unplanted, and crop conditions reflect stress.
Posted by Stu Ellis at 12:29 AM | Comments (0) | Permalink
June 16, 2009
A Marketing Plan That Does Not Require "Seat Of The Pants" Implementation.
How is your marketing plan shaping up? Is it giving you an award-winning performance? Or is it performing somewhere between a Wall Street stock portfolio and the elementary school beginner’s band? Marketing plans are documents than need to be regularly consulted, but also require preventative maintenance, just like your new combine. They need to be fine tuned periodically and implemented religiously, not just left covering up a corner of your desk with last year’s calendar. Yes, it is time for that semi-annual sermon on marketing plans.
Now that the guilt of not having, not updating, not implementing a marketing plan has been thrown at your feet, let’s not dwell on the problem, but let’s fix it. And our fixer is Ed Usset, University of Minnesota grain marketing specialist, who has addressed corn, beans, and wheat in the past several days.
Corn
His 2009 pre-harvest sales began last August (2008) with a $6.45 sale. With a recent sale of DEC ’09 corn at $4.58 he is now 75% priced at an average just above $5, which implies a cash price of $4.50-$4.60 at harvest. Happy with that being above his minimum price of $3.95, Usset is now focused on pre-harvest sales for his 2010 crop. (No, it is not in the bin or even planted, but he’s not selling any 2011 or 2012 yet either.)
The first step is cost of production, and fall fertilizer prices are available, and cash rent can be calculated. He is assuming yields will fall near a four year average, and expects that production costs will be $3.60 to $3.70 per bushel. Adding a $20 government payment and deducting a $40 labor and management charge, he’s forecasting a $3.65 minimum pricing objective. His 40¢ harvest basis would give him a $4.05 cash price per bushel and with DEC ’10 futures near the $4.55 level, a sale locks in a 50¢ profit. And he says while you are forward contracting corn, lock in your fertilizer price as well. Usset says price is not a factor, just the estimated margin over input costs.
Soybeans
Usset has also just completed the pre-harvest phase of his soybean sales and has 75% of his crop priced with a weighted average of $11.18 per bushel, still hoping he can price the remaining 25% at a higher price. And he has switched his focus to 2010 soybeans, which are near the $10 mark for NOV ’10. With a 70¢ basis for harvest delivery, he’s starting to price cash beans above $9.30. His estimated cost of production is $8.35 per bushel, which gives him a nearly $1 margin, well above historical records.
Usset urges farmers not to look at the 2007 and 2008 prices and expect them to appear, but look at the margins today’s prices offer and take advantage of them. He’s also quick to recommend against pricing beyond next year because of uncertainties in input prices and even rotational demands. So he has already sold 20% of his 2010 soybean crop, booking an early premium price for beans that will not be planted for another year.
Wheat
Again, Usset is not concerned with the prices offered by the market, but the potential margins he would receive with pre-harvest sales. “As good as those implied margins are in corn and soybeans, they are even better in the world of spring wheat.” Using an average production cost for spring wheat of $4.94 on cash rented ground; Usset is computing a $14 per acre government payment into the equation, along with a $23 charge for labor and management. Using declining costs for fertilizer, he believes 2010 production costs will not be any higher than those for 2009 wheat. With a $5 production cost, he is happy with SEPT ’10 wheat trading at $7.50 per bushel, which would give a $7.10 to $7.20 cash price, which is $2 over production costs.
Summary:
With 2009 corn and soybeans beginning their growing season, and some fields yet to be planted, it may be time to consider marketing the 2010 crop. If costs of production can be computed, and most of those can be estimated within a few percent, many farmers would be well served to compare those production costs to prices offered by the market. Using typical basis levels check the potential margins that cash prices would offer. Unless you are going out of business, pricing a portion of the 2010 crop may offer some early profit opportunity.
Posted by Stu Ellis at 12:58 AM | Comments (1) | Permalink
June 11, 2009
USDA Reports New Crop Prices May Edge Higher.
USDA’s June Supply and Demand Report generally fell within the expectations of the market, but those estimates did reflect tighter ending stocks and a supply scenario that would support higher prices. The market, however, has been more focused on external factors such as currency values and oil prices, and therefore commodity prices still await their turn in the spotlight for another day.
In the World Agricultural Supply Demand Report, the US projected corn crop was lowered to 11.935 billion bushels, a function of lower yields from planting delays in the Eastern Cornbelt. In fact the average yield was estimated at 153.4 bushels per acre, down 2 bushels per acre. US production fell 155 million bushels from the May estimate. USDA economists reduced feed demand by 100 million bushels in the coming year based on estimates for reduced red meat production. Ethanol will consume 4.1 billion bushels and exports will need 1.9 billion, both of which were held steady from May. The total demand was estimated at 12.5 billion bushels, 525 million above production, which would lower ending stocks to 1.09 billion bushels. The reduced carryover caused USDA to add 20¢ to the top and bottom of the price range, which now is estimated at $3.90 to $4.70 for the coming marketing year.
Globally, coarse grain supplies are forecast to drop by 8.1 million tons, and lower US corn production is half of that decline. Brazil and Russia will produce less corn in the coming year, and global coarse grain ending stocks will drop by 6.3 million tons.
USDA kept its 3.195 billion bushel projection for US soybeans for the new crop. However, the torrid export business for the current year is expected to reach 1.250 billion bushels, and that will lower old crop ending stocks to 110 million bushels. With fewer soybeans on hand at the start of the 2009-2010 marketing year, the carryout at the end of that year is also projected to be at a relatively low level of 210 million bushels. USDA projected a 1.675 billion bushel crush and a 1.260 billion bushel export business. The season average price for the new crop was raised to a $9 to $11 range. In addition to changes in the soybean balance sheet, USDA shifted some soybean oil away from biodiesel production and into the export column for this year and next. That was a result of lower soybean oil exports anticipated from Brazil. In fact, Brazil is using more of its own soybean oil for biodiesel production.
The story in soybeans is one of the global market being served by the US. The Argentine drought cut its production to the point that it will only export 5.4 million tons, the least in 9 years. And China’s increased purchased of US beans are the reason for the export demand and the strong price. Global production of oilseeds will be down marginally in the coming year. Argentine soybean production for the current year is down 2 million tons to 32 million due to droughty yields.
US wheat production is down slightly by 10 million bushels compared to the May estimate, most of which is soft red winter wheat. Total US wheat production is projected to be 2.016 billion bushels, well under the 2.500 billion bushels of last year, and slightly under the 2007-2008 crop. However, ending stocks will rise slightly because of reduced consumption. The average farmgate price is estimated 20¢ higher than May at $4.90 to $5.90 per bushel.
Globally, wheat production will decline this year because of lower yields from dry soils in many production areas. However, economists are expecting lower overall consumption of wheat in the coming year, with ending stocks showing a slight increase.
Summary:
USDA’s latest estimate for US and global grain production shows prices for new crop grains edging slightly higher. Corn prices will rise because of reduced US production from planting delays and strong export demand from reduced South American production. Argentine soybean production is down, and Chinese imports are up, keeping good US export business and stronger prices. US wheat production is down slightly as is most of the world production, consequently prices might edge higher for the new crop.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
June 8, 2009
How Will Delayed Planting Hurt State Yields In IL & IN And National Corn Production?
If USDA’s forecast for corn production is based on planted acreage and a trend line yield, could there be a better production forecast that considers the late planting in Illinois and Indiana? After all, 30% of the corn crop has been planted, or has yet to be planted, after May 20, and that raises significant concerns about the size of the 2009 US corn crop. And if you are making a decision about ACRE, that state yield will be an important statistic!
USDA’s May 12th forecast was for a 12.09 billion bushel crop, based on a 155.4 bushel per acre average yield. Since that forecast was made, corn planted has been delayed in IL, IN, ND, and KY, while normal progress has been reported in MN, IA, and NE. Using actual April weather to project the yields, and factor in the planting delays, University of Illinois economists Scott Irwin and Darrel Good and meteorologist Mike Tannura believe sufficient evidence has been accumulated to make a more accurate prediction of the new crop’s real potential. Their analysis is based on a crop weather model that estimates the impact of technology (trend), state average monthly weather variables, and portion of the crop planted late on state average yield.
The Illinois group bases its rationale on the fact that typical spring planting is two weeks earlier now than it was 40 years ago. Additionally, corn yields now decline at a more accelerated rate after early May than they did 40 years ago. This is somewhat difficult to calculate because of the growing variability in weather from season to season and the fact that some corn is planted in a timely manner and some is not.
When is late planting really considered to be late? One answer is the changing yield penalty, another compares the actual date with the optimum date, and a third is factored into crop weather models. Looking at the late planting variable for each state for a nearly 50 year period, the Illinois group found the lack of any specific trend, and in most years corn is planted on time. But when it is late, there are some serious delays, such as this year for Illinois and Indiana. 62% of the Illinois corn crop this year was planted after May 20, and the percentage is 63% for Indiana. In Iowa, only 7% was planted after May 20th this year, which is less than average.
The Illinois group revised its weather model, which cuts the Illinois yield by .29 bushels per day past May 20, 0.18 bushels in Indiana, and 0.38 bushels in Iowa. They say April rainfall is a significant yield factor in all three states, possibly because of its impact on subsoil moisture. For their weather model, they find that poor weather reduces yields more than good weather improves yields. Their calculations for 2009 is based on estimates made for the past 49 years, and forecast 166.3 bushels per acre for Illinois, 156.8 bushels for Indiana, and 167.9 bushels for Iowa. All three of the estimates used actual precipitation between September 2008 and April 2009, but reflect different weather scenarios for the balance of the growing season.
1) For Illinois, the yield could vary from 133.8 to 171.6 depending on weather.
2) For Indiana, the yield could vary from 131.8 to 164.2 depending on weather.
3) For Iowa, the yield could vary from 157.1 to 187.0 depending on weather.
Nationally, the yield could vary from 130.7 to 161.3, depending on weather, putting production anywhere from 9.950 billion bushels to 12.272 billion bushels.
Based on planting progress, the Illinois group says Illinois and Indiana yields will be below trend yield and the average of the past two years, and above trend yield and the average of the past two years in Iowa. Since those three states represent 40% of the US corn production, they project a 148.6 bushel per acre national yield. However, they calculate that if half of the unplanted acreage in Illinois and Indiana switch to soybeans, then the US harvested acreage would fall to 76.1 million acres. Further, they say average summer weather would produce an 11.3 billion bushel crop, well below earlier estimates.
How far off could they be? Their basic weather model last year predicted a 12 billion bushel corn crop that turned out to be 12.1 billion, and a 3.1 billion bushel soybean crop that turned out to be 2.9 billion. And refinements have been made for this year.
Summary:
Delayed planting in Illinois and Indiana could contribute to a significant shortfall in US corn production, even with average weather for the balance of the growing season. The impact of delayed planting, plus the potential to switch unplanted corn acres to soybeans at this late date, may push national corn production down to 11.3 billion bushels. The estimate is based on lower projected state average yields for Illinois and Indiana, as a result of weather models.
Posted by Stu Ellis at 12:47 AM | Comments (1) | Permalink
June 3, 2009
Does Your Marketing Plan Include Foreign Currency Relationships With The US Dollar?
Corn prices have been climbing for the past six weeks, and one of the reasons is increased export trade, resulting from the declining value of the dollar. As farmers recognized in 2008, a weaker dollar ignites exports, and the world could not buy enough of our grain. What was seen last year with the strong export trade, and the mini version in the past several weeks, is an example of the impact of the value of the dollar on agriculture. Farmers need to watch the foreign exchange markets just as they do the grain markets.
The agricultural importance of foreign exchange rates is explained in an article in Choices Magazine, written by USDA economists William Liefert and Mathew Shane. They outline both direct and indirect effects of the global recession on US agriculture, saying the direct effect will not be strong, but consumer spending on food will be down slightly, and largely a cutback on restaurant purchases rather than grocery store purchases. Another direct effect will be tighter credit, but again most rural banks are insulated from the Wall Street woes.
The indirect effects of the recession are traceable to overseas markets and their economies, which is where the US dollar will be the link from those consumers to US commodity values. The USDA economists note that large importers of US goods have been affected, along with the exchange rate relationship between their currency and the dollar. With the decline in the world Gross Domestic Product (GDP), the economists say foreign consumers will reduce their food demand, and particularly imported food. Among those will be importers of large volumes of US food products, including China, Taiwan, Mexico, Egypt, and Russia.
Some of those nations, China in particular, have been on the flip side of the economic fence with the US. While the US has been under saving and over consuming, they have been over saving and under consuming, all of which has contributed to the trade imbalance that aggravates the seriousness of the economic crisis. The USDA economists believe, “The main way to correct this problem would be with a realignment of exchange rates, in particular for the currencies of the trade surplus countries to appreciate against the dollar. This would raise prices of their exports in the United States and lower prices of U.S. exports in their countries. U.S. imports and consumption would fall and exports to the trade surplus countries rise, while trade surplus country exports would drop and their imports and consumption rise. The U.S. trade deficit would shrink.”
After the economic crisis began, the US dollar appreciated in value drawing foreign investors to the US to help fund some of the government stimulus programs. While that happened, ag exports fell since the cost to foreign buyers was more than they wanted to pay. That is particularly true when the dollar is adversely priced in comparison to other exporting countries, such as Canada, Australia, and Brazil. In the short run, appreciation of the dollar will be unfavorable to agriculture. In the long run, any appreciation will be unfavorable, but any depreciation will be favorable.
Since China is one of the largest trading partners with the US, buying soybeans, pork and many lesser commodities, consider the relationship between the dollar and the Chinese yuan. If the dollar appreciates, China will reinvest its dollars back into the US and keep the trade imbalance high and the dollar strong. But the trade surplus would not be corrected and the US economy would suffer further.
If the dollar depreciates against the Chinese yuan and the currencies of other countries with a trade surplus with the US, then their investment would be reduced in the US, and agriculture would benefit from increased world growth and a lower valued dollar. The USDA economists say another commodity price increase such as seen in 2007 and 2008 would hurt world consumers, but the impact would depend on the strength of the US dollar, “The difference between the dollar depreciation and appreciation scenarios is that the latter would carry the risk of another world economic crisis, triggered by flight from the dollar. A second crisis would again temporarily reverse any previous rise in world energy and agricultural prices.”
Summary:
The current global economic crisis has hurt agriculture the worst in its export business, making exports all the more sensitive to the exchange values with foreign currencies. As a result, farmers looking for information to factor into their marketing plan may want to track currency values, particularly between the dollar and the currencies of many of the larger customers of US farm products. If the value of the dollar falls against those currencies, there is a greater chance for increased purchases of US commodities.
Posted by Stu Ellis at 12:43 AM | Comments (1) | Permalink
May 25, 2009
Does The Oil Market Provide Any Hint About The Future of Corn Prices?
The soybean market has been hot this spring, thanks to supply issues linked to the drought in Argentina. But while beans were climbing the charts with the help of supply fundamentals, the corn market has been locked in a sideways channel for the past six months with no clear direction for marketing plans. There is a strong argument for the interconnection between the corn and the oil markets, so will learning about the oil market provide a lesson for corn marketing?
Economists who studied the relationships between corn and ethanol, and between ethanol and the oil market, all indicate there is about a 90% correlation between them, which links the price of corn to the price of oil, because ethanol has to be priced in relation to unleaded gasoline. Consequently, knowledge of the oil market may provide a head start on corn marketing.
Members of both Houses of Congress last week gathered in the Joint Economic Committee to hear authorities analyze oil prices and the US economy. Among them was Economist James Hamilton of the University of California at San Diego, who observed that four big increases in the price of oil for the past 35 years have all been followed by global recessions. We are in number five, and Hamilton says the latest surge in oil prices was an important factor that contributed to the current recession. However that surge resulted from a combination of declining oil production, increased Chinese demand, and a heated global economy, all of which pointed to a rise in oil prices to ration the supply.
Hamilton says the $4 price for a gallon of gasoline got the attention of US consumers, and the abrupt change in spending patterns disrupted certain key economic sectors, such as a plunge in sales of light trucks and SUV automobiles, which took 125,000 jobs out of the economy. But the economist also said paying $1 more for each of the 140 billion gallons of gasoline sold in the US takes $140 billion away from consumer purchasing power. Hamilton says the biggest economic effects of an oil price increase are not seen until 3-4 fiscal quarters after the price rises.
The University of California economist suggests that speculation in the oil commodity trading pits were partially involved, and says that may have benefited from the Federal Reserve action to reduce interest rates early in 2008. He favors an emergency plan to reduce petroleum demand that can be implemented on short notice in the wake of any future oil crisis. But Hamilton notes the long term challenge is a “booming world petroleum demand in the face of stagnant world oil production.”
Retail gasoline prices have climbed 50 cents per gallon since the December low, which is $70 billion dollars taken from consumer spending power. Hamilton says there are many other dynamics now at work in the recession, which are more important than oil prices; but he says the recent price increase in gas indicates the challenges ahead. “Even if we see significant short-run gains in global oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007-08 will be back to haunt us again.”
Based on Hamilton’s analysis, the gasoline market will be climbing, helping ethanol to return to higher levels, and that could take the corn market upward with it.
Dr. Daniel Yergin, Chairman, IHS Cambridge Energy Research Associates, also testified to the Congressional Committee and agreed that the surge in oil commodity prices was a significant contributing factor to the current recession. But Yergin says the oil industry is increasing its capacity by 2 million barrels per day at the same time demand is declining by 2 million barrels per day, putting downward pressure on oil prices. However, the cost of producing new oil fields has remained high, and despite lower oil prices, oil exploration remains costly.
With such high production costs, the new capacity may not materialize, and projects to find more oil may be postponed or cancelled. How soon that will occur, Yergin says, depends on oil demand and the recovery from the global recession, as well as the implementation of green climate change policies.
Summary:
With the corn and ethanol market closely linked to the gasoline and crude oil market, corn growers may be able to plan long term, based on the future of the oil industry. Economists have told Congress that while capacity is up slightly, demand has fallen by a like amount. However world demand should return, and with it, higher prices for gasoline. Will those become a factor in ethanol prices and corn demand? If recent history is any value, corn prices should rise along with the oil market.
Posted by Stu Ellis at 12:31 AM | Comments (1) | Permalink
May 14, 2009
The Crystal Ball: What Does It Hold For Cornbelt Farmers?
What are your feelings about the grain markets? Are they poised to climb higher, or have the spring rallies taken them as high as they are going? Has the recession dampened demand for ethanol-blended gasoline and softened the corn market? Has the recession curtailed demand for meat and reduced the need for more feed grains? Is there any bright spot in the in the crop outlook at all?
If the market has you down and out, you have come to the right place. Iowa State economists agree with you that there are uncertainties, but they think the outlook for Cornbelt corn and soybean producers is a bright one. If you are surprised at that, they point to your counterparts overseas:
· World supplies of grain have not grown as rapidly as expected because prices are down the world around, and foreign producers have not expanded production.
· There have been less than ideal growing conditions around the world, particularly the drought that cut 60% out of the Argentine grain crop.
· Credit constraints have seriously hampered many foreign farmers from getting money to buy inputs.
The bright outlook comes from the Spring issue of the Iowa Ag Review. Economists Bruce Babcock and Lihong McPhail look back to 2006, just before the commodity price run up, and say new crop corn is 35% higher and new crop soybeans are 56% higher. That is a 68% increase in revenue potential for a 50-50 corn-soybean rotation. But they are quick to acknowledge higher production costs:
· 14% annual increase in seed bean costs
· 20% annual increase in seed corn costs
While many farmers applied $900 per ton anhydrous ammonia, the cost of fertilizer and seed doubled production costs, and that should have eliminated any benefit of a 68% increase in grain revenue. But the Iowa State economists say returns to land, management and machinery have gone up 43% per acre over 2006 levels, if one is farming his own land. Rented land will not have that level of a return, and may be less well off than in 2006.
The economists calculate that if fertilizer prices next fall reflect current world prices, then returns on 2010 crops will be $70 more per acre, if Monsanto and Pioneer keep seed prices steady. That is also dependent upon stability in the grain market.
In 2006 ethanol consumed 2.1 billion bushels of corn, but will need 4.3 billion bushels for production in 2010, and that equates to 10 million acres of corn, once the distillers’ grain supply replaces feed corn. They believe that if the world financial crisis is resolved in another year or two, then world demand for meat and livestock will resume as population and income return to growth rates. They predict the US will need to devote more acres to grain production to meet world demand, and that will require higher commodity prices to achieve acreage expansion.
Their acknowledged rosy philosophy relies on a continuation of the US biofuels policy, but forecasts would have to be recalculated, if the public wants changes in federal biofuels or climate control policies. In those cases, corn demand would suffer.
Based on current USDA projections for future corn and soybean demand:
1) The average price of 2009 corn at $4.38 would drop to $3.48 if renewable fuel policies were eliminated.
2) The average price of 2009 beans at $9.52 would drop to $9.46 if renewable fuel policies were eliminated.
The Iowa State economists emphasize that strong crop prices depend on a continuation of biofuel policies as they are now, or there would be a 20% drop in corn prices and a growth in corn carryover of 800 million bushels. Their overall grain price outlook depends on a strong biofuels industry.
Summary:
Compared to farm revenue prior to the run up in commodity prices, prospects for 2009 and 2010 are much more favorable than in 2006. While grain prices are higher, so are production costs, particularly for seed and fertilizer, yet return to land, management and machinery will provide profitability, unless high cash rents are paid. The prospects for strong grain prices depend on an end to the economic crisis and a continuation of US biofuels policies. The latter helps maintain strong demand for corn and soybean prices.
Posted by Stu Ellis at 12:55 AM | Comments (0) | Permalink
May 12, 2009
Soybeans: A Flash In The Pan, Or Here For The Long Haul?
Your grandfather may remember the time before soybeans were planted on your farm. They are a relatively new crop, compared to corn and small grains. As agriculture changes, will your son and grandson also be planting soybeans, or will that be a crop that is replaced by something else?
You are more concerned about getting a crop planted this year, and are probably not even thinking about next year, but economists at the National Soybean Research Laboratory at the University of Illinois are looking at the long term viability of soybeans, all the way out to the year 2030. Economists Tadayoshi Masuda and Peter Goldsmith remind us that soybeans are consumed as human food, but primarily crushed into oil and meal, both of which are used for a wide range of human foods, livestock feeds, and industrial feedstocks, including biodiesel. Their focus was projecting long term demand in the domestic and international markets to determine if there was a need for US farmers to grow soybeans.
World consumption of soybeans in 2003 was nearly 184 million tons, which was 7.4 times the amount consumed just four decades earlier. The US consumes more than 26% of the supply and the top five consuming countries consume nearly 75%.
1) The US produced 73.4 million tons of soybeans, consumed 48.3 million tons, and exported the balance. Domestic use included 44 million tons crushed into meal and oil, both of which recorded some exports. About 11% of the oil was consumed for biofuels and industrial purposes.
2) China produced 15.8 million tons of soybeans, imported 17.5 million additional tons, and consumed the total. 71% of them were processed into food, and the balance crushed into meal and oil. 27% of the oil produced was exported.
3) Brazil produced 43.8 million tons of soybeans, exported one third of the production and consumed the other two-thirds. Of the soybeans that were crushed in Brazil, 61% of the meal and 40% of the oil were exported.
The economists believe that international organizations may be underestimating feed demand in coming years, and say, “Linked with the expansion of meat consumption and biofuel usage, it is expected that the world demand for soybean and soy products will increase steadily.” They calculate world demand growing at a 2.8% annual rate currently, then 2% in the next five years, and gradually slowing to a 1.1% growth rate annually in 2030. However, that rate of growth will require more than 307 million tons of soybeans, compared to the 183 million tons in 2003.
1) The US demand for 49 million tons today will rise to nearly 56 million tons in 2030, and the US will only be requiring 18% of the supply, compared to the current 26%.
2) China’s current demand of 33 million tons of soybeans will grow to 109 million tons in 2030, which is over 35% of the world demand.
3) Brazilian demand, which is 14.7% of the world at present will fall to 12.8%.
4) India now consumes 3.3% of the world demand for soybeans, and that will increase only to 4.4% by 2030.
Regarding soybean meal, the US currently uses 29 million tons annually and that will rise only to 33 million tons in the next two decades. Brazil now uses less than 8 million tons of meal, but that will rise to more than 11 million tons by 2030. China now uses 18.7 million tons of meal, and that will rise to nearly 88 million tons in 2030.
Regarding soybean oil, US and Brazilian consumption will grow slightly, but nothing compared to Chinese consumption, which is nearly 5 million tons today, and should reach 27.4 million tons in 2030.
Summary:
The versatility of soybeans, which are a popular crop today, will keep that commodity in international demand over the next two decades. World demand will increase by two-thirds by the year 2030, much of the increase in demand coming from China, which will more than triple its demand for soybeans, and more than quintuple its demand for both soybean meal and soybean oil.
Posted by Stu Ellis at 12:08 AM | Comments (1) | Permalink
May 7, 2009
Today's Test Question: Do Ethanol Plants Provide Nearby Farmers With A Corn Price Advantage?
Spurred on by federal policy support of ethanol, thousands of Cornbelt farmers began coffeeshop meetings, then community meetings, and ramped up to form cooperatives and build ethanol refineries. Their vision was an investment that would pay premium prices for corn sold to the ethanol plant. How did that work out for them?
There is no secret to the success of ethanol as a (relatively) new use for corn that was designed to consume surpluses and keep a steady forward pressure on the corn throttle. Just a few years ago, consumption was measured in a few million bushels that would be turned into a few million gallons of ethanol. This year we’ll convert 3.7 billion bushels of corn into 10.5 billion gallons of ethanol. Corn demand pushed prices higher in 2007 and 2008, but the trend has partially reversed.
As new ethanol plants began operating and competing for corn from the surrounding area, the question is asked that if the payoff met the expectations of farmers who sold corn to these new local markets. Did they get a premium price?
Agricultural economist Ani Katchova at the University of Kentucky delved into the issue and quickly found that a biorefinery built in a new location would have to compete with previously established marketing channels to secure corn as an input to the ethanol process. Many prior studies found that there were positive responses for corn prices around ethanol plants, but Katchova wanted to discover if there were significantly higher prices for farmers located close to ethanol plants. Prices that were offered near the plants and farther away at the same time were compared.
Using information from the Renewable Fuels Association and comparing zip codes with corn prices reported by the USDA, Katchova analyzed statistics from IL, IN, IA, KS, MN, MO, NE, and WI. Price comparisons used 2007, which was the latest complete set available from USDA and 2005, as a base period. Katchova found the average corn contract price for the two years was $3.12. But how valid are the statistics?
· 22% of counties with corn price information had ethanol plants.
· 5% of the zip code areas had ethanol plants.
· 10% of the corn contracts had an ethanol plant in the county
· 2% of the corn contracts had an ethanol plant in the same zip code.
· 7% of the corn contracts had a new ethanol plant built in the county in the last two years.
· 0.6% of the contracts had a new ethanol plant built in the same zip code.
The economist analyzed 2,851 corn delivery contracts in 632 different counties. Between 2005 and 2007, corn prices rose by 76¢ to 79¢. While Katchova reported corn contracts were nearly 11¢ per bushel lower for farmers in the same zip code as the ethanol plant, the economist says that did not indicate a negative impact, but only differences from areas around the Midwest. The economist looked at changes in prices from one period to the next that may be common for both groups regardless of whether an ethanol plant is located nearby, and determined, “These results provide an indication that while prices in real terms have risen over the last few years across the U.S., farmers located close to ethanol plants have not been able to secure even higher prices due to their proximity to ethanol plants.”
Other correlations that were found:
· Larger farms are able to obtain higher prices because of higher volumes delivered.
· There are some indications that operator age has a positive effect.
· There are some indications that operator education has a negative effect.
Katchova’s findings contrast to those recorded in 2001 and 2002, but there were fewer ethanol plants at that earlier time and “since then ethanol production and biorefinery construction have intensified.”
The economist says future profitability of ethanol plants depending on corn prices, and the findings imply that “As corn production nears its capacity to provide for local production of ethanol, the competition may drive local corn prices higher and make ethanol production less profitable. Therefore, it is important to consider future plant construction sites as to not reach the capacity point in a local area and thus bid up local prices.”
Summary:
Conventional wisdom is that corn prices are higher around ethanol plants because of the intense competition, but that may not always be the case. The proliferation of ethanol plants around the Cornbelt has apparently smoothed out the price differences and while corn prices have risen the past several years, farmers near an ethanol plant do not enjoy any price advantage. As ethanol continues to consume larger amounts of corn, a given area may reach a corn supply capacity, and that may result in competition that will be detrimental to ethanol plants that are price sensitive.
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
April 29, 2009
Alternative PCP: Your New Friend (Or Enemy) At The FSA Office.
Whether it is used or not, everyone loves USDA’s commodity loan program. It is simple, it is quick cash, and in recent years it provided more income opportunity with the Loan Deficiency Payment program. But just like the complexity of its big brother, the ACRE program, USDA’s loan program has new wrinkles as well.
The CCC non-recourse loan program has been around as long as grandpa, who made frequent use of it to finance spring crop input costs at loan rates less than what the bank charged. Convenient, and if the market price stayed low, the government took the grain (non-recourse) and neither the loan nor any interest had to be repaid. But to keep burdensome commodities out of government warehouses, the marketing loan program and the LDP provided cash benefits, and everyone learned about the Posted County Price. In fact, when prices were below the PCP many farmers became adept at working the formula to maximize the LDP. It was a way of making the bottom of the market pay off if the top of the market was too elusive.
But the 2008 Farm Bill has brought some new changes in the loan program according to Iowa State University ag economist Stephen Johnson. His recent newsletter says April 15 was the implementation date for USDA’s new system for determining repayment rates on non-recourse loans. Yes, the days of furiously faxing an LDP request to the FSA office after the market closed have gone the way of grandpa’s “sealed granary.” But never fear, everyone will soon figure out how the program works and begin smiling again.
Loan rates are key to understanding the new program, and there will be county loan rates that vary across the country. Although the national loan rates of $1.95 for corn and $5.00 for soybeans will remain steady, the county loan rates will be announced soon. With crop prices above loan rate levels, few farmers have been interested in the loan program at this time. But if prices venture toward loan levels, understanding the changes will be important.
Loan Deficiency Payments can still be obtained. They will be available at the FSA office when the Posted County Price falls below the Loan Rate. There is nothing new about this calculation.
Alternative Posted County Prices are new to the concept, and the Alternative PCP will be calculated daily to provide, what Johnson calls, “more stable system for determining non-recourse marketing assistance loan repayment rates and PCPs that determine the LDP.” The new method essentially smoothes out the market volatility and reduces the daily variations in Posted County Prices and LDP’s. Johnson’s expectation is that it will “minimize potential forfeitures, accumulation of CCC stocks, CCC storage costs, market impediments and discrepancies in benefits across state and county boundaries.”
The loan repayment rate will be determined by an average of price of the five prior days and an average of prices of the 30 prior days. The 30-day moving average will be calculated from all terminal market prices for the crop, adjusted by the difference between the national loan rate and the county loan rate. The 5-day moving average will be calculated from the terminal prices, adjusted by a county differential and any terminal price adjustments. The terminal prices are typically determined by feed demand, processor demand, or export demand and the two terminals used by a given county will reflect prices driven by consumption. The higher of the two prices will be the Alternative PCP. It will not have much impact, until it moves below the county loan rate.
In the last Farm Bill, a producer with grain under loan could “lock in” a repayment rate for as many as 60 days to minimize the amount required for repayment. Producers without grain in the loan program could maximize their income opportunities by taking the LDP at low levels. However, in the new program, those movements will not be as significant, since the Alternative PCP will be based on moving averages and not the daily close of a volatile market.
Summary:
The loan program remains one of the pillars of the Farm Bill, but changes have been made in the way that repayment rates are calculated, and the way that LDP opportunities are determined. Loan rates will soon be assigned to each county, but the calculation of the Posted County Price, now being called “an alternative PCP,” will be based not on daily closes of the commodity market but on 5 and 30 day moving averages of market prices. The impact will be a smoothing out of the daily changes of LDP’s and loan repayment rates.
Posted by Stu Ellis at 12:00 AM | Comments (0) | Permalink
April 23, 2009
Grain Market Volatility: How Does One Survive?
The past two years when corn and soybean prices were higher, the volatility was not always appreciated. This year, after the volatility has disappeared and prices have found a sideways trend, they are still not appreciated. Current grain price trends, which have become the Rodney Dangerfield of the farm economy, are just not respected, but is that because they are not well understood?
Common questions revolve around the permanency of high prices, the tendency for volatility, and the impact on farmers, grain merchandisers, and end users. That is the perspective of agricultural economists Scott Irwin and Darrel Good at the University of Illinois, whose analysis is included in the current issue of the electronic magazine Choices.
Irwin and Good look back 35 years ago to the early 1970’s when the grain market last climbed to a new level, and compared that to the recent upward market trend. That period of volatility and a new price level was the function of exchange rates, Soviet grain purchases, higher energy prices, and rapid inflation. They believe, “As a starting point, if average monthly nominal prices in the new era that appears to have begun in late 2006 increase by a similar amount to those over the post-1972 period, averages would project to about $4.60 for corn, $5.80 for wheat, and $14.40 for soybeans.” That would put the corn/wheat ratio at 1.26 and a corn/bean ratio at 3.13, which they contend is too much for crop competition.
Since the shift to a higher price level, as seen in the late 1940’s, the early 1970’s, and the current period has been marked by volatility, the economists looked at how the range of volatility compared to prices when they finally settled down.
1) Low prices were 66 to 77% of the average price for corn.
2) High prices were 146 to 201% of the average price of corn.
3) Low prices were 71 to 81% of the average price of beans.
4) High prices were 161 to 166% of the average price of beans.
5) Low prices were 57 to 96% of the average price of wheat.
6) High prices were 162 to 175% of the average price of wheat.
Applying those average to today’s prices, the economists say, “To date, then, the average monthly price of corn and soybeans has been lower than projected for the new era. The average price of wheat has been near the projected average for the period.” But are those projections taking into account current market fundamentals? Irwin and Good say corn is being driven by the ethanol/crude oil market, “Not only do ethanol prices explain about 90% of the variation in corn prices, but the relationship is evident over the entire wide range of ethanol prices during the last couple of years.” They go on to say the simplest way to think about corn prices is the value of corn to an ethanol producer, and a rise in crude oil would shift both ethanol and corn to higher values, with wheat and beans having to climb as well to remain competitive for acreage.
What does that mean for the farmer? They say it means (1) that a shift to higher price levels has occurred, (2) peak prices have been well above projected prices, and (3) prices can still move lower. It also means average prices will impact the producer in the form of farm income levels, profitability, and value of land. The variations in prices from year to year also underscore the importance of using options contracts to protect profitable prices, while reducing chances for the use of forward cash contracts because of limitations imposed by cash grain buyers. Finally, they believe that such price levels will also have an impact on participation in government farm programs, including both revenue support programs and crop insurance programs.
What does that mean for the grain elevator? They say the higher potential prices mean the need for more cash to buy grain, and the magnitude of volatility will determine the amount of capital needed for margining hedged grain, and having good access to credit markets. It also means a potential for risk that grain sale contracts will not be fulfilled, if producers can obtain higher prices elsewhere.
What does that mean for end users? The end user is concerned about acquiring the cash grain commodity and the timing of the delivery. That means end users have to maintain profitability all the way from contracting for grain to be delivered through the pricing of the end product made from the grain. In the event they are unable to do that, they will have to rely on the spot market for both inputs and outputs, increasing their risk.
Summary:
Grain prices have undoubtedly taken a turn upward with a healthy dose of volatility. But market observers will also compare it to prior times, and say, “been there, done that.” The challenge is for market participants to understand the potential range of volatility in the market and be able to price both sales and purchases of grain at levels of manageable risk.
Posted by Stu Ellis at 12:17 AM | Comments (1) | Permalink
April 14, 2009
What Potential Do You See For Corn And Soybean Prices?
USDA’s Prospective Plantings Report and Grain Stocks Report on March 31 and the April 9 USDA Supply-Demand Report both were newsworthy in their own right. But when you combine the results of the three reports, Cornbelt farmers, who have both old and new crop corn and soybeans to sell, certainly have new information to integrate into their marketing plans.
The planting intentions report indicated that corn and soybean acreage would not be expanding by any great degree. The stocks report indicated inventories were not surprisingly large and the supply-demand report indicated consumption would grow and carryover would decline for both corn and beans.
Purdue Marketing Specialist Chris Hurt, writing in his latest marketing newsletter, says the acreage report indicates the 1 million acre cutback in corn from last year “will reduce the national production potential, although yields on these acres are much lower than the national average. But, there will also be less intensive application of inputs this year that will somewhat lower yield potential on the planted acres.” As a result, Hurt is more optimistic about corn prices for 2009. “This means the prospects of overproduction in a period of weak demand have been reduced and provided a price strengthening tone for grains and soybeans. In addition, it increases the upward price movement that will occur if growing season weather should turn adverse this spring/summer, or world economic activity is not as weak as anticipated.”
Hurt does not want farmers to believe we will return to the prices of last year, because of all of the economic factors that have diluted the demand, such as a stronger dollar, a weaker global economy, slower ethanol demand, and lower prices for crude oil. But he says the combination of reports restore the possibility of higher prices, for corn and beans to levels “that come much closer to allowing producers to cover total costs in 2009 than looked possible all winter.”
Hurt’s colleague Darrel Good at the University of Illinois says in his newsletter with the increased use of corn for ethanol production and somewhat of a decline in corn use by livestock feeders, total use could still approach 12.5 billion bushels. And that means there will need to be a good growing season, “Prospects for small year ending stocks of soybeans and declining inventories of corn during the 2009-10 marketing year means that a generally favorable 2009 growing season will be needed to avoid rationing of use next year. Not much is known about growing season weather prospects at this point. The current La Nina is receding and neutral La Nina/El Nino conditions are expected for the summer months, but the correlation between those conditions and U.S. growing season weather is very low. The cool, wet start to April in some producing areas threatens to delay the start of corn planting.”
Good says that current projections for corn carryover would put stocks at 14.1% of use, which is well above the 9.4% of 2003-04. However, he says soybeans stocks would be at 5.5% of use, compared to the 4.5% in 2003-04, the least in modern history. He adds that South American soybean harvests will be smaller than last year and, “For both corn and soybeans, the timing and extent of U.S. and world economic recovery will be important in determining the strength of demand and the level of consumption.”
Good says corn and bean prices have been climbing above the prices guaranteed by revenue crop insurance products. Those levels are $4.04 for corn and $8.80 for soybeans. If you have revenue insurance, your prices are protected at those levels and below, but the span of prices between those levels and current futures prices are not protected, says Good, “That risk is about $.15 for corn and near $.45 for soybeans. With so much riding on the size of the 2009 crops, prices could well trade in a wide range over the next few months. Opportunities to price a portion of those crops at prices above those currently offered will likely be available.” He says Dec corn has already pushed up to $4.37 and new crop beans to $9.34.
Summary:
With the global economy limiting the demand for US grain, the March 31 USDA acreage and stocks reports indicates that supplies are not particularly burdensome and new crop production may not be all that large, leading to the prospect that a recovering economy could help push grain prices higher. Farmers already have the chance to price corn and beans above the guarantee levels of revenue insurance, and that potential should continue.
Posted by Stu Ellis at 12:32 AM | Comments (1) | Permalink
April 7, 2009
Index Funds: Are They Devils Or Angels?
Imagine that a journalist called or stopped you last fall and asked your opinions about the reasons for the rise and fall in the commodity market, including the crude oil market, and wanted to know your thoughts about the reasons for the upward climb and sudden drop. How would you answer? Would you lay blame at the feet of speculative investors, where conventional wisdom has placed it?
You will remember that crude oil prices last year pushed over the $145 per barrel mark and within a few weeks had lost $100 of that value. With the help of ethanol, corn prices were carried well over $7, and that pushed soybeans to the mid-teens, while wheat headed even higher in Minneapolis. Ag economists Scott Irwin of the University of Illinois, Dwight Sanders of Southern Illlinois University and a colleague from the Netherlands beg to differ with those who blame the index funds and other speculators for creating a bubble of prices that far exceeded their real value. Their research takes an opposing view, all while Congress is considering legislation to prohibit or limit index fund speculation in commodity markets.
Irwin and colleagues say the concept of a bubble may seem sensible, but markets don’t work that way. They say money flows in and out of the market at any given price level and prices will change as market participants revise their estimates of supply and demand, and if they are all equally informed. The economists say it is possible that traders saw the large flow of index fund money into the long side of the market, and thought that was the place to be, even at a higher price. But that was a fallacy because of the predictability of index trader actions.
While index funds use the futures market, they do not participate in the cash market and never take delivery of a commodity, so critics who contend index traders influenced the cash market do not have a valid argument, say the economists. They also remind proponents of the bubble theory of the traders who hedge to avoid risk and those who speculate for the purpose of taking risk. While the entities that engage in futures trading are becoming more blurred in their objectives, the economists say the index fund traders “did not disturb a sterile textbook equilibrium” and create a price bubble.
When Irwin and his colleagues looked at the data about who was hedging and speculating, who was long and who was short for the major commodities over the past two years, they found that index funds took long positions in all but one of the nine futures from early 2006 to early 2008. They found that index funds increased their long positions in corn by 250,000 contracts, while commercial firms increased their short positions by 500,000 contracts. Secondly, the economists found that the highest concentration of index fund positions in early 2008 was in livestock markets, which did not have large price increases, and not in the grain contracts that did. Thirdly, many commodities that did have large price movements, rough rice 162%, fluid milk 37%, apples 58%, and edible beans 78%, did not attract index fund investments. And fourthly, the economists say prices rose for corn, beans and wheat as inventories fell, but prices also rose for crude oil, even as inventory remained flat, which increases their skepticism of a bubble caused by index traders.
The economists acknowledge that their observations are circumstantial, and suggest a look at the actions of the index traders versus the real value of the commodity. Using their statistical tools, they found only a significant relationship between price movements and position changes in index traders in only 5 out of 30 futures contracts studied. And they said a further study by an investigatory panel using five years of data not available to the public, found no evidence that daily position changes influenced crude oil prices.
The economists say history has not been friendly to market speculators over the past 125 years, all the way from President Truman threat to limit trading, to banning trade in onion futures, and the blame placed on speculators in the early 1970’s when commodity prices took their last upward jump and resulted in an embargo on soybean exports.
Irwin and his colleagues conclude there is insufficient evidence to blame index fund managers and other large speculators for causing a price bubble last year, and after a supply-demand driven price rise, the favorable demand factors reversed because of the global market meltdown. They warn that the legislative proposals to curtail speculation “could severely compromise the ability of commodity markets to accommodate the needs of firms to manage price risks.”
Summary:
Despite the widespread notion that index traders pushed up commodity prices then pulled out to take profits as prices fell, there is no justification for believing that a commodity price bubble occurred which had no relationship to the actual commodity values. Evidence points to the fact that index funds were buying futures, while other hedgers were selling and such action is regular, predictable, and transparent. Additionally, a large number of other statistical tests on the market indicate that index funds had little to do with the price action, and attempts to legislate restrictions on speculative trading will be detrimental.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
April 6, 2009
In What Part Of The Price Range Do You Market Your Grain?
Congratulations! Your marketing skills are not as bad as convention wisdom would have. There is a common belief that farmers sell two-thirds of their grain in the bottom third of the price range. Well, some will, but not the majority, and we have the evidence to prove it!
Out of curiosity, what is your track record for marketing grain? Do you regularly hit the top of the market, or are you somewhere else? For those of you in the latter group, your marketing skills are not as bad as conventional wisdom. As a former market educator and marketing club leader whose forehead has dented many walls in frustration with farmers who fail to write marketing plans or fail to follow what they pledge to do, some new research is refreshing. It is the effort of several agricultural economists at the University of Illinois whose study focused on wheat farmers in southwestern Illinois and southwestern Kansas. While the Kansas crop was hard red winter wheat and the Illinois crop was soft red winter wheat, there were many other similarities in the study that encompassed 1982 to 2004, which allowed the researchers to study numerous supply and demand situations.
To determine the marketing performance of the wheat producers, the benchmark price used spot market prices based on grade and quality, including protein content, test weight and other factors. Other calculations included storage costs and interest opportunity cost. Once the benchmark price was determined, it was used to compute monthly average cash prices using USDA’s statistics for farmer marketing volumes along with any marketing loan benefits.
The researchers used three marketing periods:
1) A 24-month period that begins in June of the calendar year before harvest and ends in May of the calendar year after harvest.
2) A 20-month period that ignores the first 4 months of the 24-month period.
3) A 12-month period that begins in June of the calendar year of harvest and ends in May of the calendar year after harvest.
The researchers found the average farmer benchmark price from 1982 to 2004 was $2.93 per bushel in Kansas and $3.02 in Illinois. And they said, “The results show that farmer benchmark prices for wheat in Illinois and Kansas fall in the middle third of the price range, not the bottom third, about half to three-quarters of the time. Averaged across all three marketing windows, farmer benchmark prices in Illinois fall in the top and bottom third of the price range 23% and 13% of the time, respectively. On average, farmer benchmark prices in Kansas fall in the top and bottom third of the price range 12% and 25% of the time, respectively.” Further, market performance of farmers in both states was the best when compared with the 12-month price range.
Statistics indicated that marketing performance was better for Illinois farmers than those in Kansas, and the researchers reconciled that with when wheat was typically sold. “Wheat farmers in Kansas, on average, market 24% of their wheat crop after December (postharvest), while farmers in Illinois market only 14%. The greater weight on sales after December and marginally higher penalty for sales during the last 5 months of the postharvest period in Kansas ($0.24/bu versus $0.20/bu) explains the tendency for Kansas wheat farmers to slightly under perform their counterparts in Illinois.” The researchers did conclude, “There is a tendency across crops and states for farmers to store too long relative to the storage returns offered by the market.” And they added, “It is also possible that crop farmers simply do not fully understand seasonal price patterns. There is a large amount of variation in prices from year to year and this may obscure longer-term seasonal patterns. At a minimum, the results indicate crop farmers could benefit by a better understanding of seasonal price patterns and the attendant impacts on marketing performance.”
Summary:
Although farmers are typically blamed for selling two-thirds of their grain in the lower third of the price range, statistics do not confirm that, and a study of Illinois and Kansas wheat farmers found that half to three quarters of the time average grain sales occur in the middle third of the price range. Researchers said the reason for not doing even better is a possible incomplete understanding of seasonal price patterns.”
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
March 25, 2009
Planting Decisions, Marketing Decision, The USDA Report. What Should A Farmer Do?
You are less than a week away from, what could be, a significant USDA report that will have an impact on the market for enough time to change planting decisions for the 2009 corn and soybean crop. The Prospective Plantings Report will be released by USDA next Tuesday morning and will reflect what farmers have told statisticians what their cropping patterns will be based on information into the early part of the month. What could happen and how should you react?
The past two years have seen the grain markets buy acres throughout the winter prior to the planting season, but that did not happen this year. Most farmers who have discretionary acreage have indicated that soybeans will be the choice because high costs of corn production make soybeans a greater profit opportunity. If the USDA report indicates large soybean acreage, then either soybean prices will fall or corn prices will rise to balance out the demands of the market.
Michigan State University Extension Specialist Jim Hilker says the market will react to the base that the report provides. In his latest Outlook Hilker says, “If the last two years are any sign, even many farmers will not decide on exactly how many acres they will plant of each crop until their last planter has pulled out of the field. While this has always been true to some degree, if for no other reason weather conditions, I would argue that economic incentives since 2006 have made this even more true.” Hilker says the report will allow the market to adjust prices and farmers can react to those prices when they head to the field, “Bottom line, we could have some pricing opportunities after the release of the two reports, but the time period may be short. After the report the planting conditions will likely take over the market direction to a large degree.” With the market expecting a 1-5 million acre jump upward in new crop beans, Hilker doubts the report will be bullish for soybeans, “At what price would you be ready to pull the trigger, and at what time will you begin pricing regardless if they are over some minimum price? Being prepared to make/adjust soybean planting and pricing decisions is huge.”
Melvin Brees agrees that planting and marketing decisions for the 2009 crop are not easy ones to make. From his vantage point at the University of Missouri, Brees writes in his latest Outlook that grain markets have been hurt by many outside forces which have complicated marketing and final production decisions. He says one forecasting firm is using the production cost issue to predict that soybean acreage will surpass corn acres in 2009. Brees says regardless of the acreage predicted in the USDA report, it is imperative for producers to know their production costs; and if land is cash rented, that figure needs to be reflected in the total costs per bushel. Brees calculates a nearly $130 difference in corn and bean operating costs for 2009, suggesting that farmers stay with corn on discretionary acres.
Brees says in recent days soybean prices have climbed to the point of profitability on owned land, but not yet on rented land, and he says farmers without revenue crop insurance may want to stay with soybeans to avert any financial risk.
Whether or not you have revenue insurance, the crop still needs to be sold, and 17 months remain in the market for that to happen. Despite the long window, most farmers know the market provides a “tractor seat bounce” and there will be springtime marketing opportunities. Brees says, “The fact that current new crop bids already offer some profit also should not be ignored, especially ahead of possible surprises in the USDA’s Prospective Plantings report.” He says if you have revenue insurance, the issue is not as critical, but sales can be spread with some degree of comfort. But those without crop insurance will need to be more careful in spreading their sales, “When spreading sales it is likely that some sales will turn out to be disappointing, but it reduces risk. The profit margins may be much narrower than last year and decisions are not easy, but it is still possible to have a profitable year.”
Summary:
The USDA planting intentions report next week has the potential to move the market, based on expectations for corn and soybean acres, and the market could either add a premium to one commodity or discount another based on the forecast. Farmers may have a marketing opportunity immediately following the report, but pricing decisions will be difficult unless production costs are well known. Price targets should be set, but there are usually good chances in the spring to market grain, and spreading sales can also diminish marketing risk.
Posted by Stu Ellis at 12:41 AM | Comments (0) | Permalink
March 23, 2009
Futures Contract And Cash Convergence: Is The Problem Resolved?
For more than 150 years the success of the commodity futures market was demonstrated when the cash and futures prices matched each other on the date and location of when the grain or other commodity was delivered from the seller to the buyer. That has not always occurred in the last several years, because cash corn, soybean, and wheat prices at delivery points differed from the futures price when the futures contract expired. The Chicago Board of Trade has tried to fix the problem, but has the change been successful?
Since late in 2005, the convergence of cash and futures prices has not been the norm, and that has created economic issues for grain buyers, sellers, and the merchandisers along interior rivers and Great Lakes ports who make it all happen. The imbalance in the value of the futures contracts threatened their usefulness, and if traders, hedgers, and others using the Chicago Board of Trade contracts lost confidence in their value, then the US commodity marketing system was in jeopardy.
The CBOT made some technical changes in the storage rates that define its futures contracts. A group of University of Illinois economists, Scott Irwin, Phillip Garcia, Darrel Good, and Eugene Kunda, evaluated the results to determine if the problem had been solved or if more changes were needed to restore confidence in the futures delivery system. Their analysis suggests partial success, but more work is needed.
What was the initial problem that caused the lack of converge between cash and futures prices? While there is not total agreement, the general reasons revolve around some structural issues in the delivery process and the fact that contract spreads reflected full carry for the most part. The large carry issue interfered with the attempted by futures and cash prices to converge. The structural issue was defined by the economists as the fact that corn and soybean contracts were delivered with a shipping certificate, while the wheat contract had been a warehouse receipt, until it was also changed to a shipping certificate beginning with the July 2008 contract.
The economists determined that if there was a large spread between two futures contracts at the time of delivery, then someone who was receiving delivery would tend to hold the contract until the next month, rather than loading out the grain. Consequently, the lack of load out at the delivery points interfered with the value of the cash grain matching the futures contract. Until 2005, the spread between contracts was generally 80% of the full cost of carry, such as interest and other economic factors. But beginning in early 2005, spreads began to expand to about 100% of the cost of carry. That made it profitable for those receiving the grain to hold onto it until the next delivery month. The Illinois economists report that convergence was poor when the carry exceeded 80% and better when the carry fell below 80% of the full cost.
To show that the proof is in the pudding, the economists point to recent events in the market. “Two other observations are particularly relevant regarding the most recent behavior of delivery location basis and carry. First, the recovery of corn basis levels in March 2009, soybean basis in January and March 2009, and wheat basis in September 2007, December 2007, and March 2008 tracks the decline in carry below 80%. Second, the large carry in wheat since May 2008 continues to inhibit convergence.”
The study also notes that futures and cash prices will never duplicate each other because of the existence of grain grading, location, and delivery times that may total 6-8 cents per bushel as the cost of delivery.
The Illinois economists say their findings for problems with the convergence of wheat futures and cash values were sharply different than corn and soybean problems. They said hedgers could not predict basis with any degree of certainty. Several reasons were found for the problems:
· Storage rates allowed by CBOT contracts were less than actual commercial storage costs and that allowed the spread to expand to full carry.
· Large index funds that only take long positions in the market were continually rolling to the next contract contributing to a permanently large carry.
· There was a significant “risk premium” built into the deferred futures contracts.
Commercial storage rates were the subject of a 2008 CBOT survey of grain elevators. Rates averaged 4.3¢ for corn, 4.6¢ for soybeans, and 7.1¢ for wheat. While the corn and soybean rates were similar to the 4.5¢ allowed by the CBOT futures contracts, the wheat storage rate was well above what the CBOT allows.
Regarding the impact on the market by the long hedge index funds, there was no indication their activities impacted the convergence problem. Additionally, the risk premium issue was not proven to be a factor.
The University of Illinois economists propose that storage rates be adjusted to reduce the likelihood that spreads will go to 100% carry and eliminate the motivation for grain buyers to receive and own shipping certificates. Another potential solution is to decouple cash and futures in delivery contracts and settle them by cash and limit the number of shipping certificates that can be held by an individual firm. They report that large carries in the corn and soybean markets have disappeared with the expiration of the January and March contracts, but problems remain with the wheat contract that adjusting the storage rate may not totally resolve. They say the CBOT will be increasing the storage rate for wheat to 8¢ beginning with the July 2009 contract.
The researchers evaluated the current delivery points, and reported declines in volume along the Illinois River, but since New Orleans was the primary export terminal, there was justification for the Illinois River to remain a corn and soybean contract delivery point. They reported Chicago grain facilities were not in the commercial flow, and the shuttle trains in northwest Ohio, and barge-loading points at Cincinnati and Memphis had not yet proven their usefulness. They propose the elimination of Chicago and Toledo as wheat delivery points and the establishment of anew wheat contract with the Mississippi River Waterway as a delivery point with shipping certificates and differentials linking them to the Illinois River and the New Orleans facilities. All classes of wheat could be delivered to satisfy the contract.
Summary:
Efforts by the Chicago Board of Trade to resolve the convergence problems with the corn and soybean contracts have been successful with modifications to the storage costs allowed for futures contract delivery. Problems remain with the lack of convergence in the Chicago wheat contract. A solution may be to phase out the present wheat futures contract and replace it with one that would accept all classes of wheat, higher storage rates, and use the Mississippi River as a delivery point with shipping certificates instead of warehouse receipts as the delivery instrument.
Posted by Stu Ellis at 12:47 AM | Comments (2) | Permalink
March 11, 2009
The Lessons Of History May Provide A Perspective On The Future Of The Grain Market.
The bull market that lofted many commodity prices to unprecedented highs between 2006 and 2008 was unique in volatility, but parallel in other facets to similar bullish grain markets in the early 1970’s and the mid-1990’s. What was the economic environment present during those earlier events and can the lessons learned then be applied to today?
The explosive oil market that lifted ethanol and the corn prices on its shoulders may or may not be to blame for the price trends of the past two years, however the rapid rise in grain prices caught the world’s attention and drew parallels to the past. That is the thought of USDA economists May Peters, Suchada Langley, and Paul Westcott writing in the March 2009 issue of USDA’s electronic magazine Amber Waves. They attribute the more recent run-up of prices to “burgeoning food demand in developing and transition economies, sharply higher energy prices that boosted production costs of agricultural products, increased demand for corn and oilseeds for bioenergy, the depreciating U.S. dollar, production shortfalls due to weather, and policy responses of both importing and exporting countries.”
Were any of those factors present during past commodity price events?
The 1970’s included: export demand growth, slow growth in US production because of setaside programs, government food policies that created demand and reduced supplies, and weather-induced crop failures. At the same time, the dollar was depreciating, oil prices were rising, foreign reserves of petrodollars were accumulating, there was futures market speculation, and inflation was present.
The 1990’s included: export demand growth because of food demand, slow growth in production because of declining investments in research and land retirement programs, government food policies that created demand and reduced supply, and weather-induced crop failures. At the same time the economy was growing, the dollar was depreciating, and there was a financial crisis.
The USDA economists say a rapid increase in global demand for grain and oilseeds, triggered by the Russian wheat purchase, stimulated the 1970’s demand. Twenty years later, strong demand and increasing trade stemming from the newly industrialized Asian nations resulted in the spike in the mid-‘90’s. In those cases, as well as recently, a low stocks-to-use ratio contributed to rising prices.
In all three instances, one of the key factors was the rapid increase in foreign demand for US products, and recently that demand has increased 50% with most of the business coming from developing nations. But the recent price spike also included the new demand from biofuels, which was consuming 23% of US corn production and taking a significant bite out of soybean oil production, something not present in the earlier cases.
The 1970’s period of high prices ended as world consumption slowed along with a slowdown in global expansion and a monetary policy designed to control inflation. That resulted in global production growing faster than consumption and grain prices fell. In the 1990’s the Asian financial crisis quickly ended the price surge, softening food demand along with a dollar that was growing stronger.
Following the two historical examples, markets adjusted and prices declined. As before the value of the dollar increased and more land was brought into production to supply a demand that was decreasing. Unlike before, the oil price surge reversed itself and somewhat linked was the financial collapse, but this time in developed countries. The USDA economists say, “The length and severity of the current global economic slowdown will help determine how fast, how far, and how long prices retreat. As agricultural markets adjust in this weakened economic environment, price behavior may continue to be volatile.” But they are quick to add that the past does not necessarily predict the future. They believe that food demand in developing countries will accelerate and they account for more than 80% of the global population. They also expect additional demand strength if global policies favor biofuel development, and those factors will keep crop prices from falling as low as their pre-spike levels.
Summary:
The grain price rise and fall of the past two years can be compared to similar events in the 1970’s and 1990’s, because of parallels in supply, demand, and political policies. Additionally, a common factor was a low stocks-to-use ratio. New to the formula this time was the demand for biofuels, and a continuing global policy favoring biofuels will be one demand factor that may buoy grain prices. A second would be the food demand from the growing economies in developing nations.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
March 5, 2009
Were Commodity Markets Being Manipulated During The 2008 Price Volatility?
During 2008, when markets were up limit one day and down limit the next, hedge funds and index traders caught the wrath of farmers, elevator grain merchandisers, and others who alleged improper activity and illegal market manipulation. So far the regulators have not hauled any one or any company off to jail for such improprieties. But why?
The market volatility last year was not the result of concerted efforts by traders or illegal activity says Dave Lehman, Director of Commodity Research and Product Development for the CME Group, which now operates the Chicago Board of Trade. Lehman’s presentation at the USDA Outlook Conference was designed to answer the questions of many farmers and others who looked upon the recent performance of the price discovery system with a jaundiced eye.
With research assistance by Informa Economics, 8 different contracts on 5 exchanges were analyzed and matched with data from the Commodity Futures Trading Commission, which regulates exchanges. The investigation covered commercial hedgers, managed money traders, commodity index traders, and non-reportable traders during the period of January 2005 through June 30, 2008, when the recent bull market peaked.
The Informa researchers found:
· Index traders had the most consistent trading pattern in the markets studied, getting into a contract 75 days before expiration and exiting 25 days before expiration.
· Money Managers were the most erratic, trying to profit by investing their pool of money.
· Commercial traders, such as grain processors, would enter the market early and maintain their positions, which were the largest positions.
During the 42 months studied:
· Liquidity increased for corn, Chicago wheat, natural gas, and crude oil futures.
· Liquidity decreased for Kansas City and Minneapolis wheat and cotton.
· There was no link to changes in liquidity and any group of traders.
Regarding market volatility:
· The corn, wheat, and cotton market volatility had some correlation between index traders and money manager participation, but no evidence their participation increased the volatility.
· There was an indication the corn, wheat, and cotton, correlation could be connected to the long positions of index traders and the money managers who follow the market trend.
Was there a connection between price and changes in trader positions?
· Changes in futures positions by any category did not cause a price change.
· Changes in price caused many categories of traders to change positions.
· Index trader and money manager activity did not drive price changes, but price changes drove their activity.
What was happening in the final 20 days of the life of a contract?
· No trade group consistently influenced price levels in the final 20 days of trading.
· Most of the agricultural futures contracts were more likely to be too cheap rather than too rich.
To corroborate the Informa study of the markets, Lehman pointed to USDA’s Amber Waves Magazine which evaluated similar volatile periods in the 1970’s and 1990’s, as well as a recent study by the Government Accountability Office which found that federal laws do not prohibit the type of commodity trading being used, and a 2006 University of Illinois study on contract performance following changes in speculative limits.
Summary:
An in-depth study of futures trading on several commodity exchanges over the past 3 and one half years has found no illegal activity, but moreso, found that recent volatility in the commodity markets was not the result of any group of traders or their typical practices. The volatility stemmed from the bull market, resulting from world demand and the low value of the dollar, but was not a function of trading activity.
Posted by Stu Ellis at 12:27 AM | Comments (0) | Permalink
March 3, 2009
USDA Issues Its Forecast For Grain And Oilseed Supply And Demand For The New Crop.
The USDA won’t make an official supply and use projection for grain and oilseed crops until May 12, but the projections issued last Friday (Feb. 27) at USDA’s Outlook Conference will have to serve as a ball park estimate until then. While the market viewed the numbers as only marginally trade worthy, the forecast will serve as a benchmark for production and marketing purposes until some better statistics are released over two months from now.
The Grain and Oilseed Outlook for 2009 is a joint effort by the World Agricultural Outlook Board, the Economic Research Service, the Farm Service Agency, and the Foreign Agricultural Service, so quite a bit of energy was spent in creating the forecast. The economists say their outlook is driven by declining commodity prices and a net return outlook less favorable than 2008.
Because of the decline in prices, total acreage, weak global demand, market volatility, higher input prices, higher costs of fertilizer, and prospects for more global competition, the economists say the combination of corn, bean, and wheat acres will drop 3.8 million from last year to 221 million.
Corn acres will be unchanged at 86 million because of the net return outlook for corn versus soybeans, but the drop in net returns for corn will limit any sharp increase in acres. New crop production plus the carry-in from last year will make 14.170 billion bushels available for use in the 2009/2010 marketing year. The national average yield is projected at 156.9 bushels per acre. Domestic use is forecast at 10.6 billion bushels, up 4% from the current year due to higher ethanol demand. Feed use will be 5.2 billion, down 2% as livestock herd numbers drop and more corn is replaced by DDGS. Industrial use is forecast at 5.2 billion, up slightly, helped by a 14% increase in ethanol demand. While ethanol capacity is up to 12.4 billion gallons, 2009 operating capacity will be only at 10.5 billion gallons. Corn exports will be 1.85 billion bushel, with more competition from Argentina and less from Brazil. Ending stocks will be down 4% with a stocks to use ratio at 13.8%. The season average price is forecast at $3.60, held up by many producers previously benefiting from good prices in forward contracts.
Soybean acres will be up 1.3 million to 77 million, with nibbles at wheat, cotton, and peanut acres. Expansion is limited by lower soybean prices, and less double cropping. Soybean supplies will be 3.453 billion bushels, up 9% from last year, helped by increased production of 3.240 billion bushels. The increase in plantings will be outside the Cornbelt, with a national trend yield of 42.6 bushels per acre. Domestic use will be 1.848 billion bushels, up nearly 2% from last year. While the soybean crush is forecast at 1.675 billion, it is driven by anticipation of high meal exports replacing the drought-induced shortfall from Argentina. While meal will see more demand, consumption of soybean oil will drop slightly as biodiesel demand levels off. 2009 will bring the fifth consecutive year in which soybean oil has declined in the amount used in the food industry. Soybean exports will grow to 1.225 billion bushels, due to increased share of global oilseed trade and lower supplies available from South America. China will control the international demand, taking half of world trade. Ending stocks are forecast at 380 million, up 80% from the current estimate, pushing stocks to use ratio to 12% and the national average farm price down to $8 per bushel, compared to the $9.25 current year projection.
Wheat acres will be down because of a 4.2 million acre drop in winter wheat, and a 2.9 million acre drop in soft red winter wheat. In the northern Plains, spring wheat area is expected to decline with increased soybean plantings. The national average yield is expected to be 43 bu. per acre. Current crop conditions in the Southern Plains are less favorable than a year ago. Crop conditions in the Central Plains are better than last year. Conditions for the Midwestern soft red winter wheat crop are generally favorable. Wheat supplies are expected to rebuild from last year’s 60 year low. Domestic use will be up slightly to 955 million bu. due to the population growth. Exports are expected to decline 5% to 950 million bu. due to surpluses in competing countries. World production will decline from the 2008 record. Ending stocks are projected at 664 million, up 9 million, and a stocks to use ratio of 30%. The average farm price is projected at $5.15, down $1.65 from last year.
Summary:
USDA’s forecast for corn is steady acreage from the current year due to less profitability, despite increased ethanol use. Feed and export demand will both be lower, as will the average price based on higher stocks. The USDA soybean forecast is for increased acres, more exports, and a higher ending stock projection that will push down the average price. Wheat acres have declined due to more global competition as well as soybeans taking some wheat acreage. Both domestic and foreign use will decline, pushing down the season average price.
Posted by Stu Ellis at 12:12 AM | Comments (1) | Permalink
February 12, 2009
Have You Been Watching The Soybean Market Dynamics?
March and July soybeans have spent a good part of 2009 around the $10 mark. November beans were above $10 for a brief time in early January, and have faded lower. But since the futures contracts have come off their highs, more information has become known about the South American drought that may reduce soybean yields in Argentina, Paraguay and in Southern Brazil. Is this a time to sell or hold soybeans, or is it a time to pay more attention to the weather-driven market?
USDA’s Oil Crops Outlook for February, released on Wednesday, focused on the lack of rainfall in South America and the impact it was having on US soybean exports. And farmers with unpriced soybeans are watching for marketing opportunities. USDA economists are raising their export forecast because of the strong demand from foreign buyers. Marketing year exports could reach 1.15 billion bushels while the domestic demand is expected to weaken.
Soybean prices will be up and down this year, as they are every year, but the successful marketer will consider the timing of the market dynamics. USDA analysts expect the poor crops in South America will cause producers there to store their soybeans and wait for better prices. However, the global soybean demand expected to be supplied in the next couple months from South American ports. In the absence of available supplies from South America, they are increasing their purchases from the US, and could match last year’s record.
While the export market is on fire, the domestic market is barely smoldering. With Gulf prices pushing toward $11 and interior processors bidding below $10, it shows a slow livestock demand compared to exports. Even less soybean oil is being refined into bio-diesel because of cheaper alternatives, over capacity within the industry, and potential disqualification from foreign markets.
While the outlook for the soybean oil market is not as vibrant as in 2008, the demand for soybean meal is improving and prices have been rising. Meal prices are up about $40 per ton from last month and USDA has increased its estimated price for soybean meal.
The export demand for US beans is rooted in the Argentine drought, which is said to be the worst in more than 50 years. Reduced plantings and spotty rains have diminished the potential crop, and USDA says the amount of rain in the next two months will determine continued rates of abandonment. In addition to the drought, late planted soybeans are at risk from frost beginning in May. The impact of the weather will be on reductions of available soybeans for immediate export and reduction of carryover stocks for later export.
In Brazil, soybean production has been reduced by a combination of adverse weather and economic conditions. While the Brazilian weather has not been as harmful as that in Argentina, rainfall has been below average is major soybean production areas. The expectations for a smaller harvest will also mean that stocks will be reduced.
Summary:
The primary dynamic in the US soybean market is a function of the drought in the Southern Hemisphere. Hot, dry weather, mostly in Argentina has curtailed production of soybeans, not only in reduced plantings but increased abandonment of fields. The soybeans that are produced will likely be held back for sale at a later time when prices may be even higher. The reduced competition and available supply have combined to increase global demand for US soybeans. With nearby and harvest futures prices flirting with the $10 range, analysts indicate the strength of the market is due solely to export demand, since the domestic crush is weaker and demand for livestock feed is soft.
Posted by Stu Ellis at 12:28 AM | Comments (0) | Permalink
January 22, 2009
Price, Supply, Basis, Transportation, And Other Corn Fundamentals Changed By Ethanol.
If you think ethanol had a significant impact on corn supply and demand, and influenced the strength in the 2006, 2007, and 2008 corn market, then consider the overnight shift in how corn moves around the Cornbelt that resulted from the biofuel industry. The Iowa corn market is no longer doing business the way it used to do business, and it will not be going back to those “good old days.”
The redistribution of corn to a major new consumer and the distribution of distillers’ dried grains have created a new paradigm, say economists Edward Yu of the University of Tennessee and Chad Hart of Iowa State. Their analysis says the change in distribution of grains and feeds and the utilization of shipping affected grain prices, the basis, and other feedstocks. Yu and Hart looked primarily at the impact on the Iowa interior markets, but some of their findings can be expanded to a wider portion of the Cornbelt.
Prior to 2003, they reported that more than 40% of annual production was shipped out of state, but the ethanol industry increased its corn use at the expense of other consumers of corn. Ethanol use rose from 6% of the 1999 crop to 21% of the 2005 crop. Corn that was shipped out of state dropped from 44% to 35%, and the livestock use also lost market share.
The researchers utilized a 2001 survey for comparison in which 80% went to elevators and 13% went to processors, but for the 2006 corn crop only 62% went to elevators and 16% went to ethanol plants and 10% went to other processors. The greatest reductions in volume of corn were at river terminals and on-farm feeding operations. The latest survey indicated that ethanol plants absorbed at least 10% of the corn in 8 of the 9 Crop Reporting Districts in Iowa.
Of the 1.1 billion bushels of corn produced from the 2006 Iowa crop, 26% went to ethanol plants, 23% to cattle feeders, 18% to processors, 11% to out of state cattle feeders, and 5% to river-based grain terminals. That compares to the 2001 crop, of which 44% was processed in Iowa and 27% was fed to livestock. The researchers report, “Although the share of corn utilization in some markets may decline, the corn volume to those markets is expected to increase, as total corn marketed posted significant growth between the two survey periods.”
From the 2006 corn crop, the Iowa ethanol refiners produced about 2 billion gallons of ethanol, 5.1 million tons of distillers’ dried grains and 2.6 million tons of wet distillers’ grains; but the ethanol made up 85% of the total sales. The majority of the ethanol was used in Iowa and surrounding states. Interestingly, 25% of the DDG was shipped to California and 13% to Texas.
The researchers conclude that country elevators are still the primary market for Iowa grain producers, receiving 62% of the corn, but the share going to processors and particularly ethanol refiners increased sharply in the first half of the decade. While Iowa cattle feeders received less corn direct from farms between 2001 and 2006, the total amount of corn and other feeds delivered to feedlots indicated they remain the single largest end user of corn from the 2006 crop.
While country elevators are suffering from a smaller share of the corn handling market, the researchers found they are benefiting from the emerging sales of wet and dry distillers’ grains.
While very few of the ethanol plant remove the corn oil during the refining process, the increased value of that commodity indicates more will convert their refining process to capture the additional revenue and that will become an additional feedstock for the biodiesel refiners.
Summary:
The first half of the decade brought a substantial shift in where corn was delivered and how it was used in the Cornbelt with the rapid development of ethanol plants. Elevators lost a substantial market share of corn handling to the ethanol plants, but the growing volume of corn offset the loss. Elevators also benefited from the merchandising of wet and dry distillers’ grains to livestock operations, which remain the largest end user of corn and ethanol co-products. The dynamics in the market will continue to shift, impacting the basis, transportation, and product availability.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
January 13, 2009
Monday's Basketful Of USDA Production And Stocks Reports Caused It To Overflow.
Without the typical fanfare reserved for the August 1 Crop Report, USDA put the wraps on the 2008 crop with some numbers that surprised most of those who weigh in with their own predictions. A handful of reports were released Monday, including the Quarterly Grain Stocks Report, and the Final Production Estimates for the old crop. So how did the numbers change?
USDA’s final report on the 2008 crop placed corn production at 12.101 billion bushels, up 1% from the November crop report by raising the average yield to 153.9 bushels per acre. The estimate was 119 million bushels higher than what the market expected. Soybean production was estimated at 2.959 billion bushels, up 1% from November also because of a higher yield estimate of 39.6 bushels per acre.
The World Agricultural Supply and Demand Estimate (WASDE) for January raised US corn carryout for the 2008-09 marketing year by 316 million bushels because of higher production estimates and lower estimated consumption. Total production went up 81 million bushels. Feed used was dropped 50 million bushels reflecting fewer livestock numbers and ethanol use was dropped 100 million bushels due to lack of profitability at ethanol refiners. Industrial use was chopped an additional 35 million bushels because of reduced demand for corn sweeteners. Exports were also cut by 50 million bushels. USDA reduced the estimated price range by 10 cents to $3.55 to $4.25 per bushel. By raising production 81 million bushels and lowering demand by 235 million bushels, the 1.790 billion bushel carryout forced the market down limit on Monday, since the market was anticipating the carryout to hold about steady.
Global coarse grain production was raised 5.5 million tons because of better yields, however consumption was lowered because of less livestock feeding, and so ending stocks were raised 12.2 million tons.
The WASDE report raised US soybean production estimates by 39 million bushels to 2.959 billion bushels, but also raised exports by 50 million bushels due to strong export demand. But domestic crush estimates were reduced 30 million because of a lower demand for soybean meal for livestock feed. Ending stocks were raised 20 million to 225 million bushels. The season average price was reset to $8.50 to $9.50, compared to the December estimate of $8.25 to $9.75. The larger surplus of soybeans, when the market was anticipating a decline in stocks, contributed to the weakness in the market, which also saw soybeans close limit down Monday.
Global soybean production was estimated at 416 million tons, down 2 million from December, primarily from dryness that reduced planted areas.
The WASDE report forecast lower domestic wheat consumption by 30 million bushels and less seed used for planting, which raised ending stocks by 32 million bushels. USDA clipped a dime from each end of the estimated price range, and reset it to $6.50 to $6.90 per bushel. The market was anticipating a decline in surplus stocks, not an increase, and the surprise caused weakness in the wheat market which closed limit lower.
Global wheat production estimates declined 1.1 million tons from December, and with global consumption declining, world stocks estimates were raised by 1 million tons.
The Quarterly Grain Stocks report was also released, reflecting grain stocks on December 1. Corn stocks were dropped by USDA to 10.084 billion bushels, down 2% compared to year ago levels. The September to November disappearance was 3.64 billion bushels, compared to 4.06 billion in 2007. The market expected more consumption and for stocks to recede, instead of the 239 million additional bushels.
Dec 1 soybean stocks totaled 2.275 billion bushels, down 4% compared to year ago levels. Disappearance was measured at 889 million bushels, down slightly from 2007 disappearance. The market also anticipated more soybean use and was surprised at the 95 million bushels of additional stocks.
Dec 1 wheat stocks totaled 1.422 billion bushels, up 26% from the same period in 2007. The quarterly disappearance was estimated at 436 million bushels, 25% less than the same period in 2007. Traders expected wheat stocks at 1.365 billion bushels, and were surprised with the 57 million additional bushels.
Winter wheat seedings were estimated by USDA at 9% less acreage than the 2008 crop. Total acreage was forecast at 42.098 million acres, compared to 46.281 million a year ago. USDA says wet weather delayed the start of planting and the pace remained behind prior years. Hard red winter acreage is estimated at 4% less than 2008, soft red winter acreage is estimated at 26% less than 2008. White wheat acreage is up 1% and durum wheat acreage is down 16%.
Summary:
While the grain market was surprised at many of the statistics released Monday by USDA, the report reflected increased production, reduced consumption, and more surplus stocks. With those statistics in hand, farmers and the grain market must determine the amount of corn and soybean acreage that should be planted this spring. The limit down closes in the corn, soybean, and wheat markets make those decisions difficult today, but supply and demand issues will soon become less emotional.
Posted by Stu Ellis at 12:31 AM | Comments (1) | Permalink
December 30, 2008
Wheat: Larger Supplies, Lower Quality, Lower Demand, And Lower Prices.
The wheat market, which reached toward the $20 mark a year ago, has shown up and down movement. But unfortunately for the wheat grower, the up reflects the volume of excess supply and the down reflects the market price. USDA has been making adjustments of its wheat balance sheets to indicate more supply and less demand and that is a complete turnaround from the recent bullish wheat market.
The latest Wheat Outlook from the U.S. Department of Agriculture indicates imported wheat is making its way into the US market, much of it lower quality feed wheat which seems to be abundant in the global wheat market. The supplies for the current marketing year are more than 2.9 billion bushels, 280 million above the past marketing year. Increased US stocks, primarily a jump in soft red winter wheat production, is a large contributor to the wheat market. SRW makes up 60% of the additional supply, because of the largest crop in more than 25 years.
Milling use has been dropping, so flour production is down, pushing food use of high quality wheat down by 10 million bushels. While various classes of wheat exports change month to month, the total export volume of US wheat has remained steady. When USDA’s wheat balance sheet is complete, ending stocks will be up 20 million bushels to 623 million, about twice the carryover from a year ago.
The abundance of wheat has forced USDA to lower its forecast for wheat prices for the marketing year by 15 cents per bushel on each end of the range, which now extends from $6.40 to $7.00 per bushel. USDA says the price is relatively high, compared to current cash prices, because of the significant quantities of 2008 wheat that were forward contracted last spring, and because significant quantities of cash wheat were sold before the market began to deteriorate in October.
The new crop is in good shape according to the weekly NASS survey, which shows 65% in good to excellent condition and only 8% in poor or very poor condition. The 2008 crop was in a lesser quality condition when it entered dormancy, compared to the 2009 crop.
Global wheat production is going to be higher as well, with better yields in Canada, Europe and Brazil, pushing the 2008 crop to 648 million metric tons. There had been fears of excessive rain in Brazil causing quality deterioration, but those fears did not materialize.
Relative to the larger world production, world consumption will be down slightly to 656 million metric tons, with over half of the reduction being recorded in the US. Despite the drop in human consumption, there is anticipation of an increase in livestock consumption because of the abundant supplies of low quality feed wheat, which has displaced corn on the world market.
Global wheat stocks will be slowly increasing with the larger production and smaller consumption. USDA forecasts stocks at 147.3 million, about the same as in the 2005/2006 marketing year. World wheat trade will be at record levels for the current marketing year with nearly 124 million tons traded, a rise of 7% from the past two years. US wheat exports will be 22% lower compared to last year. They face competition from large supplies of feed wheat in Europe, Canada, Russia, and Ukraine.
Summary:
Supplies of wheat are growing in both the US and global warehouses, easing some of the tightness in supply seen around the world the past two years, and reducing prices both domestically and internationally. Weather issues have caused some quality deterioration abroad and foreign wheat is frequently found to be lower quality feed wheat which is moving into the US and other livestock feeding countries to compete with corn. US domestic milling and exports will be down during the current marketing year compared to last year and imports have started to rise, causing larger carryouts and reducing the season average price for wheat.
Posted by Stu Ellis at 1:29 AM | Comments (0) | Permalink
December 29, 2008
Have The Corn And Soybean Markets Bottomed Out Yet?
Have the corn and soybean markets reached the bottom and headed back up for air? That is the question every grain producer is asking, but there are few answers that are offered with any degree of certainty. The precipitous fall in grain prices has seemed to have subsided, but whether the parachute opened for the last part of the ride downward, or whether the ground has been reached is debatable. But what is so hard to determine that?
A year ago corn and soybean buyers were in a bidding war designed at ensuring there were enough acres of their crop to fill the demand. Currently, there is no bidding war and the demand has not been heard from since mid-summer. At Purdue, Marketing Specialist Chris Hurt says the corn market needs demand and the bean market may see some price recovery.
Hurt says the corn market may have bottomed earlier in December when he looks back and sees the price gains that have been achieved. Those have been attributed to the weaker dollar and the prospect of a federal public works program that will require the use of basic commodities, such as concrete, steel and copper. But until there is a concrete turnaround, Hurt says demand for US corn continues to depreciate, such as the 300 million bushel downward adjustment in USDA’s estimate for corn used by ethanol refineries and a 100 million bushel drop in the estimate for exported corn.
Hurt is most concerned about the future of ethanol in today’s crude oil price territory, because gas is cheaper than E-85 and refiners will only distill the minimum amount of ethanol to meet the national renewable fuels standard of 9 billion gallons this year and 10.5 billion gallons next year.
Cash corn wandered into the $2 territory several weeks ago and Hurt says March futures need to reach $4 for the threat to be past. However, he says the bigger threat is the fact that it takes more than $4 to raise $2 corn, and if that is the case for many producers, there will be fewer corn acres in 2009 to parallel the demand depreciation.
Soybeans also ventured down into $7 territory before climbing back to the mid-$8 range. Demand is lacking, both in the domestic feed market and by international customers. Some of the latter may be awaiting South American soybeans, but it is going to be mediocre itself with only a 2% gain in production expected.
The issue of expensive nitrogen for corn is pushing many farmers to increase their soybean acres, if they have that flexibility. Hurt says that might push cash prices below the $7 mark next fall in conjunction with large acreage and a large yield. Between now and then, Hurt believes the global financial crisis will continue to depress the grain market, and cause soybeans to trade between $8 and $9 for the coming year. He’s not expecting much of a price recovery this winter without weather concerns in South America or a recovery of the economy.
Summary:
Both the corn and soybean markets lack the fireworks they had a year ago, when insufficient acreage was a concern. In fact, corn acres may fade because of high production costs, and soybean may pick up some acres as a result of corn. But demand is generally absent from the market, beginning with ethanol that spurred on the acreage war last winter. With fewer miles driven and a stronger dollar, oil prices have dropped and that brought down both price and demand for ethanol. Soybeans have some minimal export demand interest, but that may be replaced by the new South American crop that will soon be harvested.
Posted by Stu Ellis at 12:34 AM | Comments (1) | Permalink
December 25, 2008
What Did We Learn From The Markets In 2008?
The staff and management of the farm gate extend our best wishes to you for a Merry Christmas and a profitable New Year. And being the educational folks that we are, our Christmas Day gift to you is a collection of marketing lessons, which we all learned in the past year.
Even the best of marketers had a challenging year in 2008, watching the market climb to record levels, then fall precipitously because of outside markets. Marketers who depend on reading the fundamentals threw their arms up in disbelief. But looking back over the past year, Melvin Brees at Missouri’s Food and Agriculture Policy Research Institute offers several lessons that we can apply to future challenges.
1) It is a big world out there. The typical fundamentals of supply and demand will not always define the market price. Brees says worldwide financial conditions, international supply and demand forces, currency values, politics and other factors push and pull on the price of grain. There are probably thousands of different global dynamics that impact the price of US corn and soybeans. Brees says add those to the list of domestic fundamentals, such as the ethanol demand for corn and corn acreage that has caught the attention of large commodity trading funds which have been blamed for using techniques that distort the market. All of these and many more have inserted a new level of price volatility into the market that means large price risks for producers.
2) Price opportunities do not last. We have to re-learn that hard lesson every time prices reach new highs, as they did in early summer of 2008. Brees says the steep uptrend that began in the fall of 2007 became a steep downtrend in mid summer 2008. He says history shows that record prices never last very long and those who waited for more always missed out. Brees says a marketing plan should always include a strategy for capturing prices during a market rally.
3) There is risk in depending upon cash contracts. The spring of 2008 brought higher prices and many farmers booked forward contracts at elevators, which were then obligated to hedge the purchased grain on the Chicago Board of Trade. But with the market moving against that hedge, elevators at every railroad junction were forced to pay margin money to the CBOT or close out the hedge. Subsequently many elevators halted the use of forward contracts, the primary risk management tool of the Cornbelt farmer. But other farmers who contracted delivery to some ethanol plants that have failed, are now obligated to deliver at prices well below the contract. The use of futures and options are expensive risk management tools, but will allow producers to remain in control of their marketing.
4) Risk management has become expensive. As noted previously, the maintenance of a futures or options account will be an expensive risk management tool. The volatile market required a $2,000 margin account per corn contract and $4,000 per soybean contract. But the rising market demanded another $3-4 per bushel be added to the corn margin and another $8 per bushel for soybeans hedged. Options were less expensive, if you consider 60-70¢ per bushel for corn and $1 per bushel for soybeans to be less expensive. All of these strategies provided price risk management to the producer, but it is a lesson that has to be mastered by the producer and the lender.
5) Marketing risks that became apparent in 2008 need to be considered in 2009 business planning. Market volatility threatens farmers’ ability to capture profitable prices, and price risk management will be an important element to maintaining profitability in 2009. Just as production inputs have increased in their expense, so has the cost of risk management, which farmers and their lenders will have to understand. Unfortunately, it has grown more complex.
Summary:
Commodity prices in 2008 were significantly influenced by non-traditional supply and demand factors, which could resurface in the future. Farmers saw fast rising and falling markets, and along with the fall they learned that price opportunities do not last very long. The farmer-friendly forward contract created financial havoc for grain elevators, which quit offering them due to unforeseen costs, demonstrating that there is a significant cost to good risk management practices. Future risk management will be expensive, but a necessary part of a farming operation that needs to be understood by farmers and lenders.
Posted by Stu Ellis at 12:48 AM | Comments (1) | Permalink
December 22, 2008
Can You Legitimately Price Grain Based On The Crude Oil Market?
While a seat belt might be a necessity, about the only safety net farmers have during a new era of crop values and volatility is a marketing plan with flexibility. Grain prices are marching to a different drummer, and the pace has picked up considerably. But before you can develop a marketing plan for today’s prices, the change in the market has to be well understood.
Agricultural economist Scott Irwin at the University of Illinois assessed the personality change in the commodity market, and offered several findings during a series of recent presentations:
1) From January 1947 to January 1973, the average monthly price of corn was $1.28. Between 1973 and 2007, the average was $2.42. Corn price action since has indicated prices will likely range from $6.70 to $3.00 with a $4.60 average price.
2) From 1947 to 1973, the average price of soybeans was $2.63, but that rose to an average of $6.15 from 1973 to 2007. Currently, soybeans are in a new channel ranging from a $17.56 high to a $7.51 low and $10.58 average price.
3) For wheat, prices averaged $1.77 from 1947 to 1973, then average $3.74 until 2007. Since then wheat prices have indicated a range of $10.15 to $3.30 with an average of $5.80.
4) For hogs, the period of 1947 to 1973 saw a $19.18 average monthly price. Between 1973 and 2007, the average climbed to $44.74.
Irwin says his price analysis points to several factors that have a place in writing marketing plans.
• Evidence suggests that prices are likely establishing a higher average
• $3 corn, $8 soybeans, and $3.50 wheat are not inconsistent with new price range
• Prices can quickly rebound to much higher levels
• Concern: Long-lasting, world-wide economic contraction.
Irwin draws a close parallel between the price action of weekly crude oil futures and the price of corn bid by ethanol plants in Iowa. He says the relationship is about 75%, when those two commodity prices were compared each week of 2008. Therefore, the prices of crude oil, gasoline, ethanol and corn are linked. Specifically, there is an 85% correlation between weekly crude oil futures and gasoline futures, a 62% correlation between weekly gasoline futures and ethanol prices at Iowa refineries, and a 66% correlation between corn and ethanol prices at those Iowa plants.
Irwin says the market volatility can be traced through the price linkage, and knowing ethanol prices can be beneficial in knowing what corn prices may do at ethanol refineries. Based on gross revenue of ethanol at $1.50 per gallon and distillers’ grains at $120 per ton, gives an ethanol plant a $5.26 gross revenue per bushel of corn refined. Production costs would be estimated at $2 per bushel, meaning the maximum price the plant could pay for corn would be $3.26 per bushel.
If ethanol is dominating the value of corn, and other grains are keyed to corn prices, then ethanol values can be used to determine the potential price range for other commodities. Irwin says a $1.50 ethanol price equates to a $3.34 corn price, an $8.17 soybean price, and a $4.17 wheat price. Each 10¢ move in the price of ethanol would be a 40¢ move in corn prices, a $1 move in soybean prices, and a 50¢ move in wheat prices.
Therefore, Irwin says:
• Ethanol processors are the marginal bidders for corn in the short- to intermediate-run.
• Volatility in energy markets is transmitted directly into agricultural markets.
• Each step of the energy chain between crude oil and corn is a source of risk.
• Energy policies will play a key role in determining ethanol prices in 2009.
Summary:
Corn, as well as soybeans, and wheat, are economically linked to each other and to the ethanol market, which means prices of those commodities can be traced to the crude oil market. Commodity price volatility in the past year has been the result of the crude oil linkage, and indicates a new era of price levels and market volatility. Creating a grain marketing plan with the price relationships of crude oil and ethanol can be accomplished, since energy prices and energy policy will be major drivers of the grain markets.
Posted by Stu Ellis at 12:10 AM | Comments (1) | Permalink
November 13, 2008
$3 Corn Or $5 Corn? Which Will Come First?
The bears have been pulling value out of the corn market just like it was salmon from an Alaskan stream. And while the bulls have been getting hungry, they have found the pavement on Wall Street to be unfriendly. Market observers frequently admit that corn prices have totally ignored the fundamentals, and with continued liquidation in the equity market, commodities have been sold off as well to raise cash. That doesn’t help anyone trying to sell corn to raise enough money to plant next year’s crop. Despite the no-win situation, we’ll try to assess the current corn market.
Place your bets: $3 corn or $5 corn. Which will we reach first? Purdue economist Chris Hurt is looking for the bottom in the corn market. He’s like the nimble-tongued politician who said about an issue, “Some people are for it, some people are against it, and I tend to agree.” Hurt can argue either way on the direction of corn prices.
On the positive side, he said USDA is counting on ending stocks next August 31 to be tight at 1.1 billion bushels. That is the least in more than a decade, and at 14% of use, the least in more than 3 decades. So tight stocks will support the market.
We’re two weeks from Thanksgiving, and only 71% harvested, so Hurt figures the market still owes us a post-harvest rally. And he quotes some of the financial economists who say the stock market has the negative news built in and it should soon recover, which Hurt says would help the corn market.
December corn futures have found support three times at $3.70, which Hurt says may form the base for a rally, which he says may take corn to the $4.30 to $4.50 range over the next month. From there, he says corn may extend its rally to the $4.75 to $5.00 range for July futures during the spring or early summer months. He says that comes with the assumption the global financial crisis is in the rear view mirror and was not as serious as it could have been.
On the negative side, Hurt says corn demand could be weaker than USDA anticipates due to poor export sales, declining livestock numbers, narrow ethanol margins and more wheat being fed instead of corn. Driving those are the global financial crisis, falling energy prices, and the rising value of the dollar.
1) The lack of spending, and the preference of consumers to hold onto cash or pay down debt, would deflate the value of commodities
2) Declining oil prices, which take ethanol and corn values down, may be looking for a bottom that would also signal a bottom for ethanol prices as well.
3) Rising values of the dollar make importers spend more for US corn, and that dampens demand and weakens energy prices. While corn exports have been weak, so have exports for US meats.
4) The ethanol markets have tight profit margins and losses have been recorded since September due to lower oil prices. Expected excess capacity in 2009 will also mean plants will operate in the red. With the six cent drop in the blenders’ credit scheduled in January, the lower subsidy will push corn prices down by 17 cents per bushel.
Chris Hurt says any drop in the corn market below $3.70 will possibly push it down to the vicinity of $3.10.
The Purdue economist says farmers fearful of corn reaching $3 should consider a forward contract to deliver corn by early summer. If the basis is weak, a hedge-to-arrive contract will protect your futures price until summer while the basis can strengthen.
For the corn market to increase, Hurt says the financial crisis cannot get worse, oil has to hold at $60 per barrel, and the US dollar must level off. Due to the uncertainty, USDA reduced its estimated farmgate prices to $4.40 per bushel for the marketing year average.
Summary:
When fundamentals regain control of the corn market, some could take it down to $3 and others could push it to $5. Arguments can be made for both, but for prices to rise, the global financial issues need to be resolved, oil prices need to hold, and the dollar needs to quit appreciating. Once those are controlled, corn prices would be pushed higher by tight supplies and a very tight stocks to use ratio.
Posted by Stu Ellis at 12:35 AM | Comments (1) | Permalink
November 12, 2008
Values Are Known For Grain In The Bin, But What Is The Value Of A Standing Crop?
Even though you had your combine set perfectly, a herd of cattle can always find plenty of grain in corn stubble. And with many cattlemen holding their stock out of feedlots as long as possible to save money, this year’s challenging corn crop may provide opportunity for both the corn grower and the cattleman. The only question is the value that can be placed on pasturing cornstalks.
Values can be well documented for grain in the bin and hay in the barn, but when a forage crop is still in the field, there is a lot of head scratching about its value. For the most part the forage season is gone for this year, except for corn stalks. But with the help of Iowa State economist William Edwards, we’ll tackle the value of cornstalks and venture into the value of forages in the field.
Cornstalks
Many head of cattle are being turned out into cornstalks, but when different owners are involved, the value of the rented field must be determined. Edwards says rental rates are $6 to $10 per acre, or $4 to $8 per AUM, which is equal to a mature beef cow grazing for one month. Edwards says harvested cornstalks are worth about 50% of the value of grass hay for beef cattle. If the buyer does the harvesting, then use 25% of the value of grass hay for the price. If weights of large round bales are used, Edwards suggests 1,200 to 1,300 lbs. for hay and 800 to 900 lbs. for cornstalks.
Hay and Haylage
Looking ahead to next year, Edwards says selling standing hay is the same as renting pasture, and can vary widely depending on the type of forage, quality of the crop and the local demand. For the first cutting, a charge of 40% to 50% of the yearly rent would be appropriate, and later cuttings would be worth 35% to 30% of the annual pasture rent. If hay is selling for $5 per small bale, subtract $1 for mowing and baling and charge $4 for the hay, multiplied by the expected number of bales. For haylage, the feed value of a ton of unharvested haylage with 40% to 50% moisture is equal to a half ton of dry hay, minus the cost of harvesting and hauling. If the price of hay is $90 per ton, and harvesting is $18 per ton, the standing crop would be worth $27 per ton.
Corn silage
Corn silage is valued at the price of the grain, and accounting for the harvesting costs saved, a ton of silage is worth 6 times a bushel of corn. Multiply the value of a ton of silage by the tons per acre to get the value of standing corn. Moisture will be about 60% of the volume, but compensate for differing moisture content. If the silage has been harvested and stored, the value increases to 9 times the price of a bushel of corn, with any adjustment for condition, access, or delivery.
Oats
Similar to corn, standing oat silage can be valued at the price of the oats. Edwards says the straw has a value, harvesting costs have been saved, and if the oats are 70% moisture, then the value of a ton of oat silage is 13 times the value of a bushel of oats. If the silage has already been harvested, then use a multiplier of 17.
Summary:
Livestock producers have long fed their own crop without accounting for its value, and only trying to add value to the grain by converting it to meat. However, with multiple owners of crops and livestock, and the opportunities that arose this year to save money on cattle feed and also glean fields of downed corn, the value of cornstalks comes into question. If grain prices remain high and livestock operators look more to feeding standing crops, reasonable values must be assigned to those crops.
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
October 23, 2008
How Much Further Will Corn Prices Drop?
Whether you think December corn futures put in a double bottom on the charts Wednesday or just underscored $3.85 on its way further down, its $4 decline since July has been a classic chart pattern demonstrating that bear markets move faster than bull markets. The question in every Cornbelt coffeeshop and elevator office is, “How low will corn prices go?”
Iowa State University economist Bruce Babcock rhetorically asked the same question, but unlike most of the rest of us, he arrived at a plausible answer. In the new issue of Iowa Ag Review Babcock says the declining corn market is a boon for livestock producers, a bust for corn growers, and difficult for everyone who needs to make financial plans. He says predicting the market is foolhardy, but it is reasonable to examine the market dynamics.
Babcock says a lot of the corn market volatility stems from the impact of ethanol, as well as livestock producers, the industrial market, and the export market, all of which have maximum prices they can pay for corn. And he says when there is a plentiful supply, corn prices can drop because few users have a maximum corn price that is relatively low. The corn users will vary from year to year in their maximum price and it is not possible yet to predict which industry will have the lowest maximum price during 2009. Combined, the livestock, industrial, and export industries will need 8.7 billion bushels of corn and have a high maximum willingness to pay for corn.
However, the ethanol market has a level that will cause it to lose money when corn prices exceed it. Ethanol plants will sell ethanol and DDGS, but that income has to cover corn, energy, and labor costs. Babcock says if ethanol is priced at $1 per gallon, then the breakeven price of corn is $3.15 per bushel. That rises to $5.07 when ethanol prices are $1.50, and then to $7 per bushel when ethanol is at $2 per gallon.
In the marketing year that just ended, the livestock, industrial, and export industries used about 10 billion bushels of the 13 billion produced, and ethanol used the balance. If the first three had high maximum levels they could pay, that meant ethanol was the marginal user and its ability to pay determined the price of corn. If that is the case, then the market price of corn will be the breakeven price for the ethanol industry. So what is that breakeven price?
That price is determined by the market price of ethanol, and because it is a substitute for gasoline, it closely follows oil prices. But even so, it does not track it perfectly. Babcock says typically the price of ethanol is 68% of the price of gasoline, since it has only 68% of the energy value, plus the blenders’ credit that will drop from its current 51 cents per gallon to 45 cents in January. But he says that formula has over-predicted ethanol prices by 8% since June. Based on that formula, Babcock predicts $70 crude oil to imply a $3.24 corn price, and $80 crude oil to imply a $3.77 corn price. Corn would climb to $4.30, if crude oil goes to $90 per barrel. He says corn farmers should be alarmed if oil prices fall to $50 per barrel, because corn prices would fall to $2.18 per bushel, and that will not cover costs of production and insufficient supplies of corn would be produced to meet the 13 billion bushel demand.
Under the current federal mandate for renewable fuels, the 2009 corn crop must produce 11.5 billion gallons of ethanol, and to do that as well as meet the demands of the other industries, the US will have to grow 12.9 billion bushels of corn. At a 154 bushel per acre trend yield, that will require 90 million planted acres, and Babcock says that will not happen if corn prices are $2.15 per bushel. He says it will take $3.50 to $4.00 corn to induce farmers to plant that much.
The Iowa State economist notes that the ethanol mandates put an effective price floor under the corn market, which also protects the price of soybeans from falling further. So he believes the ethanol mandates will determine acreage and any post-planting price action will be a function of the size of the crop and other demand fundamentals.
Summary:
The seeming free-fall in the corn market has created concerns about how low prices will go, but the price of corn is so closely tied to the price of crude oil, one only needs to look at ethanol production economics to predict the price action for corn futures. The mandates for ethanol production will require 90 million planted acres in 2009, to produce the corn needed by the ethanol industry, as well as for feed, exports, and other industrial uses. For farmers to plant sufficient acreage, the price will not be able to go much lower than $3.50 to $4.00 per bushel, which will also shield soybean prices from going much lower.
Posted by Stu Ellis at 12:24 AM | Comments (5) | Permalink
October 13, 2008
After Last Week, It Is Time To Update Your Marketing Plan.
In the midst of an economy in which demand is decreasing, the USDA Crop Report on Friday indicated the supply of corn and soybeans is increasing. With that news, the grain markets plummeted toward yesteryear when supply overshadowed demand and the government loan program was a legitimate option for every farmer. We’re not there yet, but the precipitous fall in grain prices in a weak economy was probably not part of your marketing plan.
If you need to revise your marketing plan, you’ll have the benefit of information from a trio of Extension marketing specialists. Chad Hart at Iowa State, and Melvin Brees at the University of Missouri both released their analysis of the report on Friday. Additionally, Chris Hurt at Purdue released his monthly newsletters on corn and soybeans. (Follow the links to their publications.)
Chris Hurt begins by saying prayer might be appropriate at this point because the bear market is not only out of the hands of agriculture, but out of the hands of mankind to do anything about it. Hurt says the financial markets are not only falling but the currency is deflating, “Prices of crude oil will drive corn prices. Cash corn prices will tend to run 4.5% to 5% of the crude oil price per barrel. The current $78 crude means $3.50 to $3.90 cash corn prices. Crude, just a few dollars lower at $70, would mean $3.15 to $3.50 cash corn prices. Crude futures right now are $82 for May 2009—that’s $3.70 to $4.10 corn next spring-probably much lower than most producers are hoping for!”
Chad Hart at Iowa State notes the substantial drop in USDA’s estimated season average prices. USDA’s Supply and Demand Report reset the ranges for corn for soybeans, “USDA significantly updated its season-average prices for corn and soybeans to $4.70 per bushel for corn and $10.35 per bushel for soybeans. The corn price is off 80 cents per bushel, while the soybean price is down $2 per bushel from last month’s estimates. While these are sizable drops in price, they look relatively optimistic compared to futures prices. Based on Oct. 9th settlement prices, the futures markets were projecting 2008 season-average prices of $4.27 for corn and $9.79 for soybeans.”
Hart agrees with Hurt that factors outside agriculture will continue to strongly influence farm markets. He says the outlook for fuel demand has dropped and credit markets have tightened or ceased to function. Hart says the higher input costs and lower commodity prices will put a squeeze on farmers, “The 2009 crop year was already looking to be a tighter year for crop producers, as input costs have ratcheted up. And just as it took a while for costs catch up on the upside, costs will also lag prices going down. Based on USDA current estimates of relative net returns, soybeans may be the most attractive play in 2009 given its lower production costs.” His chart indicates 2009 net returns at today’s prices would be about $230 for soybeans, $175 for corn, and $75 for wheat above variable costs of production.
Brees says the lower prices resulted from the higher supply estimates and the recent market action. As reported on Friday, USDA reduced corn acreage by 100,000, but an increase in the estimated yield, raised both production and ending stocks. At the same time, USDA reduced the yield estimates for soybeans, but raised acreage by 2.2 million acres, and that raised both production and ending stocks. Brees joined his counterparts in noting the significance of the limit down moves in the grain market Friday, and said, “The price downtrends remain intact and further downside price risk appears to exist.”
So what is the downside risk? Hurt says, “By historical standards, prices today are still high. Today, October 10, 2008, the December 2008 futures are at $4.08 which is the highest December futures price ever on this date. Let me say it once more: “corn futures prices are still at record highs by historical standards.” And he says the financial system has to recover before the grain market will. In the meantime, Hurt says seasonal movement will take corn prices higher, “Current bids across the storage season suggest an increase of about 60 cents per bushel in prices into next spring. For those with on-farm storage, and assuming 6% interest, this will net about 40 cents return above interest costs. Commercial storage appears to be about breakeven.”
For soybeans, Hurt says the USDA price estimate is higher than the market’s projection, possibly because the market is assuming reduced demand because of the world economy. “Another way to interpret the USDA price estimate is that soybean prices will recover by $1.25 per bushel (on average) if the financial crisis has only a minor impact on world income growth.” And for your marketing plan, Hurt says, “Returns to storage appear to be favorable with anticipation for about a 90 cent per bushel increase in prices into next spring. Subtracting 6% interest still provides an anticipated return of around 50 cents per bushel from on-farm storage above interest costs.” And he adds that with the dismal returns estimated for wheat and reduced soybean yields, double-cropping is not worth it, unless straw prices are high.
Summary:
In the wake of the financial market shock that drained liquidity out of the grain market, USDA’s higher supply and lower demand estimates further depressed commodities. If corn prices are driven by the oil market, corn prices may have more decline ahead of them. On-farm storage with a spring forward contract may provide a return to storage, but commercial storage for either corn or soybeans will be a financial wash.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
September 23, 2008
Why Aren't Supply and Demand Fundamentals Moving Corn And Soybean Markets Anymore?
You have carefully constructed your marketing plan for the new crop. Your cost of production is noted. Tabs are kept on the domestic crop production. Notes are made about demand, and pricing opportunities look good with strong demand for both corn and soybeans. Fundamentals are strong, but for some reason the market does not seem to be following the fundamentals. In fact, it is totally ignoring the fundamentals. So what do you do with your marketing plan, tear it up?
No, don’t tear it up your marketing plan and shift to production of organic goat manure. But just recognize that the commodity market is no longer driven by supply and demand fundamentals. Agriculture has changed a lot in the past two years, and commodity marketing is one of the many changes. Elevators sometimes won’t offer forward contracts. Charting the basis does not always help. And the volatility in futures contracts is more than the basic contract price was three years ago. With the realization that it is hard to rely upon the old marketing adages taught by Dad and Grandpa, we find ourselves in a new marketing world that is a long way from finding its boundaries.
Extension Marketing Specialists Melvin Brees at the University of Missouri and Darrel Good at the University of Illinois both alerted farmers Friday that corn and soybean prices are now a function of many more factors than which existed a few months ago. And those factors are creating a market of volatile uncertainty. Darrel Good says, “Over the past week, December corn futures traded in a range of $0.55. In the past seven trading sessions, November soybean futures traded in a range of about $1.20.”
If you check the supply and demand statistics on your marketing plan, can you find significant changes in demand or supply? Probably not, but it does not take a significant drop in demand any more to undercut the grain market by $1-3 per bushel. Farmers are used to watching the progress of the Brazilian soybean crop, but that will have minimal impact, compared to the new era factors that are driving the grain markets.
Melvin Brees says the markets are being driven by more than the weather, production and carryover supplies. He says the new biofuels market has linked corn and soybean prices to the price of crude oil, and the value of the dollar has impacted all commodities from the standpoint of their export demand. And he adds, “These factors have become even more complicated due to the Wall Street financial woes, which has impacted the commodity markets as well as the financial markets. The activity in the energy, currency and financial markets, along with technical trading (chart signals, price action, etc.), sometimes overshadows the fundamentals (supply and demand factors) in the grain markets. But, not always! Some days the fundamentals overshadow the outside market factors and this uncertainty leads to volatile price action. Limit or double-digit prices move up or down on one day are often followed by double-digit price changes in the opposite direction the next day. This volatility is frustrating and creates a difficult environment for making marketing decisions.”
Darrel Good suggests watching the forces at work and understanding what impact they will have on the market.
1) In general, a weakening of the U.S. dollar has been viewed as positive for export prospects and therefore for prices of corn and soybeans and a strengthening of the dollar has been viewed as negative for both.
2) Lower crude oil prices are generally viewed as having a negative impact on prices due to the relationship to the price of biofuels and the profitability of biofuels production. Higher crude oil prices, then, are viewed as positive for corn and soybean prices.
And Good says the developments in the financial markets may have demand implications for corn and soybeans, “If problems in those markets lead to weakening U.S. and world economies, the demand for both food and energy could also weaken with direct implications for corn and soybean prices.”
Summary:
Supply and demand fundamentals are no long the only factors that move corn and soybean prices. Changes in the value of the dollar, variable prices for crude oil, and even the financial markets as impacted by investment bank activities to avoid bankruptcy have pushed and pulled on grain prices.
Posted by Stu Ellis at 12:21 AM | Comments (3) | Permalink
September 9, 2008
Is Today's Market Price A "Good" Price, But If Not, What Is A Good Price?
Grain price volatility has become part of the agricultural landscape. For the past two years the demand for corn, soybeans, and wheat acres has raised the ante, and agricultural gamblers from LaSalle St. to Rural Route 2 have been in a high stakes game. With wide, quick swings in market prices, it is difficult anymore to define the term “good price” and then capture it with any confidence. Let’s put this into some perspective.
Grain prices have climbed upward in long, slow, stairsteps, but when it comes time for one of those upward moves, it reminds you of your first month with a driver’s license and taking a hill a bit faster than your parents would. One period extended from the post-war years to 1972, then there was a “whee” in 1973. After settling down for another boring 30 years, the latest “whee” began in November of 2006. At least that is how a grain producer would see the picture. University of Illinois economists Darrel Good and Scott Irwin identify the first period as the lifting of price controls as the market rebuilt after World War II. The next period was driven by exchange rate policies, Soviet purchases, higher energy prices and higher inflation, say Good and Irwin.
Their research on The New Era of Corn, Soybean, and Wheat Prices depicts the higher nominal prices in each step, and the price volatility at the outset. They say, “As a starting point, if average monthly prices in the new era that appears to have begun in late 2006 increase by a similar amount over the post-1972 period, averages would project to about $4.60 for corn, $5.80 for wheat, and $14.40 for soybeans.” Based on long term price relationships, they say the wheat to corn ratio of 1.26 is reasonable, but the soybean to corn ratio is too high at 3.13 and a 2.5 relationship would indicate an average soybean price projection of $11.50.
Comparing the long term average lows and highs during the volatile years to the average prices of the period, provides a range of prices that producers may expect for the new era we are in. Good and Irwin contend, “Using the percentage price ranges only during the first 5 years of the most recent period results in projected monthly price ranges for the current period of $3.00 to $6.70 for corn, $8.20 to $19.00 for soybeans, and $3.30 to $10.15 for wheat.” Using the average monthly price over the past 18 months for each of the commodities, Good and Irwin say, “To date, then, the average monthly price of corn and soybeans has been lower than projected for the new era, but with prices since early 2008 above the projected average. The average price of wheat has been slightly higher than the projected average for the period.”
After identifying the relationship with long term averages, Good and Irwin compared the prices with the current market fundamentals and found:
1. Corn prices will continue to be closely tied to energy prices in the immediate future and that the price of the other two crops will have to be competitive with the price of corn.
2. To a large extent, the value of corn is a function of the price of ethanol, which is a function of the structure of subsidies and the price of gasoline. (Hence, corn is related to the price of crude oil.)
The bottom line identified by Good and Irwin is that peak prices for corn, beans, and wheat since December of 2006 have been well above average prices projected for the new era. While that does not preclude higher prices, it does provide a perspective on where prices might stabilize.
Summary:
In comparison to outset of higher grain prices that followed World War II, and yet a higher level beginning in 1973, the more recent rise in grain prices have been marked with a period of volatility. Since that trend seems to be common, sellers of grain need to gain a perspective of the range that grain prices may seem to trade, to determine what a good price may be. Based on percentage of high and low prices from earlier years, present day prices are in the range, but are in the upper regions of the expected price range during the current period of volatility.
Posted by Stu Ellis at 12:18 AM | Comments (1) | Permalink
August 26, 2008
Will The Wheat Market Be As Strong Next Year As It Has Been In The Past Year?
The Midwestern and Great Plains wheat producers have a bit more competition this year, compared to the past two years when the US wheat market was about the only game in town. World production is up, global trade is up, supplies are plentiful and that means demand may be a bit softer for US wheat.
USDA reports world wheat production prospects have grown to 671 million tons, with the greatest supply of low quality feed wheat in 18 years. The past two years have seen weather problems diminish production and supplies were described as being at the lowest point in the past 30 years. In its latest Wheat Outlook, USDA now says global carryover is rebuilding and stocks are up 18% over last year.
Part of the increased global supply is attributed to US domestic production, which is the highest since 1998 with production at 2.462 million bushels. Hard red winter wheat is up 94 million bushels over 2007, soft red winter wheat production is up 251 million bushels over 2007, with white and hard red spring wheat also up over last year. US ending stocks will be higher with lower domestic use and a 264 million bushel decline in export projections. That led USDA to project a season average price of $6.50 to $8.00.
So what is happening globally that is reducing export projections? USDA says wheat production has expanded in Russia, India, the EU-27, Ukraine, Canada, and Brazil. Russian production increased from more acres, better yields, and better weather. India recalculated its production and found more that it thought it had. European-Union 27 recorded better yields and more acres. Ukraine’s production reached 18 year highs.
World wheat production will reach nearly 650 million tons which means livestock that had a ration made up of corn and sorghum for the past two years will be back on feed wheat. The higher wheat production will be a factor that softens the corn market for the 2008-2009 marketing year.
With higher production, carryout will also increase, and the more abundant supplies will allow world wheat trade to also expand. Exports will grow for many nations, except the US, which enjoyed record exports the past year. USDA says the pace of US exports was strong in July with strong outstanding sales yet to be delivered. However, as the marketing year progresses, USDA economists say large foreign production and lower world prices are expected to limit US exports.
USDA economists project US harvested acreage in 2009 at 56.6 million, up about 5.6 million from the 2008 crop. The trend yield is at 43.5 bushels per acre, putting production at 2.462 billion bushels. US domestic use is estimated at just under 1.3 billion, and with exports falling to 1 billion bushels, total disappearance will be 2.294 billion bushels. US ending stocks are estimated at 574 million, well above the 305 million from last year. That puts the stocks to use ratio at 25%, up from the 13% in 2008.
Summary:
Changes in world wheat production not only mean less demand for US wheat, but with increased supplies of feed wheat available around the world, it will mean less export demand for US corn. Global supplies are building as the result of better weather, compared to two years of drought conditions in the Southern Hemisphere and other major wheat producing nations. The situation the past two years brought the world to the US wheat market, but now US wheat exports are expected to fall more than a quarter billion bushels. Without much change in US domestic consumption from prior years, more wheat will be carried over and that means a weaker national average price.
Posted by Stu Ellis at 12:30 AM | Comments (1) | Permalink
August 21, 2008
Take A Look At Cornbelt Crops From The 30,000 Foot Level; And What Do You See?
At that point in the summer when corn should be dented and beans should be podded, the Cornbelt is far from that benchmark. With Farm Progress next week and Labor Day the following week, somehow the harvest season is coming quicker than it should. With a quick fly around the Cornbelt, we’ll check on crop progress and particularly moisture, which is becoming more scarce than crops can stand.
USDA’s weekly state by state report for the current week provides the basic information.
ILLINOIS reports nearly 7 days suitable for fieldwork indicating lack of rain, and that is reflected in the soil moisture report which shows 25% either short or very short. 66% of the corn has reach the dough stage, 20 points behind average for this point. Only 70% of the beans are setting pods, compared to the 89% average. 72% of the corn is good to excellent, as are 66% of the soybeans. Crop maturity has slowed from cool temperatures and precipitation is also below normal.
INDIANA also reported nearly 7 days for fieldwork because only spotty rains fell, leaving soil short of moisture by 37% and crops starting to show moisture stress in Central and Northeastern counties. Less than half of the corn is in the dough stage, and a small percent still unpollinated. Usually, 28% is dented by now. 69% of the corn is rated fair to good, and 73% of the soybeans are rated fair to good. Some have still not bloomed, but 61% are setting pods and that is more than 20 points behind the average. Temperatures were 4 to 9 degrees below normal with insignificant rainfall.
IOWA has had a bit more moisture with 72% of the soil in the adequate range and some surplus, with nearly 90% of the subsoil moisture rated adequate to surplus. 70% of the corn is still in the milk stage with 5% still unpollinated. 72% of the corn is rated fair to good, parallel to the 75% of the soybeans rated fair to good. 80% have set pods, but some have still not begun to bloom. The weather has been dry and mild.
KANSAS is wetter than Iowa, with soil moisture rated 75% adequate and 10% surplus; and 75% of the subsoil has adequate to surplus moisture. The only corn report is that 3% of it is mature.
MICHIGAN has drier soil with 29% very short of moisture and 33% in the short category, and more than half of the subsoil is finishing the summer with insufficient moisture. “Soybeans bloomed and most set pods,” but have not yet begun to turn color, but this is about the time that change occurs. Corn is reported to be mainly in the dough stage with crop conditions dependent upon available moisture. The NASS crop reporters say, “Crops need soaking rain. Some areas received light rain but not a meaningful quantity. Farmers many areas anxious for rain to boost crop growth and relieve dry soils across State.”
MINNESOTA soils are reported 58% adequate in moisture, but 28% are short of moisture. 74% of the corn is in the milk stage, well behind the 89% average, and only 22% of the sweet corn is mature enough to harvest. The wide variety of other Minnesota crops also reflect the lateness of crop maturity, including spring wheat, barley, and canola. About half of the various crops are rated good, with the balance evenly split between fair and excellent. Temperatures have been cool, but about normal for this time of year.
MISSOURI crops are becoming stressed from cool night temperatures and lack of moisture. The past week saw thermometers 4 to 7 degrees below normal. While 68% of the state has adequate soil moisture, 24% is in the short category, and that is reflected in pasture conditions.
NEBRASKA soils are split about 2/3 having adequate moisture and 1/3 on the short side. The dryland corn crop is 56% good and the balance split between fair and excellent, but 5% is in the poor to very poor category. 67% is in the dough stage, about 20 points behind normal. In the soybean crop 77% are setting pods, compared to 91% for the multi year average. 60% of the beans are in good condition, with more in the fair category than rated excellent. Crop stress had been noted in the prior week, but rains in the past week and below normal temperatures helped moderate the stress, however crops remain behind the average in their development.
NORTH DAKOTA has also been dry, with 42% of the soil rated short or very short of moisture, and a majority of the subsoil also has less than adequate amounts of moisture. Small grain conditions also reflect the late and cool growing season, with many behind in their typical stage of development. For example, only 35% of the soybeans have pods, compared to 55% at this time in prior years. Heavy rainfall has recently been recorded, but it gave way to hot and dry conditions.
OHIO cornfields are well behind typical development with only 52% in the dough stage compared to the 69% average. 85% of the soybeans are setting pods, compared to practically all of them by this date on prior calendars. 16% of the corn is poor to very poor, equal to the 16% in the excellent category; with 68% fair to good. Likewise, the soybean crop is also all over the board with 32% fair, 39% good, and only 11% rated excellent. Both corn and soybeans are showing signs of drought stress.
SOUTH DAKOTA has had adequate moisture and 77% of the soil is rated adequate and crops are ripening about on average. Barley, oats, and spring wheat are only a couple percentage points each behind schedule. 99% of the corn is tasseled, which is average. NASS crop reporters noted the cool weather, but said it did not delay crop progress in the past week.
WISCONSIN is short of moisture with the topsoil rated 9% very short and 32% short. That is reflected with crop ratings, particularly on the lighter soils where crops are more stressed. Temperatures were also slightly below normal in the past week and only spotty rains did not help crop conditions that much. 95% of the corn is in pollination and 75% of the beans have started to set pods.
Summary:
The overall theme is well known. Crop maturity is well behind averages by 15 to 20% for corn and soybean crops, and the general lack of rain in the Central, Eastern, and Northern Cornbelt states has begun to stress both corn and soybean crops in many areas. With the lack of rain and heat units, many farmers have reason to grow increasingly concerned that the slow maturing crop may not make it to the finish line before Mother Nature declares that time has expired.
Posted by Stu Ellis at 12:52 AM | Comments (0) | Permalink
August 13, 2008
Despite June Floods, The Crop Keeps Getting Bigger.
USDA’s first field-based estimate of the new corn and bean crop spurred farmer curiosities of where that much grain was found. Nevertheless, 12.288 billion bushels of corn and 2.973 bushels of soybeans are the latest figures for the market to trade. While December corn opened lower, it closed higher than 3 of the past 4 trading sessions. Beans opened higher and stayed above the four month lows set last week. We’ll explore the report in detail.
USDA statisticians re-interviewed about 9,000 farmers to compare their acreage with the June 30 Planted acreage report, and revised corn acres down by 350,000, and placed planted acreage at 86.977 million. Harvested acres will be 79.29 million, 350,000 more than forecast in June. Acreage estimates were reduced in IL, IN, MO & WI, but USDA found 10 Cornbelt states with record high stalk counts. USDA acknowledges the late planting and delayed maturity, however crop estimates are made based on normal weather for the balance of the growing season. Currently, the national average corn yield was pegged at 155 bushels per acre, putting production just under 12.3 billion bushels.
Corn use for feed was raised 100 million bushels to 5.3 billion bushels for the coming marketing year, ethanol use of corn was raised to 4.1 billion bushels, up 150 million bushels from the July estimate, and exports were kept at an even 2 billion bushels. Ending stocks were raised from 833 million to 1.133 billion bushels. The average farm price estimate was lowered by 60¢ per bushel to range of $4.90 to $5.90.
Planted acreage for soybeans was placed at 74.8 million with harvest expectations at 73.341 million, up 1.2 million from the June report. USDA also indicated the late planting caused maturity delays for both blooming and pod setting. The national average soybean yield was estimated at 40.5 bushels per acre with production calculated at 2.973 billion bushels.
Soybean use in the domestic crush was forecast by USDA at 1.815 billion bushels, down 15 million. Exports were kept at 1 billion bushels, and ending stocks were estimated at 135 million. The season average price was dropped by 50¢ per bushel from July to a range of $11.50 to $13 per bushel.
University of Illinois marketing specialist Darrel Good says the market was expecting the numbers reported Tuesday by USDA, and that is why significant market moves did not develop. In his weekly newsletter, Good says the market will be watching for adjustments to the August estimates when the September crop report is released. However, he said the report indicated that crop ratings remained steady after several weeks of improvement, and with crop maturity lagging behind the average, frost would potentially damage it, and that will curtail production.
At Iowa State marketing specialist Chad Hart's analysis expects downward pressure on crop prices, particularly if crude oil prices continue to fall and the value of the dollar continues to rise. Crude oil keeps ethanol profits and corn prices buoyant, and the higher dollar dampens export interest.
At the University of Missouri marketing specialist Melvin Brees in his newsletter reminds farmers that an increasing supply of grain points to lower prices, and that is the reason for USDA taking 60¢ out of the corn price and 50¢ out of the soybean price.
Summary:
Improving crop prospects were reflected in the latest USDA crop report, which was bearish for corn and neutral to bullish for soybeans. Double-checking acreage estimates from the June flood and all of the crops lost to ponding, USDA still found near record production and that caused it to lower estimated prices for the new crop.
How are your yield prospects? From your vantage point, do you agree with USDA? Will the crop size continue to grow and prices decline?
Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink
August 6, 2008
Is It Just Me, Or What's The Deal With The Basis Always Being So Wide?
Most farmers have noticed that since grain futures prices have risen over the past couple years, that cash prices have not kept pace. In this chicken-egg type of question, are futures prices too high or are cash prices too low? They are separated by the basis and for some reason the basis has grown over the past two years without apparent reason. Anyone care to offer an answer?
Whether your first introduction to the grain market was in FFA or a college marketing class, the take home message was that futures and cash prices converge at the point and time of delivery. But a group of University of Illinois agricultural economists say that is not happening as it should and they have proposed some ideas to resolve the dilemma. Economists Scott Irwin, Phillip Garcia, Darrel Good, and Eugene Kunda analyze the convergence problem in the current issue of Choices electronic magazine. They say in a perfect market with a futures price above the cash commodity, the grain would be purchased, the futures sold and delivery made. When the cash commodity is higher than the futures price, the user would buy the futures and take delivery. In theory the transactions have no cost, but the economists say in reality there is a 6 to 8¢ cost.
The Illinois economists say in corn, bean, and wheat contracts over the past 7 years, when the futures contracts enters the delivery stage, the basis has been steadily growing. Yes, Hurricane Katrina created havoc with the delivery system, but they have eliminated that statistic from their analysis, and say the July 2006 wheat contract was the initial problem, and the worst was in September of 2006 when there was a 90¢ gap between futures and cash with wheat at the Toledo delivery point. Poor convergence performance began with soybeans in March of 2007, and was particularly weak for corn in September 2007 and March of 2008. As the basis has continued to widen at delivery time, the average deterioration has been 14¢ for corn, 25¢ for beans, and 50¢ for wheat.
What does a wide basis at anytime mean to you? It tells grain marketers to store their grain, that the cash price should rise toward the level of the futures price and the overall price will improve. The economists say market basics indicate the point of delivery will not change, and the cash price should improve overtime, but that just has not happened with the predictability that farmers and other cash grain merchandisers have depended upon. Prior to 2006 they say corn hedging effectiveness was a respectable 87%, but that has dropped to 28%. For soybeans hedging effectiveness has dropped to 26%, and they add that hedging effectiveness for wheat was poor even before their analysis began.
The bottom line is that the markets have depended upon hedging for their existence, but the long run viability of the market may be threatened if farmers and other cash grain traders do not have a reliable hedging mechanism. At the same time of the growing market inefficiency, there has been a growing volatility of the market which depends on market liquidity. Without the ease of buying and selling the economists say hedgers will look to other risk management products to manage their price risk.
So what is the answer? The economists say a variety of suggestions have been made, but so far they may be pre-mature in implementation, because there has been no definitive reason for the lack of convergence between cash and futures prices. They say the problems are less serious in some months than in others, and it is difficult to point to a particular problem that can be solved. Without an identifiable problem, they urge the market to continue to study the issue and not take action that might either be useless or create unintended consequences.
Summary:
For the past two years, the futures prices and cash prices for corn, beans, and wheat have frequently been growing wider when the contracts expire and the prices should grow closer to the point of converging. Studies have shown that the difference between the two, which is the basis, has been widening without real identifiable reasons, and that has become a threat to the reliability of the market. Without a reliable market, hedging efficiency deteriorates and that will force buyers and sellers of grain to use other risk management tools. Since a specific reason for the lack of market convergence has not been identified, it may be too early to implement possible solutions.
Posted by Stu Ellis at 12:49 AM | Comments (2) | Permalink
July 30, 2008
Has The Grain Market Caught A Bad Case Of Volatility?
You would think that anyone who spent a half million dollars to buy a seat on the Chicago Board of Trade would assume that a seat belt was included. Anyone who has marketed grain in the past year probably wishes they had one, also. Seat belts are mandatory in motor vehicles, and may soon be necessary in grain marketing. There is nothing worse than to hurtle through buy-stop signs on a plummeting futures contract. With that in mind, let’s look at volatility in the commodities markets.
If you think that grain markets have hit the accelerator pedal, you may be correct. They have risen farther and faster than in many years, and within a short period of time. In just the past two years most grain commodity prices have at least doubled, and in the case of corn and beans, tripled in values. But with the higher prices, come other challenges. It is like mountain climbing and the higher the mountain, the farther the fall.
Ohio State University economists Carl Zulauf and Matt Roberts explored grain market volatility for corn, wheat and soybeans. The looked at various period from 1989 to 2007, and used two different statistical yardsticks to measure the volatility.
1) One yardstick was the coefficient of variation of monthly US cash prices, and measured historical cash price variability.
2) The second yardstick is the average of daily implied volatilities for the new crop futures contract over the course of a year. Zulauf and Roberts say this is a measure of the market’s expectation of price variability during the year.
Their findings and calculations indicate a rather slow upward trend from 1989 to 2003 for all three commodities, regardless of the yardstick. However, substantial changes occurred the past several years. Corn market volatility jumped from about 25% to nearly 35%. Soybean market volatility jumped from about 20% to nearly 35%. Wheat market volatility jumped to more than 40% from its prior points in the 20% range.
Zulauf and Roberts also computed the change in volatility between the periods of 1989 to 1991 and 2003 to 2006. While the historical corn variability was only 1%, its implied volatility—what the futures market expects—was 41%. Both beans and wheat recorded historical variability in the low 30% range and implied volatility above 40%.
Then the economists looked at the change from the three year period of 2003 to 2006 with 2007. They say while the increase in price variability in 2007 is larger, the increase prior to 2007 is also substantial. Their findings indicated:
1) Price variability has increased during the 2007 crop year, but,
2) This increase is part of a longer term trend of higher price variability.
The average crop year price volatility increased 32% in the period beginning in 1989 and ending in 2003. However it increased 50% between the 3 year period beginning in 2003 with 2007.
Zulauf and Roberts say the volatility increase suggests long term structural changes are responsible for the change, such as declining world stocks and increasing world demand. And if so, that means volatility could be higher in the future. The impact would be greater costs for managing risk, such as more costly crop insurance premiums, higher option premiums, and greater margins for hedging commodities. And if a farmer has to pay those costs, prices must increase, and that puts more pressure on processors and higher food prices.
Summary:
Grain market volatility has increased over the past 20 years, no matter how you measure it. Such volatility also seems to be increasing at a greater rate, and that means the structure of agriculture will be impacted, specifically, the management of risk and the cost of commodity trading. Farmers bearing those burdens will eventually see processors and the consumer sharing in that additional cost.
Posted by Stu Ellis at 12:43 AM | Comments (1) | Permalink
July 29, 2008
Catching Up With The Wheat Market, As Harvest Plays Catch Up
US wheat stocks had practically been “the only game in town,” for the past year, forcing the world wheat consumer to shop at the US grocery store. Global stocks remain tight, but supplies are loosening up a bit with the northern hemisphere harvest well underway and wheat returning to the international pipeline. As we begin a new wheat marketing year, we’ll assess what is known.
Higher wheat prices were the driving force for the US producer last fall and spring and USDA reports an additional 3 million acres were produced, with harvested acreage at 56.6 million, and that is the largest since 1998. USDA’s Wheat Outlook says less wheat was abandoned this year than last because 2007 spring freezes destroyed more acreage than did flooding this year. But delayed maturity is putting harvest progress well behind 2007 rates.
For winter wheat, acreage was about 1 million below last year, but the harvested ratio will climb because of high prices for the new crop. In addition to flooding and slow maturity, rainfall increased the incidence of disease. Spring wheat acreage is also 1.4 million more than last year, but the crop maturity is significantly behind 2007 and the five year average.
Total production is estimated at 2.461 billion bushels, up 394 million from last year with a national average yield at 43.5 bushels per acre and that would be the most since 2003. USDA’s grain stocks estimate at the end of June put ending stocks at 306 million, up 52 million from last year. The average farmgate price was calculated at $6.48 per bushel which is a record high, nearly $2 above the 1995-96 season price of $4.55.
But that was last year and this is this year, and ending stocks for the 2008-2009 crop will be up, with consumption about even with the old crop. Projected use for the new crop will be 2.329 billion bushels, which reflects 271 million bushels more domestic use and 267 million bushels lower export demand. The export demand is weak because of high US prices and larger world production. US wheat, because of its feed value relative to corn, is expected to remain at a high market price supported by corn. Subsequently, USDA is expecting the 2008-2009 wheat crop to average $6.75 to $8.25 for the marketing year, all because producers made an abundance of early forward contract sales.
Global production will rise slightly, and about the same amount of increased US production, since production in other nations is flat. In the EU, acreage is up, but yields are down. In Australia, acreage is up, and some sheep pasture has also been planted to wheat. World wheat consumption is projected higher and should reach 647 million tons, compared to 664 million tons of production. Consumption will be up in part because high corn prices are forcing livestock producers to feed wheat instead of corn. The global wheat surplus, with ending stocks is 133 million tons.
Global wheat trade is estimated at more than 120 million bushels, boosted in part by less control in the European Union, where wheat exports had been curtailed last year to preserve stocks for domestic use.
Summary:
US wheat growers will not enjoy quite the “sellers market” which they had for old crop wheat, however, many of them took advantage of the higher prices of the past year and forward contracted a large portion of the 2008 crop as noted by the high USDA estimates for average market prices. Nevertheless, global wheat demand will remain high, as stocks remain at historic lows. US domestic consumption is expected to rise about as much as the export volume is expected to fall, leaving rather static stocks levels. US production this year suffered slightly from abandoned acreage from floods, but not as much compared to the 2007 Easter freeze that reduced harvested acreage last year.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
July 24, 2008
Get Prepared, In Case Forward Contracts Are Again Unavailable.
Most farmers were cheering on the bull market this spring until elevators quit accepting forward contracts because they could no long afford the multi-million dollar daily margin calls. Sobriety set in. What does a farmer do when the market climbs, he tries to price part of his crop, and the elevator manager says “Do it yourself at the Board of Trade and pay your own margin calls.”
That happened to thousands of farmers across the Cornbelt last spring, who were concerned they did not have their favorite marketing tool, and were unsure about the others. Faced with the loss of the forward contract, more farmers probably just held onto their grain longer than switched to futures and options. What were the alternatives? Nebraska economists Darrell Mark and Rebecca Small and Oklahoma State economists Wade Brorsen and Kim Anderson outline their suggestions in the latest issue of Choices Magazine.
The economists say the diminished farm program payments and the availability of crop insurance to pay non-performance penalties in the wake of crop failures has increased the use of forward contracts. The big benefit is the avoidance of margin calls, typically paid by the elevator, but which became financially burdensome as prices rose earlier this year. Some elevators quit offering them; some reduced the basis to help pay for the margin costs; and some put short time limits on the delivery options.
When the Chicago Board of Trade increased daily price limits from the initial 20¢ on corn to 70¢, margin requirements also increased to amounts about equal to the daily price limits. Elevators quickly emptied their margin accounts, and then sought loans to cover more margin calls in lieu of closing out their accounts.
In addition to the margin risk, elevators also faced increased basis risk, which has been the lack of convergence between cash and futures for the past couple years in several commodities. That has resulted because of the growing number of ethanol plants that are drawing in as much corn as do river terminals, as well as the increased cost of transportation. The inconsistent convergence has resulted in action being taken by exchanges at Kansas City and Chicago to correct the problems. Parallel with that action, some elevators are controlling basis by selling to non-traditional buyers such as feedlots, or passing on their margin costs to producers obtaining forward contracts by widening the basis.
So what does a farmer do if faced with a forward contract that no longer exists, or does not approach the value the farmer has in the grain?
1) Hedging on the grain exchanges can lead to higher net prices than at local elevators since the merchandising margin is eliminated. The basis risk remains, but that may be controllable depending on location of the grain. The farmer still has the problem of margin calls and the economists calculate a producer who hedges half of his corn and soybean production from 2,000 acres may have a $42,000 margin liability.
2) A basis contract is another option, which leaves open the futures portion, but allows a farmer to lock in a basis when it is narrow and to his advantage. Payment on a majority of the production may be available upon delivery, but the producer still has to manage the futures portion and lock it in at an advantageous time, and that can be done with a commodities broker on a paper transaction.
3) Options on futures positions are another alternative, but they too, are a paper transaction and the basis risk remains. Using it to replace the unavailable forward contract would be the purchase of a put option on December futures in the spring. Gains in its value, should the market value diminish, leave the farmer with the right to exercise the option and force the buyer to complete the purchase, which would be similar to an insurance contract.
4) While option premiums are expensive, there are numerous ways to reduce the costs by selling options, and obtaining someone else’s premium. Those require risk that a user should be familiar with before entering into a option strategy.
5) A rarely used alternative is contracting with a user of the grain, such as an ethanol plant, or a feedlot, or a grain processor that pays premiums prices for specific grades and types of grain. Wanting to manage their financial expose, they may be quite willing to forward contract just to get the grain. The downside is the potential complexity.
6) Another alternative is the use of crop revenue insurance that covers both yield risk and price risk. Crop insurance does not protect against basis risk, and price level changes are capped. One aspect is the new ACRE program in the Farm Bill that will become effective in 2009, and indemnify producers with revenue shortfalls.
Summary:
Farmers lost an old friend earlier this year when forward contracts were denied by many elevators unable to meet margin requirements. That forced many farmers to abandon their marketing plans and either hold grain without selling or using a variety of other marketing tools including hedging on their own. If a similar scenario recurs, farmers will have opportunities to use either basis contracts with a futures hedge, option strategies, or look for alternative purchasers of their grain.
Posted by Stu Ellis at 12:51 AM | Comments (0) | Permalink
July 23, 2008
Corn And Soybean Markets: Is There Demand, Where Is Support?
Yesterday was “turnaround Tuesday,” but for the corn market it was a terrible Tuesday as selling continued. Yesterday we tapped into the thought processes of Darrel Good at Illinois and Melvin Brees at Missouri to gain their insight into the grain market as it weakens. Today we’ll find two more marketing specialists to see if they have different perspectives.
Looking at the influence of outside markets is Alan May at South Dakota State University, who says the falling price of crude oil has been a particularly strong factor on corn. But he also says the demand for commodities has slowed due to inflationary signals that have caused investors to liquidate their positions. May underscores the fact the market has been a demand market, rather than a supply market, and while that is still the case, demand projections call for fewer bushels of corn. While ethanol wants more, exports and livestock want less and the net difference is 215 million fewer bushels wanted by the market.
Even though ethanol wants more corn, Chris Hurt at Purdue, says, “We will likely look back at $7.00 corn and say that was just “too high.” He says ethanol plants slowed down at that point and exporters stopped doing business, and when that happened the carryover began to grow and prices began to fade. Hurt says about that time the corn crop ratings began to improve and he expects the August Crop Report to show corn averaging over 150 bushels per acre, which would push harvest prices into the $5 to $5.50 range.
May’s warning is that no one should be surprised at the downturn in the market, but the skid will not last, and in the meantime your marketing plan should be adjusted. He says the new crop production will play a major role in how the demand market views the sufficiency of supplies. Hurt agrees, but adds that corn values are linked to the energy output of ethanol and ethanol is linked to the value of crude oil, which means corn will have that level of support, except during the harvest glut. Hurt says corn prices have averaged 4.5% to 5% of the value of crude oil and 4.5% of $120 oil ($127 Tuesday) is $5.40 for corn. And Hurt adds, “New crop basis will likely be better than current bids, so this continues to favor producers selling futures through their commodity advisor rather than forward contracting at the elevator.”
In the soybean market, Alan May says there is less logic for the price decline compared to corn because soybean supplies are tight for the old crop and new crop as well. But he says demand has softened because of high prices and competing supplies from South America may be available. He also says the weaker crude oil prices have helped push down commodity values across the board.
Purdue’s Chris Hurt says the tight inventory will support the bean market, but the reductions in livestock production will slow the crush.
May says the downward skid in soybeans will not last, but should not have come as any surprise, and marketing plans should accommodate the changes until total production is determined and if the market decides if it can meet the demand. That is a major consideration to Hurt because of the uncertainty of acreage, the large double crop acreage, the large amount of replanted beans, and whether they will really mature. He says yields tend to be determined by weather in August and early September.
Hurt’s yield forecast puts production at 3 billion bushels, which does not build stocks, and he points out that current harvest delivery bids are well above USDA price range forecasts. That means the market wants bean commitments now, instead of later, and the harvest basis is about $1. He warns not to hold beans long because of the price drop going into harvest and a good sales opportunity for the old crop.
Summary:
Soybean prices have faded somewhat because of weakened commodity values and price rationing has softened the demand. But supplies are tight for both the old and new crops, and while new crop prices are above USDA estimates, the harvest basis is not pretty. Demand is expected to stay strong, but the supply remains uncertain because of the flooded acreage impact and late planting that could impact maturity. The market is seeking beans, but there is a strong price break as the new crop will be delivered. Soybean values are expected to remain relatively high throughout the year because stocks will not be built.
Posted by Stu Ellis at 12:46 AM | Comments (1) | Permalink
July 22, 2008
Up, Down, Up, Down, Down, Down, Will The Market Turn Around?
The wisdom of Sir Isaac Newton has manifested itself in the grain markets over the past several days. You know, “what goes up must come down;” and falling grain markets make one wonder whether the market is correcting itself or whether a significant top has been put into the market and those days are past. We’ll get the thoughts of some authorities.
Darrel Good at the University of Illinois reports in his weekly newsletter, “December 2008 corn futures increased about $2.00 per bushel during the month of June, topping out just under $8.00. During the same period, November 2008 soybean futures rallied more than $3.00, topping out just under $16.37.” But since those heady days, December corn has dropped $1.80 from its high in late June and November beans have declined about $2.30 since the early July top. While Good says corn prices have dropped more than 20%, beans are down about 15%.
Melvin Brees at the University of Missouri is not worried, and in his monthly newsletter
he says the declines are just the typical seasonal movement of the markets. Both Brees and Good point to bullish and bearish news in the market.
In the corn market, the high prices have curtailed feed, export, and ethanol demand to some degree, and the resultant rationing has allowed ending stocks to rise, which is a negative factor that has softened prices. However, the weaker corn price has allowed a wider margin for ethanol profitability and Darrel Good says, “Corn consumption for ethanol should continue to increase as forecast as corn prices follow crude oil prices.”
In addition to the demand scenario, the actual supply will be important in the analysis of Brees. He says there is still no real confirmation of a 78.9 million harvest acreage figure, nor the 11.715 billion bushel production; and all of the flooding could still cause acreage and average yield to fall from those levels.
In the soybean market, Brees says new crop production will be consumed by new crop demand and the tight carryover will remain tight. Good calls that resiliency in price, helped out by the uncertainty of the US crop size, and the on again-off again export conflict in Argentina. He says while crop ratings are generally good, the lateness of the crop has to make the market wonder. Good says the Climate Prediction Center is giving a favorable outlook for August weather.
Additionally, cash prices for both corn and beans are weaker because of the high energy prices that have affected the entire economy, says Brees. He also says ethanol’s negative publicity is generating calls for policies to be changed that would be negative to the grain demand and corn prices. He is also concerned about the criticism being leveled at speculators in the market because if they leave and liquidate their holdings, corn and beans would be sold at bargain basement prices.
So what is next? Brees says there is always significant downside risk and lower prices for corn and beans are quite possible. In Good’s insight, “The same factors that have been contributing to the extreme price moves of the past four months will continue to be important for corn and soybean prices for the next two months.” Both agree that supplies will be tight for the old crop, as well as the new crop, even with good growing conditions for the rest of the season. Brees says new crop corn futures are at the top of the USDA’s projected price range, and soybean futures are well above that benchmark.
Brees says with the downside risk it is important to watch for opportunities to make pre-harvest sales or obtain price protection for stored crops. Good says there is more than the typical amount of uncertainty about acreage, and even if prices continue to weaken, they could settle in a sideways pattern until production prospects unfold. He expects large daily price moves.
Summary:
Corn and soybean prices have dropped 15-20% since their highs in the last several weeks, as the market price rations the crop. That weakness has resulted from increased prospects for carryout, particularly in corn, but the weakness should also strengthen ethanol margins. Acreage is still an uncertainty for both corn and beans, and while large daily market moves should be expected, prices should shift from a downward slide into a sideways pattern until more information is known about production prospects. There is substantial downside risk to the market and good price risk managers will either make some pre-harvest sales or protect crops going into storage.
Posted by Stu Ellis at 12:27 AM | Comments (0) | Permalink
July 21, 2008
As Corn Profits Rise, So Do Ethanol Profits, Or Do They?
The July 12th USDA Supply-Demand Report revised the 2008 estimate of corn used for ethanol production downward by 50 million bushels. And University of Illinois Marketing Specialist Darrel Good reported that the market was beginning to cast doubt on whether this year’s projection of 3.95 billion bushels of corn really would be refined into ethanol next year, since high corn prices have trimmed ethanol profit margins. Does that mean the bloom is off ethanol?
Critics of high food and fuel prices have found it convenient to blame ethanol for US economic woes despite the truth. Kansas State ag economists Daniel O’Brien and Mike Woolverton and Iowa State biofuels economist Bob Wisner acknowledge that ethanol has added substantially to the demand for corn, but it will be a number of years before ethanol consumes more corn than livestock. In their recent analysis of ethanol profitability the researchers say ethanol production capacity will consume an extra one billion bushels of corn in the next marketing year, increasing to 4 billion bushels in the 2008-2009 marketing year.
O’Brien, Woolverton, and Wisner report the changing relationship between cash corn prices and the value of ethanol and its co-products is the key to ethanol profitability. They report that in early 2007, Nebraska corn prices (in the midst of ethanol plants and cattle feedlots) ranged from $3.41 to $4.16 then declined to nearly $3 at harvest. In the same period, the value of ethanol and its wet and dry distillers grain co-products on a per bushel of corn basis were at highs above $7.50 in March and down to $5 at harvest. Then corn prices climbed 136%, while ethanol product values increased 85%. The economists say the diverging percentages signal the declining profitability of ethanol.
The volatility of both corn and ethanol makes ethanol profitability unpredictable. Looking back, ethanol producers enjoyed windfall profits when ethanol quickly replaced MTBE in gasoline in early 2006. Profits and plant construction boomed and early 2007 brought margins of 40¢ to 50¢ per gallon, but by September, when ethanol prices had declined by 75¢ per gallon, profitability turned negative with market prices for ethanol below the cost of production. From December 2007 to May 2008, both ethanol prices and production costs went up, and during that time, profits averaged 13¢ per gallon.
When profitability was erased late last year, almost no new plants were begun because of low market values and increasing costs of corn. However, the rising price of crude oil, which determines the price of gasoline and ethanol, kept pushing ethanol prices higher. At the same time corn prices rose by a greater percentage and some less efficient ethanol plants either halted production or construction. In addition to corn prices, two other factors apply pressure to ethanol plants, and those are the distance that corn has to be hauled and the ability to market distillers’ grains within a reasonable distance.
The economists say the bottom line of profitability depends on corn and crude oil prices. For the first five months of the year, ethanol production was 41% higher than in 2007, and that would not have been the case if there was no profitability. They add that if corn supplies tighten and prices rise in the near future, the Renewable Fuels Standard will provide the incentive to produce ethanol and pay the corn price necessary to reach prescribed levels. However, ethanol output could fall if the mandates are changed, or if the marketing and distribution structure for ethanol fails, or if there is a sharp drop in crude oil and gasoline prices which provide buoyancy to the price of ethanol. Overall, the economists say ethanol profitability will remain volatile.
Summary:
Ethanol remains a major consumer of corn, and while it is supporting corn at current prices, it is those prices that jeopardize the profitability of ethanol plants. Ethanol profitability is a function of corn prices, the value added by its livestock feed co-products, as well as the price of gasoline which gives buoyancy to ethanol prices. When production costs rise faster than the value of ethanol and the distillers’ grains, then profitability of plants diminish and production is curtailed. Volatility is the future of ethanol profitability.
Posted by Stu Ellis at 12:37 AM | Comments (0) | Permalink
July 15, 2008
Marketing Decisions Can Be Based On Weather Data, If You Watch Those Weekly Crop Condition Reports
High demand of grain for feed, export, and biofuel use dance with the uncertain size of 2008 crops because of late planting, flooding, and other natural phenomena that will create question marks about crop size well into harvest. But would those weekly planting progress reports issued by USDA help with estimates of production, if compared to weather models?
University of Illinois agricultural economists Darrel Good and Scott Irwin, along with weather specialist Mike Tannura have evaluated the new crop yield potential for Illinois, Iowa, and Indiana using previously developed weather models. Their research adjusts the trend yield with the weather variables to project a state average yield.
Planting dates are important, and over the past 40 years it has been moved up by 2 weeks with a resulting positive yield response. While there is little difference in when crops are planted before a certain date, the yield falls significantly if planting occurs after that date. In a recent study of planting dates and weather variables, earlier planting was found to be the dominant reason for higher yields in the northern and western Cornbelt. The researchers looked through the weekly USDA statistics back through 1979 and analyzed the dates planting progress reached 50% complete vis-à-vis May 1. Despite variations, they confirmed the trend toward earlier planting, which was 20 days earlier for corn and 10 days earlier for beans than in 1960. The researchers also looked at the lateness of planting in given years to evaluate yield penalty, the amount of delays, and the impact of weather.
Interestingly, Good, Irwin, and Tannura found that the optimum precipitation in May was zero. They say while that seems unrealistic, the converse of too much rain means planting delays and lower yields. Late planting in Iowa and Illinois were frequently linked, but not between Iowa and Indiana, reflecting the variability in weather patterns. Another finding was that it is impossible to break down the trend yield into its dynamic components of plant modification, management and environmental changes. Their models explained 95% of the variation in corn yields for the three states and about 90% of the variation in soybean yields for the three states.
Among the findings:
1) Relative to average levels, corn yields in 2008 are estimated to drop 2.9, bushels per acre in Illinois, 3.5 bushels per acre in Indiana, and 6.3 bushels per acre in Iowa, due to May precipitation and late plantings.
2) Relative to average levels, soybean yields in 2008 are estimated to drop 1.1, bushels per acre in Illinois, 0.4, bushels per acre in Indiana, and 1.0 bushels per acre in Iowa due to May precipitation and late plantings.
3) The magnitude of the yield declines due to slow planting progress in 2008 are relatively small due to the fact that May precipitation, while high, was not extremely high, and the magnitude of late planting, while above average, was considerably less than previous highs.
4) It is important to keep in mind that these estimates do not take into account the impact of replanting due to flooding in some areas of Illinois, Indiana, and especially, Iowa during June 2008.
To estimate yields, based on observations of good to excellent percentages of the corn and soybean crops, the researchers developed formulas to modify the trend-adjusted yields. The formula incorporates weather through June and assumes average weather in July and August and forecasts based on crop condition ratings at the end on June. Applying the formulas to the crop conditions as of June 29, they project yields of 152.4 bushels per acre for corn and 42.9 bushels per acre for soybeans. While other models have a 33 bushel range for corn and an 8 bushel range for soybeans, the Illinois crop weather model is remarkably close to current production estimates.
The researchers say estimates of total production have to be weighed against the uncertainty of harvested acreage, remaining summer weather, and the statistical errors in the crop weather model.
Summary:
Earlier planting dates have contributed to increasingly larger corn and soybean yields in the Cornbelt, but weather can also explain about 90% of the yield variability. A study of planting dates and May precipitation found statistically relevant yield impacts for 2008 for corn and soybeans in Illinois, Iowa, and Indiana. That information, combined with crop condition ratings at the end of June and average July and August weather, can predict state-based yield expectations with relative accuracy.
Posted by Stu Ellis at 12:15 AM | Comments (0) | Permalink
July 1, 2008
It Is Still Foggy, But The Picture Of 2008 Crop Size Is A Bit More Clear
When the USDA released its Planted Acreage Report Monday, the size of the corn and soybean crops switched from wild guesses to educated guesses. And with the USDA proviso that flooded acres and unplanted acres are still undetermined, the size of the crop will still be unknown until the final estimate is made six months from now. For now, corn acres are down from last year and beans are up from last year, and we’ll examine what that means.
For the record, corn acreage was estimated by USDA at 87.327 million acres, compared to the 2007 acreage of 93.600 million. However, by eliminating silage and some flooded acres, the harvested area is estimated at 78.940 million, compared to 86.542 million last year. Comparatively, that is up 1.31 million from the March 31 Intentions report.
Planted acres
State 2007 2008
IL 13,200,000 12,300,000
IN 6,500,000 5,700,000
IA 14,200,000 13,700,000
KS 3,900,000 4,100,000
MI 2,650,000 2,350,000
MN 8,400,000 7,800,000
MO 3,450,000 2,900,000
NE 9,400,000 9,000,000
ND 2,550,000 2,400,000
OH 3,850,000 3,350,000
SD 5,000,000 4,650,000
WI 4,050,000 3,800,000
While harvested acreage drops from planted acreage, it is noteworthy that the flooding caused USDA to drop its estimates of harvested acreage to 11,500,000 in Illinois and 12,800,000 in Iowa. Nationally, USDA projects 7.6 million fewer acres of corn will be harvested in 2008, compared to last year. University of Illinois Extension Marketing Specialist Darrel Good says the yield potential is difficult to predict, but if the weather and crop improve, and the USDA estimate of 148.9 bushels per acre national average is reached, then the crop potential may approach 12 billion bushels.
In addition to the Planted Acreage report, USDA also released its estimates of grain stocks, as of June 1. Good said the corn stocks of 4.028 billion bushels were 500 million above levels of 2007, and use was about the same as last year. However, continued drawdown of stocks will depend on the rate that the livestock herd is reduced and the amount of wheat that replaced corn as a feed grain. He says that may mean livestock use may be less than the 6.15 billion projected by USDA. Good says if corn stocks begin to rise, there will be less need for rationing than has been the case.
Compared to the corn crop, the soybean crop grew in size from last year, but is a slightly smaller than the 2006 record crop. Acreage is estimated at 74.5 million, a 17% increase from 2007. That means an increase in planted acreage in all states, led by a 950,000 jump in acreage in Nebraska, with 900,000 acre increases in Illinois and South Dakota. When the statistics were taken earlier in June, only 79% of the soybean crop had been planted, the least in the past 12 years.
Planted soybean acres
State 2007 2008
IL 8,200,000 9,100,000
IN 4,700,000 5,500,000
IA 8,550,000 9,400,000
KS 2,600,000 3,200,000
MI 1,750,000 1,900,000
MN 6,250,000 7,100,000
MO 4,600,000 5,300,000
NE 3,800,000 4,750,000
ND 3,050,000 3,400,000
OH 4,150,000 4,600,000
SD 3,200,000 4,100,000
WI 1,350,000 1,650,000
USDA indicated that flooding may eliminate about 500,000 acres each in Illinois and Iowa. Marketing Specialist Darrel Good said the 74.533 million acre estimate for soybean planting is 10.9 million acres more than last year and 260,000 less than what farmers said in March that they intended to plant. Harvested acres are expected to be 72.121, meaning about 1.4 million more acres will be abandoned than usual. While good summer weather could produce a good crop still, Good says the market is somewhat skeptical about that.
Soybean stocks were estimated at 676 million bushels, and Good says use was near normal in the past three months, dropping stocks levels 416 million bushels below levels of 2007. Good says if production falls short of USDA’s 3.1 billion bushel target, stocks will be tight for another year.
Summary:
USDA’s acreage estimates of 87.3 million for corn and 74.5 million for soybeans will be the targets for the market to trade until production estimates are released in about six weeks. USDA’s asterisk on the numbers because of the uncertainty created by the recent flooding will keep the market guessing more than usual. However, corn stocks may reduce the need for further rationing, while bean stocks are considerably tighter than a year ago and the market will remain strong.
Posted by Stu Ellis at 12:32 AM | Comments (1) | Permalink
June 24, 2008
Will The Next Market Move Be Up Or Down?
If the corn market turned south tomorrow and did not look back, would your marketing plan manage your price risk? If the market begins a bearish drop, how fast and far would it go? Is this something that could not possibly happen, given the high demand and low supply? Let’s take a look at the future in the futures market.
If you think back to 1993 when flooding washed out Cornbelt cropland, the market receded along with the water. The market was satisfied that it had accurately traded the corn and bean crop, demand had been rationed, and it was time to move on. Are we just about at that point this year?
South Dakota State University economist Alan May says last Thursday’s market downtown was indicative of a market prone to heavy profit taking while at the same time having fundamental factors providing sufficient support to prevent more significant losses. And in last week’s newsletter, he says, “All this means is that it is important to watch this market closely to make sure that you don’t assume that the only direction is higher; rather, utilize those tools that can protect your price in the event of a sudden downturn.”
Is that “sudden downturn” imminent? Darrel Good at the University of Illinois acknowledges in his newsletter there is considerable uncertainty about acreage, yield, and production, but if there is favorable weather for the balance of the growing season, there could still be a respectable crop. If that is the case, Darrel Good says there may be some cracks in the foundation holding up the current record high prices.
1) Large cattle and swine numbers have been eating a lot of corn for the past year, which has been expensive, and has caused many producers to curtail production, and if so, that means corn demand will weaken. Cattle placements into feedlots are declining, the number of cattle on feed is declining, and another upward spike in corn prices would reduce the farrowing rate. If you look at livestock futures, the market is anticipating reduced numbers later this year.
2) Corn export shipments have slowed. While we have sold nearly 2 billion bushels into the export market, to get to USDA’s 2.5 billion bushel forecast would require a rate of export sales above what has been happening in recent weeks.
3) Have you noticed the recent headlines about plans being scrapped for new Midwestern ethanol plants? An ethanol slowdown extends from those cancellations to also include slower work on plants under construction and closure of plants currently operating. Those actions signal a loss of profitability in the ethanol production industry, despite a recent increase in spot ethanol prices in the past weeks.
If those planets are lining up, along with an estimate of potential supply such as USDA’s June 30th Planted Acreage Report, the market could be ripe for a correction, and it is impossible to predict how far and fast it may retreat. That is the end of a fiscal quarter and hedge fund managers like to show profits at the end of the quarter.
That does not bode well for the producer, many of whom have gaps in their fields, or maybe even no fields or farms left because of the flooding. However, the management of risk is incumbent upon everyone in agriculture today, and preparing for a market downturn is smart marketing.
Summary:
A slowdown in ethanol production, a decline in livestock feed demand, and slower exports all point to the fact that current high prices may have accomplished their goal of rationing demand. With next week’s USDA forecast of acreage, the supply can be projected, and with those elements, the market may be poised for a downward correction. Smart risk managers will have their marketing plans in place for adequate price protection.
Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink
June 17, 2008
The Corn Market: Prices Will Ration Short Supplies
Corn futures are pushing toward the $8 mark. The good news is you don’t have to sell 4 bushels to get $8. The bad news is some farmers may only have four bushels to sell. Nightmares have come true for many farm operators across the Cornbelt, as they watch crops drown and their topsoil wash down rivers that used to be miles away. Little to nothing can be done except the aftermath paperwork. But for the corn market, the headaches have only begun.
Purdue economist Chris Hurt says we only have to follow the 1993 row marker when the last 500 year flood arrived. In his June 11 newsletter Hurt says yields were ultimately reduced by 18% from planting expectations and that would mean a 127 bu. national average this year when the trend yield was 30 bushels higher. Also, 6.3 million acres were abandoned to the flood. Hurt says a 142 bushel average applied against 76 million harvested acres only produces 10.8 billion bushels compared to the 13 billion bushel crop last year and the expected ethanol consumption of an additional 1 billion bushels.
If we are short 3-4 billion bushels of corn, University of Illinois economist Darrel Good says that means rationing. In his June 16 newsletter Good says the 1993 crop saw exports decline 20% and feed use declines an average of 11% in short crop years of recent vintage. He says USDA is projecting a consistent decline in use as a result of the expected short crop this year. Feed use will be down 16%, exports will be down 21%, but domestic consumption is expected to increase 33% with the help of ethanol taking 1 billion bushels more than in 2007.
Hurt says the ethanol estimate really depends upon oil prices and corn prices. He calculates a $1 loss per bushel currently and some plants are already in a slow down or shut down phase. One help may be a 32% increase in consumption of DDGS, which Darrel Good expects because of high corn prices.
As we move toward the June 30 Planted Acreage Report, Good says the data has already been collected, and there may still be some corn replanted or beans planted that the report does not reflect. He also says harvested acreage will also be tough to calculate because of the flooding and ponding. He believes “A fair amount of crop loss and demand rationing are already priced into the corn market with December 2008 futures approaching $8. The worst of the crop stress may have passed and more favorable growing conditions are forecast. Corn prices may now moderate somewhat, at least until more is known about crop size.”
However, Hurt says we are in an explosive price environment, with the potential for July futures to reach $8.50. However, he says a drying pattern is forecast by the National Weather Service, leading to a near term peak in prices this week. If prices are at a breaking point with downside potential, you’ll be interested in the thoughts of South Dakota State University economist Alan May, who says you know your expenses, and they should be written into your marketing plan. In his June 10 newsletter he says, “If current offerings of new crop bids on corn mean profit for you, there is nothing wrong with making sales now. Remember that with every sale of new crop corn you make, you give up something (the chance for a higher price) to get something else in return (protection against lower prices).” May says the wheat market reached its $20 peak in February, and then prices fell $4-$5 per bushel.
Summary:
Rationing is either upon us or around the corner for the corn market. With the loss of several million acres of corn, and crop quality declining in the face of adverse weather, US production this year may be closer to 10 billion bushels than the 14 billion that is needed to meet full demand. Cornbelt marketing specialists believe ethanol producers will get the corn they want as long as oil prices remain high. That means livestock producers will get shortchanged along with importers, unless the US dollar weakens further. But for corn growers, cash prices are quite attractive and will yield a profit for producers who have a marketing plan.
Posted by Stu Ellis at 12:17 AM | Comments (0) | Permalink
June 16, 2008
Changes in Agricultural Policy Could Impact Your Long Term Cropping And Marketing Plans.
What have high commodity prices done? First and foremost, they have provided American crop farmers with revenue that has been appreciated and long overdue. But there have been numerous consequences for domestic and foreign consumers who have had to pay higher prices. There have also been impacts for the grain marketing industry. And they have also spurred increased global production. Members of Congress asked for an analysis of the issues, and you’ll find out what they were told.
The Congressional Research Service reviewed the impact of high commodity prices and reported to Congress in early May. Since 2007 and through 2008 so far, prices for the world’s two major food crops, wheat and rice have risen substantially. Wheat prices rose 81% in 2007, and have risen 44% so far this year. Rice prices climbed 21% in 2007 and 144% since late last year. In March the Director of the United Nations World Food Program asked for $500 million in donations to supply food to low income households around the world. Pleas for money, pleas for understanding, and warnings for a worsening crisis followed quickly. Domestically, the higher prices contributed to food price inflation and raised costs for livestock feeders and food processors, and created hedging problems for grain merchandisers.
But the issues that have affected one commodity have not impacted others, says Randy Schnepf of the Congressional Research Service (CRS),
• For wheat, a combination of international weather-related crop failures over the past two years that has resulted in historically low U.S. and global stock levels is the primary impetus behind high prices. Government policies by several key foreign producers to limit exports in favor of domestic markets also have contributed to higher prices.
• For coarse grains and oilseeds, a combination of growing demand bolstered by rapid income growth in developing markets and government biofuels mandates are the key drivers.
• For rice, the combination of population-driven demand growth outpacing crop yields over several years, and recent government policies by several major rice exporting countries to limit exports, are the primary catalysts.
Carryover stocks are expected to be at or near historical lows when the new crop is ready for harvest:
• Stocks for coarse grains and wheat are projected to drop by mid-2008 to the lowest levels since 1977, while ending stocks of total grains fall to the lowest level since 1981. More importantly, their respective stocks-to-use ratios are all projected to reach record lows.
• The stocks-to-use ratios for global corn and vegetable oils are projected to be the tightest since the early 1970s.
• Global rice stocks, as well as the stocks-to-use ratio, are projected up slightly from the previous year at 77.2 million tons and 18.2% in 2007/2008. However, the previous year’s stocks-to-use ratio of 18.1% was the lowest since 1976.
• U.S. wheat ending stocks for 2007/2008 are projected to fall to their lowest level (242 million bushels or 6.6 million tons) since 1947 — well below their pipeline range.
• U.S. soybean stocks of 4.4 million tons are projected at the lower end of their pipeline range.
• U.S. corn ending stocks, although projected at what would appear to be an ample level, are low in historical global supply-to-use terms.
The term “perfect storm” has been used to describe the simultaneous factors that have resulted in high food prices:
1) Global grain production declined in 2005 & 2006, and then an Australian drought cut wheat production for a second year.
2) Increasing population and robust economic growth in China and India raised the demand for food in households with strong purchasing power.
3) A weak US dollar made food exporters cheaper, and buyers bought more products and increased the frequency of their purchases. The shift in the exchange rate has equaled the rise in commodity prices in some cases.
4) Concerns over rising oil prices created governmental policies to promote biofuels, many of which are made from agricultural products typically sold as foods.
5) Several foreign governments took the initiative to restrict export of their food products, complicating the supply-demand relationship in global trade.
6) Higher energy costs have impacted processing and transportation, causing food prices to rise in retail markets.
High commodity prices have many implications for the US agricultural economy.
1) Farm income has recorded significant gains, and is expected to rise to $96.6 billion, up 10% from 2007.
2) Direct payments will be $13.4 billion in 2008, down from the four year average of $17.4 billion.
3) Crop insurance premiums will rise because higher commodity prices mean farmers will have to pay more to insure their crop.
4) Feed cost for livestock operators will be $45 billion, up 18% over 2007.
5) Volatility in the grain markets is diminishing the effectiveness of the futures markets, and lack of convergence between the cash and futures market is increasing the risk in forward contracts offered by elevators.
Will high prices bring about lower prices?
1) For wheat and rice, the price increases are likely to be short term because it was weather related shortfalls that contributed to the price increases, and consuming countries are trying to catch up on their own production. With expansion comes lower prices, but volatility could remain.
2) Biofuel feedstock demand has bid up the prices of corn, soybeans, and other crops that compete for acres. Acreage will increase to meet part of the demand, however low stocks are expected to persist as global production will have difficulty keeping up with the demand.
3) Continued increases in global population and income will sustain the demand for livestock products and good growing conditions will have to be present.
The US government has been asked by many individuals and groups to take a variety of actions they believe would alleviate problems, such as reducing or eliminating ethanol mandates, more food aid shipments, more investment in agricultural infrastructure, opening up the CRP to production, and a variety of other policy changes.
Summary:
High commodity prices have raised US farm income, but at a price. Domestic farm and biofuel policies have been targeted by critics for change, low income consumers here and abroad have seen their food prices rise, and competing countries are planning on expansion of their grain production. Wheat and rice, whose prices rose from weather related issues, will see near term declines in price. Feed grains and oilseeds used for biofuel production will continue to be in high demand.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
June 12, 2008
The Cornbelt: Land Of 1,000,000 Lakes
In just 80 days the new marketing year starts, and we’re fortunate to have a modest amount of carryover, because the new corn and soybean crop is not yet ready for prime time. Barely a majority of the new crop can see the light of day, because the rest of it is either underwater, in the ground, or still in the bag. This may soon be a reality check time for farmers who have forward priced a significant portion of their expected crop, but forgot to sign up for crop insurance. We’ll tour the flood-stricken Cornbelt and check up on crops and ponds.
Our tour guides are the hundreds of volunteer crop reporters throughout the Cornbelt who provide the data that is assembled on Monday by the National Agricultural Statistics Service. The complete report is available on Tuesdays during the crop production season.
ILLINOIS: Surplus moisture covers 61% of the state, and only 1% is in the short category. 88% of the corn has emerged, probably meaning 12% has yet to be planted. 82% is fair to good. Only 45% of the soybeans have emerged, probably meaning the other 55% are still in the bag, and 86% of the crop that is up is listed fair to good. Heavy rains have impeded planting progress, but warmer temperatures have helped the crop that is growing.
INDIANA: 99% of the soil moisture is evenly split between adequate and surplus, With severe flooding in central and southern parts of the state with half of the counties rated as flood disaster areas. 94% of the corn has been planted, and 83% has emerged with 77% in fair to good condition. 73% of the soybeans have been planted, and 80% of the emerged crop is rated fair to good.
IOWA: Three-quarters of Iowa has surplus moisture with the balance listed as adequate. 89% of the corn has emerged with only 2% left to plant, however 81% is rated only fair to good. 86% of the beans are in the ground, with 63% emerged and 83% of those are only fair to good condition. USDA reports severe weather has flooded cropland, pasture, and hay, delaying hay harvest and causing a shortage of feed for cattle. Fences have also been washed out, creating problems using pastures.
KANSAS: 90% of the state has adequate to surplus moisture, but is not as wet as states to the east. Subsoil moisture is listed 66% adequate. Wheat is ripening on par with 2007 with 81% reported free of insects and 50% free of disease. Forage, sorghum, and other crops are generally in good condition with farmers reporting plenty of pasture and water.
MICHIGAN: Farming weather prevailed over Michigan with 5 days suitable for fieldwork, and two-thirds of the state reporting adequate moisture in both the topsoil and subsoil. 85% of the barley and 83% of the oats are in fair to good condition. USDA reports, “Warm temperatures and rain this week advanced crop development as well as boosted farmer’s spirits.” Corn and soybean planted is all but complete, crops have emerged, and corn is being side-dressed.
MINNESOTA: Soil moisture is 68% adequate and 31% surplus, but “Crop conditions were rated mostly good to excellent in spite of heavy rains and strong storms that occurred during the week.” Corn and soybean crops were described as continuing to emerge rapidly with the help of average temperatures. Wheat, oat, and barley crops were progressing, but substantially behind recent years in their stage of development.
MISSOURI: Soil moisture is 96% adequate to surplus and about evenly split. That caused crop reporters to say fieldwork was at a near standstill for another week, due to flooded areas and continued heavy rains. Spring tillage remains 22% incomplete, and the rains have delayed corn, soybean, and sorghum planting.
NEBRASKA: 60% to 70% of the topsoil and subsoil has adequate moisture, and most of the rest is rated as surplus, indicating few days suitable for fieldwork in the past week. 95% of the corn crop has emerged and 83% is in fair to good condition. 59% of the beans have emerged and 88% are in fair to good condition. Ratings for planting, emergence, and quality are all behind recent years. 79% of the wheat and 86% of the oats are in fair to good condition. USDA reports, “Strong winds damaged farmsteads and over turned pivots, combined with hail and heavy rains across parts of Nebraska. The storms caused flooding and damage to crops as well as roads.”
NORTH DAKOTA: While 72% of the soil has adequate moisture, 20% is actually short, and nearly 60% of the subsoil is short of moisture. Spring wheat development was about on par with last year, and durum wheat was ahead of recent years. Barley, oat, canola, and sunflower crops were also generally keeping pace with 2007 and the 5 year average. And USDA reports showers in the southeastern part of the state last week were “welcomed.”
OHIO: 57% of the state has surplus moisture with the balance reporting adequate supplies. 92% of the corn and 58% of the beans have emerged, with 75% of the corn and 81% of the beans listed as fair to good condition. 69% of the oats and 76% of the winter wheat were rated in good to excellent condition. Southern Ohio received 3-6 inches of rain, leaving flooded fields that will require replanting.
SOUTH DAKOTA: Heavy precipitation halted fieldwork, leaving one-third of the state with surplus soil moisture and the rest with adequate amounts, but also with reports of flooding and hail damage. Subsoil moisture is in good shape. However crops are significantly delayed in their development compared to last year and the five year average. That includes winter wheat, barley, oats, and spring wheat. Corn planting is 95% complete, and the emerged corn is about half the size of the five year average at this time. While the recent rains delayed fieldwork, the rain was needed for soil recharge.
Summary:
With the extensive rainfall, both in volume and coverage area throughout the Cornbelt, many farmers have been unable to finish planting and many flooded fields have been damaged the point the replanting is necessary, if at all possible. Warmer temperatures in the past couple weeks have assisted struggling corn and bean plants in growth, but throughout the Cornbelt, row crops and small grains are significantly behind normal development schedules and could be in jeopardy when fall months bring frost. There is no wonder that the grain market has been concerned about the new crop.
Posted by Stu Ellis at 12:27 AM | Comments (0) | Permalink
May 28, 2008
The Day The Market Failed.
Volatile March grain markets created financial havoc for grain elevators having to make millions of dollars in margin calls, and many of them resolved the issue by halting forward contracts. Suddenly, farmers wanting to manage price risk with a hedge that covered both futures and basis risk had nothing to use. Planting time was nigh and marketing opportunities were for naught. That was when agriculture changed overnight.
Ohio State ag economist Carl Zulauf marked his calendar for March 17 as the date the elevators stopped offering forward contracts for the new crops. Calling the action neither good nor bad, Zulauf’s analysis is that farmers no longer have an assurance that forward contracts will always be there when they want to manage price risk. Officially, that is called “market failure.”
While many farmers felt that was a nasty trick the system played on them, Zulauf notes the futures and options markets were still available. Unfortunately, they do not cover basis risk, which would have been covered by a forward or many other cash contracts at the elevator. It should be noted that elevators were willing to offer basis contracts that could have been blended with a futures contract to provide the bulk of the benefits of a forward contract. However margin calls would have been the responsibility of the producer, instead of the elevator. As an alternative, options do not require margin calls, but require a significant upfront investment to cover the same price risk.
Zulauf says there are two implications resulting from the circumstances.
1) The risk of crop production and marketing has increased, and when that happens, production will decrease and prices will increase to compensate farmers for the greater risk exposure.
2) While crop insurance was no longer an option on March 17 (2 days past the sign up deadline), it can theoretically address the issue of market failure. Time is the major consideration, and Zulauf believes the new ACRE tool in the Farm Bill will allow farmers to address the risk of market failure over multiple crop production seasons. The Average Crop Revenue Election uses moving averages to help manage price risk over multiple seasons and make intermediate management decisions, including crop rotation, fertility investments, and even machinery purchases.
The ACRE program becomes an option for crop producers beginning with the 2009 crop, but once that election is made, it becomes permanent, and producers will want to work through decision aids that are expected to be made available, and consult with Extension staff or other farm business management consultants to help make the best decision.
The ACRE program provides Direct Payments at 80% of the scheduled rate, marketing loans at 70% of the scheduled rate, and an ACRE protection payment. The ACRE payment is a calculation that utilizes target revenues from state-level price and yield statistics, along with crop acreage on the farm, and a multiple year average yield.
There are acreage limitations, but if planted acres exceed base acres, then the producer can choose which acres to enroll in the program. Additionally, there are revenue limitations calculated with actual yields and revenue, but the final number must be under an average revenue calculation. Finally, there are also payment limitations, of $40,000 for direct payments and $65,000 for ACRE payments.
Summary:
USDA will be offering a new type of farm payment keyed to state-level yields and revenue, which could be considered a “just-in-time” type of crop insurance. The multiple year revenue risk program coincidentally follows the failure of the cash grain market, in which grain elevators briefly halted many cash grain sale contracts and reduced the management options for price risk. The circumstances in the market could be neutralized, if repeated in the future, by the Average Crop Revenue Election program in the 2007 Farm Bill.
Posted by Stu Ellis at 12:01 AM | Comments (0) | Permalink
May 26, 2008
The Wheat Market Has Been Good This Year, But What Can Be Expected For The Next 10 Years?
New crop wheat futures contracts have lost five dollars since pushing the $12.50 mark about three months ago. Some local cash markets were offering as much as $20 per bushel, along with some curious exchange-based trading in Minneapolis. Still, current values are nearly double the average futures price of the past decade. With unprecedented market volatility, and competing demands from corn and soybeans for acreage, what can wheat growers anticipate in coming years? Have high prices faded into history? Should a small grain drill be traded in for a row crop planter? The farm gate has some answers you need.
The profitability challenges for production agriculture continually increase, and management decisions have to be wise, and risk needs to be thoroughly managed. To help, North Dakota State University economists Won Koo and Richard Taylor have analyzed the US and global wheat market through 2017, a ten crop perspective. At the outset of their report, which was finished at the peak of the recent wheat market volatility, Koo and Taylor believe, “This volatility will not continue into the future and prices should return to levels similar to late 2007.” With that in mind, let’s focus on some of the highlights in the analysis.
Globally, the wheat market is dominated by the US, Canada, Australia, the EU, and Argentina with a combined 63% of traded wheat; however each of those produces primarily a different variety. The market, though, is dynamic and since the 1960’s production has increased 60% in Australia and 106% in India. EU production has increased 34% because of the countries added to the EU. World harvested area grew 6% in the 1980’s and 1990’s but has returned to 1960’s levels. Yields have increased 408% in China and 201% in India. EU and Argentine yields have each risen 106% and 54% in the US. While Chinese production has risen 371% since the 1960’s, harvested area has declined.
The export market is dominated by the US, Canada, the EU, Australia, Argentina, and the Former Soviet Union, which supply 66.3% of the export market:
• The US leads in exports of HRW & SRW, with primary markets in China, Asia, and North Africa.
• Canada leads in HRS and durum, with primary markets in China and Asia.
• Australia and Argentina export HRW to South America, Asia, Africa, and China.
Among these exporters, world trade is expected to increase 17% by 2017, with Australian production rising faster than other countries producing common wheat and Canadian durum rising faster in production than other durum producers.
In the US for the next 10 crops, production will grow about 28% above the 2005-2007 average with a 36% increase in SRW, 35% increase in HRW, 33% increase in durum, and a 10% decrease in white wheat. Total wheat harvested area will increase from the current 49 million to 54 million acres in 2017 with yields increasing from 40.4 to 44.2 bushels per acre. HRS acreage will drop one million acres due to competition from corn and soybeans. Consumption will grow 13% for common wheat, exports will rise marginally, and ending stocks will increase 7.6% for common wheat.
Elsewhere over the next 10 years:
• Canadian spring wheat production will decrease 17%, consumption will increase 21%, but exports will decrease 35%, and ending stocks will fall 26%.
• EU production will decrease 1%, consumption will increase 2%, exports will decrease 51%, and ending stocks will decrease.
• Australia production will increase 57%, consumption will increase 2%, exports will increase 80% and ending stocks will remain steady.
• Argentine production will increase 8%, exports will decrease 8% and ending stocks will increase 13%
The 114% increase in import demand will come primarily from China which had been a small wheat importer, but will increase imports to 11 MMT by 2017 due to limits on land and water. Steady imports will mark other Asian countries. African imports will rise 16% over the next 10 years, with significant growth in the Egyptian market and steady demand from other African nations. Mexican imports will grow 34%, leading the growth in the Latin American market over the African market.
Prices for wheat in the near future are predicted to be higher than the 2007 levels, helped by no small amount from the value of the US dollar. Koo and Taylor believe the average price will return to the $6.90 to $7.40 range for HRS. Durum prices are expected to increase to about $11 per bushel in 2008 and slow decrease to $9.60 by 2017. Current prices that might be higher cannot be sustained.
Summary:
Production, consumption, and exports of wheat over the next 10 crops should remain strong for both US and World producers. Demand for both common wheat and durum wheat will remain strong, and the recent rise in wheat values reaches a new market plateau, helped by the competition for corn acres. World trade volume will expand, but more so for durum wheat than for common wheat.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
May 20, 2008
The Tractor Seat Bounce: Part 2--corn
Catching the “tractor seat bounce” in the spring market provides the opportunity to spread out your price risk with corn and soybean sales at levels higher than at many other times of the year. Yesterday, the soybean market was analyzed to evaluate the marketing potential and today the corn market will be brought into the spotlight. Same drill, but this time with corn.
Thanks to many Extension Marketing Specialists who analyze the market from their Cornbelt offices, let’s recap what we know.
• USDA is projecting a 12.1 billion bushel crop, based on 86 million acres and a national average yield of nearly 154 bushels.
• The market demand will likely repeat the 13 billion bushels from 2007 and add another 1 billion bushels needed for ethanol production.
• Ending stocks are forecast at 763 million bushels, which is 6% stocks to use ratio.
• The season average price range is predicted by USDA to range from $5 to $6.
• December futures are above $6 and Central IL fall delivery prices are already $5.60 and up.
With those issues in mind, would it be wise to price a portion of your new crop corn?
Purdue’s Chris Hurt
Does not think the new corn crop will be sufficiently large enough to meet the demand and stocks will end up at bare minimums even after demand is rationed. He thinks livestock producers will reduce corn consumption and shift some of their demand to DDGS; and that foreign buyers will be reduced purchases by 16% from last year all to make way for another jump in ethanol demand. He’s concerned about planting delays that will reduce yields, but he says corn may be near it’s highs, based on comparative feed values with wheat and breakeven prices for ethanol production. And Chris Hurt adds, “Prices will remain strong, but there are limits to how high that price can be. December futures at $6.50 had been the objective and that has now been achieved, so consider pricing up to 40 percent of expected new crop production.”
Darrel Good at Illinois says uncertainty surrounds USDA’s projections for supply and demand and that is revealed by the fact the futures market now has prices in the upper portion of the expected marketing range. He’s thinking that a clearer picture of the supply and demand scenarios will result in weaker prices. Good’s questions about supply are in the area of planted acreage and whether the expected yield will be attained. His questions about demand are focused on the amount of corn that will be needed for feed. And he says, “Price behavior following the release of the report suggests that the market believes that much of the needed rationing of use is already underway.”
Alan May at South Dakota State notes that corn prices have risen $2 since last December reflecting the tight supply, but with corn being planted, the weather premium is diminishing and softening prices. He says there is no wiggle room for any production loss, either from acres or yield. May says the projected carryover is the second least to the 425 million in 1995, but today’s demand dynamics are much different than in 1995. And he says with the consumption shift away from feed and export to ethanol, usage factors will cause uncertainty in the market which he translates into volatility.
Missouri’s Melvin Brees begins with doubts that USDA’s projected 86 million acres will be planted, and that will point to a supply shortage from the outset. And he adds that tight supplies mean higher prices. He says there is no room in USDA’s supply demand estimates for a summer drought or early frost, much less any change in the demand such as further weakness in the dollar. Brees says new crop futures are near the record highs and it is seldom a mistake to make sales near the contract or record highs. He acknowledges that higher prices are possible but cash prices are in the upper half of the forecast price range. Brees says there may still be upside potential in the market, but prices have slipped and there is considerable downside price weakness.
Summary:
Uncertainty about acreage, yield, and consumption all are concerns by marketing specialists who have been watching the corn market. All of them point to the fact that supplies will be tight, but that prices are already in the upper portion of the expected price range, and while upside potential exists, there is also downside potential that could weaken prices when some of the questions are answered about the crop size. Most of them advocate pricing part of the new crop at this point in the spring.
Posted by Stu Ellis at 12:01 AM | Comments (1) | Permalink
The Tractor Seat Bounce: Part 2--corn
Catching the “tractor seat bounce” in the spring market provides the opportunity to spread out your price risk with corn and soybean sales at levels higher than at many other times of the year. Yesterday, the soybean market was analyzed to evaluate the marketing potential and today the corn market will be brought into the spotlight. Same drill, but this time with corn.
Thanks to many Extension Marketing Specialists who analyze the market from their Cornbelt offices, let’s recap what we know.
• USDA is projecting a 12.1 billion bushel crop, based on 86 million acres and a national average yield of nearly 154 bushels.
• The market demand will likely repeat the 13 billion bushels from 2007 and add another 1 billion bushels needed for ethanol production.
• Ending stocks are forecast at 763 million bushels, which is 6% stocks to use ratio.
• The season average price range is predicted by USDA to range from $5 to $6.
• December futures are above $6 and Central IL fall delivery prices are already $5.60 and up.
With those issues in mind, would it be wise to price a portion of your new crop corn?
Purdue’s Chris Hurt
Does not think the new corn crop will be sufficiently large enough to meet the demand and stocks will end up at bare minimums even after demand is rationed. He thinks livestock producers will reduce corn consumption and shift some of their demand to DDGS; and that foreign buyers will be reduced purchases by 16% from last year all to make way for another jump in ethanol demand. He’s concerned about planting delays that will reduce yields, but he says corn may be near it’s highs, based on comparative feed values with wheat and breakeven prices for ethanol production. And Chris Hurt adds, “Prices will remain strong, but there are limits to how high that price can be. December futures at $6.50 had been the objective and that has now been achieved, so consider pricing up to 40 percent of expected new crop production.”
Darrel Good at Illinois says uncertainty surrounds USDA’s projections for supply and demand and that is revealed by the fact the futures market now has prices in the upper portion of the expected marketing range. He’s thinking that a clearer picture of the supply and demand scenarios will result in weaker prices. Good’s questions about supply are in the area of planted acreage and whether the expected yield will be attained. His questions about demand are focused on the amount of corn that will be needed for feed. And he says, “Price behavior following the release of the report suggests that the market believes that much of the needed rationing of use is already underway.”
Alan May at South Dakota State notes that corn prices have risen $2 since last December reflecting the tight supply, but with corn being planted, the weather premium is diminishing and softening prices. He says there is no wiggle room for any production loss, either from acres or yield. May says the projected carryover is the second least to the 425 million in 1995, but today’s demand dynamics are much different than in 1995. And he says with the consumption shift away from feed and export to ethanol, usage factors will cause uncertainty in the market which he translates into volatility.
Missouri’s Melvin Brees begins with doubts that USDA’s projected 86 million acres will be planted, and that will point to a supply shortage from the outset. And he adds that tight supplies mean higher prices. He says there is no room in USDA’s supply demand estimates for a summer drought or early frost, much less any change in the demand such as further weakness in the dollar. Brees says new crop futures are near the record highs and it is seldom a mistake to make sales near the contract or record highs. He acknowledges that higher prices are possible but cash prices are in the upper half of the forecast price range. Brees says there may still be upside potential in the market, but prices have slipped and there is considerable downside price weakness.
Summary:
Uncertainty about acreage, yield, and consumption all are concerns by marketing specialists who have been watching the corn market. All of them point to the fact that supplies will be tight, but that prices are already in the upper portion of the expected price range, and while upside potential exists, there is also downside potential that could weaken prices when some of the questions are answered about the crop size. Most of them advocate pricing part of the new crop at this point in the spring.
Posted by Stu Ellis at 12:01 AM | Comments (1) | Permalink
May 19, 2008
The Tractor Seat Bounce: Part 1--Soybeans
Your Dad always told you there is a “tractor seat bounce” in the market about the time you are on the planter. New crop soybeans have recovered almost $3 from the lows made the end of March. But will delayed corn planting throw more acreage to soybeans and push that market back down? Is this a time to adjust your soybean marketing plan? What about catching up with some sales before the market softens? So many questions, but the farm gate has the answers.
Thanks to many Extension Marketing Specialists who analyze the market from their Cornbelt offices, let’s recap what we know.
• USDA anticipates an 11.2 million acre increase in soybeans to 74.8 million acres this year, and with a trendline yield of 42.1 bushels per acre, production would reach 3.1 billion bushels.
• The average range for soybean prices for the new crop year is forecast at $10.50 to $12.00. Central Illinois cash bids are $12.50 and up, well above the projected range already.
• The new crop soybean market began moving higher two weeks ago and has continued upward, bolstered in part by USDA’s latest forecast for a 185 million bushel carryout at the end of the 2008/09 marketing year.
• Current soybean values have recovered about two-thirds of what had been lost after the February highs.
• There is still uncertainty for both yield and acreage for new crop soybeans.
With those issues in mind, would it be wise to price a portion of your new crop soybeans?
Purdue’s Chris Hurt says with only 185 million bushel carryout, we will not be swimming in soybeans; and he has concerns that as many as two million acres of beans expected by USDA will not be planted, as a result of the late wheat harvest. Hurt thinks there will be some soybean rationing and the mi-point of the marketing range will be closer to $12. Hurt believes November futures may reach $13.50 and provide a good opportunity for cash contracted beans to sell in the mid-$12 range, with 30% to 40% of that priced by the end of May. He’s advocating a diversified pricing strategy that spreads sales across time.
At Illinois, Darrel Good focuses on the uncertainty in the soybean market. He’s concerned that delayed soybean planting will reduce yield prospects, and USDA is using a 42.1 bushel national yield to reach its 3.1 billion bushel forecast, when that is a large jump upward from last year’s average yield. He is also concerned that the crush and exports are also expected to be at high levels, and the USDA meal projections do not correlate with other USDA forecasts for feed use. While there are many question marks, Good says the low level of carryout will mean a continuation of high prices.
South Dakota’s Alan May notes that even with the large increase in acres, new crop supplies of beans will still be tight. He says the market is intently watching the Argentine drama between the government and farmers who are at odds over taxes imposed on exported soybeans, and he says the market is more comfortable with the idea there is less risk in having unplanted corn acres shifted to soybeans. May says the recent bounce in the bean market is “significant,” and “the current value of new crop beans would seem to be all the reason you need to make some sales now.” He says that will protect against any hard downtown that might be in the future.
At the University of Missouri, Melvin Brees says new crop soybean use is forecast at 3.073 billion bushels, just shy of the forecast production of 3.105 billion bushels, which he anticipates should support new crop soybean prices. Brees acknowledges the potential for numerous supply and demand issues for the soybean crop, but says farmers should seriously consider adding to sales. He says futures prices are more than a dollar off their highs, but have recovered two of the three dollars lost since that time, and prices remain at historically high levels. While higher prices can occur, significant downside risk exists, particularly if delays in corn planting push acreage into beans. He adds that the seasonal trend is down, and harvest prices are typically less than what is offered in May.
Summary:
Soybeans will be in tight supply for the balance of this year, but with strong demand, tight supplies and strong prices will be the trend for the new crop. With USDA’s projection for an average cash price of $10.50 to $12.00, current prices are already in the higher portion of that range or above throughout the Cornbelt. Spring prices are typically higher than harvest prices, and several Extension Marketing Specialists are advocating that farmers add to their new crop sales to protect against the downside risk in the market.
Posted by Stu Ellis at 12:40 AM | Comments (0) | Permalink
May 15, 2008
Are You Doing The Best Job Possible With Marketing, Or Could You Use Help?
Grain prices are higher than you ever imagined when you began farming. How can you go wrong with $5 corn and $13 soybeans? But should you wait for higher prices? Did you sell when soybeans were pushing toward $15? Was your corn unloaded in the $3 range? Are you still holding your entire old crop and wondering how to manage the price risk of the new crop? Would a marketing advisory service help you sleep better at night?
The past several years have taken us from picking the low points in the market and claiming loan deficiency payments to trying to find the highs in a fairytale marketing scenario where everyone lives happily ever after. Extension economist Bob Wisner at Iowa State University wonders aloud if you need a marketing advisory service. Being in a highly volatile price environment is a challenge for the best market watchers, but you have to be concerned about the financial health and profitability of your farming operation. All of the time demands on your management allow little chance to manage your marketing risk.
Wisner suggests your average your grain sales over the past several years, and compare that to your state average, which is available from USDA. Any shortfall on your part could mean the need for some help with marketing. Some farmers can make their own improvements if extra time was available, but others would benefit from the assistance of an advisory service.
But that is not a step made lightly. Clients of advisory services need a good marketing background and familiarity with cash and futures markets and the tools that are used. Since many of the services use buy and sell signals, a client should have some knowledge of commodity price charts. And the client must be prepared to act on a moments notice.
The advisory service can help accumulate information that provides an advantage, but will not sell your crops for you and should not be expected to hit the market highs year in and year out. Their objective is to recommend sales above the market averages and at prices that will be profitable.
What should you expect from an advisory service?
1) You will probably receive a weekly newsletter with charts and advice that might be separated for cash only farmers, conservative hedgers, and advanced hedgers and option users.
2) Newsletters may have significant information about chart patterns, technical analysis, and a wide range of tools that describe price action. Such information may also contain details on market fundamentals such as supply and demand.
3) Some services provide telephone or e-mail information and allow clients to speak with advisors on a limited schedule.
4) Some services will also hold seminars around the Cornbelt that provide more intense information and educational sessions on the use of marketing tools.
5) For a higher fee, the service may take over your marketing, and manage your sales with your local elevator and even manage a futures trading account in your name. That service comes at a much higher cost, but also requires monitoring by the client who needs to remain comfortable with such an arrangement.
The promotional material of the marketing advisory services indicates that each is the tops in the business, but you need to be able to judge one from the other. Their performance was rated for many years by the University of Illinois. The University of Illinois ratings were based on a benchmark system, and compared the net prices received by the service to the benchmark.
Each service will have recommendations that are in the top tier and in the bottom tier, as well as recommendations over time that are quite average. If it seems difficult looking at a list of equals and picking one out, the one that should be picked is the service that uses marketing tools that seem comfortable to use. Wisner says one should also remember that past performance is not always a good indicator of future results. Market volatility, upward trends, and other dynamics created unanticipated events that might throw off even the best market advisors.
Wisner offers a word of caution; saying that advisory services create their recommendations for an “average” client, and your needs may be much different than their average client, such as volume of grain marketed and risk aversion. Check with neighbors for their experience with such services and extend your inquiry to elevator managers, Extension advisors, and your lender. Search for information about ones that rise to the top of your list and ask for some sample of their newsletters to see if their style matches your style. Costs can also vary widely, but should be competitive with other services that provide the same level of service. Your decision should not be based solely on cost. Keep in mind that not every farmer needs an advisory service, and are able to create and implement a marketing plan that would surpass the recommendations of the best advisory services.
Summary:
Market advisory services may be a source of information to improve grain marketing in an atmosphere of market volatility and complexity which challenge even the best marketers. Such services will vary widely in what they provide, their style of marketing, and in their cost. A subscriber should find a service that matches his or her style of marketing as closely as possible and provides the amount of information that is desired.
Posted by Stu Ellis at 12:10 AM | Comments (0) | Permalink
May 13, 2008
Soybeans? Oh, I'd Forgotten All About The Soybean Market!
Earlier this year the market wanted more soybeans produced in 2008, and farmers responded with their intentions to increase soybean acres significantly. The bottom dropped out of the soybean market, farmers shifted some acres back to corn, and both crops continue their fight for acres. The May USDA Supply/Demand report indicated tight supplies when the 2008/09 marketing year comes to an end, but let’s look at the bigger picture.
Barely 10% of the 2008 soybean crop has been planted, But USDA forecasts a 3.105 bil. bu. crop with the help of a trendline yield. In the latest Oil Crops Outlook published by the Economic Research Service, the new crop will be 520 mil. bu. larger than the old crop, but demand will be strong, and the 145 million carryout expected in August of 2008 will grow only to 185 mil. bu. by August of 2009. Pushing and pulling on the number will be a slight increase in the crush and a slight decrease in soybean exports. But the tight ending stocks will be the prime support for soybean prices to range from $10.50 to $12.00 during the marketing year starting in September.
Producing 3.1 bil. bu. is predicated on soybean growers following through with their reported intentions to plant 74.8 million acres of soybeans, which is an 11 million acre increase from last year. USDA is projecting a 42.1 bu. national average yield to reach the 3.1 bil. bu. expected crop.
There will be plenty demand to consume that supply, and USDA expects competition from the Brazilian crop a year from now to compete with the new US crop. Global supplies are still expected to be tight for the coming year and that will keep exports at high levels, which are expected to again exceed 1 bil. bu. Additionally, the continued weakness in the value of the dollar will make US soybeans seem like a bargain to international buyers.
The expected 40 million bushel drop in exports will be partly offset by a 10 mil. bu. increase in the crush. USDA economists think the crush would be even larger, but high soybean prices will dampen demand for oil and meal. The contraction in the livestock herd because of high feed prices will soften demand for soybean meal. Meal consumption will be essentially flat and meal exports will be down slightly. Global soybean meal use would be down even more, but the high cost of corn makes the protein value of soybean meal attractive at current prices.
In the oil market, the high cost will also dampen demand, and the marginal increase in use is attributed to the bio-diesel production industry. Competition from other vegetable oils is expected to continue diminishing the demand for soybean oil. Strong export demand for soybean oil is attributed to the value of the dollar, and exports should slip only from 2.85 to 2.65 bil. pounds. Subsequently, soybean oil stocks will tighten from 2.8 to 2.7 bil. pounds. Prices should remain in the low 50 cent per pound range, where they have been for the past year.
Globally, soybean production is expected to reach record levels in Paraguay and Uruguay, but the large Argentine crop remains in the bin as the government and farmers disagree over how much exports are taxed. European consumption is expected to remain steady, as demand for bio-diesel has stagnated.
Summary:
Although a significant increase is expected both in acres and production, US soybeans will demand a high price this year because of continued tight carryover supplies. Farmgate prices that could average well over $10 per bushel will help dampen some of the demand for domestically produced meal and oil. However, exports of soybeans, soy meal, and soyoil are expected to remain healthy because of the exchange rate.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
May 8, 2008
If You Are Delivering Corn To An Ethanol Plant In July, Will Your Price Premium Cover The Cost Of Grain Quality Management?
To benefit from the market carry offered by ethanol plants or other processors wanting a constant inflow of grain, farmers must accept the storage risk, which includes keeping the grain in condition. That takes management and requires energy expense, but is there a payoff, and how closely should that grain be kept within parameters? As the outside air warms up and the humidity rises, grain storage issues are going to be on your mind.
This would be a perfect world without the mold that attacks stored corn, but unfortunately we have to deal with mold that likes warm moist bins of grain. The cost of prevention requires energy and management, and in turn there should be a return to that expense. Finding the balance is what a group of Purdue economists tried to find when they analyzed the profitability in storage, versus the risks. They estimate that $270 million worth of grain was lost from the 2006 crop due to mycotoxins in stored corn. As more ethanol plants begin operation, on-farm storage will have to bear the responsibility of maintaining grain quality.
Researchers have long worked on ways to control mold growth in stored grain, including sophisticated monitoring equipment. But the question of economic returns from those efforts remains unanswered. Typically, stored grain is cooled following harvest to minimize moisture content and mold growth. Late winter or early spring delivery means the management problem is eliminated, but summertime delivery requires grain moisture management and the threat of loss from mold growth and that negates the price premium being offered for storage.
Farmers who store grain know that mold growth is minimal below 50 degrees F. and 12% moisture. Harvest time drying and aeration usually take the grain into winter with success, and then any problems developing in the core of the bin can be minimized with some grain removal.
The Purdue researchers found the optimal mold management strategy involves continuation of conditional aeration even if grain is to be sold to the local elevator in March. Continuation of conditional aeration after the end of December is even more important if high quality corn is to be delivered to a food-grade corn processor later during the summer. They developed a formula for success for maintaining quality, if the corn is to be delivered to a food grade processor paying a 55¢ premium and a 3¢ per month storage fee:
1) If in-bin temperature is less than or equal to 42 degrees F. and the number of mold damaged kernels is less than or equal to 4% at any point during the storage period, then do not aerate but keep it at least for another 15 days after which you will have to monitor and decide again.
2) If temperature is greater than 69 degrees F. and mold damaged kernels is less than 5% then do not sell yet but aerate the grain conditionally (i.e., when the outside temperature is less than the in-bin temperature by at least 5 degrees).
3) If the in-bin temperature is above 51 degrees F. and mold damaged kernels reaches 6.14% any time before the first half of March, then aerate the grain conditionally and keep it until early in March to sell it to the local elevator. If it is any time past March, then sell it to the local elevator right away.
4) For the period before December, if mold damaged kernels reaches 5%, sell to the food processor because, no storage fee is paid until December and hence the risk of losing money from possible mold development is higher than the storage fees earned for the periods after December.
5) In the summer months, if the in-bin temperature is between 60 degrees F. and 96 degrees F, and the number of mold damaged kernels reaches 5.29%, then sell it immediately to the food processor. This is because, in these periods, the periodic damage from molds exceeds the storage fee paid per period.
Summary:
Delayed delivery premiums for contracted grain production can be lucrative, but will require management of the risk of the grain going out of condition, and that management should see a return. Whether the objective is to optimize a return, or minimize a loss of the price premium by overspending on energy expense, a farmer must achieve profitability by preventing mold growth. Creating a plan of benchmarks for maximum mold levels and grain temperatures can facilitate the decision-making process for delayed delivery of grain.
Posted by Stu Ellis at 12:51 AM | Comments (0) | Permalink
May 5, 2008
Checking In On The Recent Dynamics In The Wheat Market
As the US wheat crop comes to life, and makes the final turn toward maturity, domestic and global supplies will soon be expanding and concluding a multi-year chapter of short crops and tight supplies. The US wheat producer fed the world, allowing domestic supplies to run critically short in an effort to meet global needs. As the new crop in the Northern Hemisphere takes shape, what factors will dominate the market?
USDA’s latest Wheat Outlook has kept supplies at 2.613 billion bushels from the 2007 and prior crops and utilization at 2.371 billion bushels. That makes ending stocks at 242 million bushels, the least since the late 1940’s. The relative short US crop last year was just over 2 billion bushels because of freeze and harvest problems. Combined with the short crop was a 322 million bushel increase in use, primarily from export demand.
Old crop exports continue to rise and the 1.275 billion bushels estimated for the year will be 366 million above the prior year. Short crops around the world, increased economic buying power in developing countries, and the exchange rate all made the US the world storehouse for wheat.
Domestic flour consumption continues it slow climb back from the recent dietary trend that diminished carbohydrate consumption. Per capital use in the last fiscal year was 8.8 lbs. under the recent high watermark set in 2000. The diet trend toward high fiber, grain-based food will spur wheat flour consumption. Last year’s consumption of 137.5 lbs compares to the all time high of 225 lbs. in 1879 and 110 lbs. in 1972.
New crop production is based on an estimated 63.8 million acres, up 6% from last year. Winter wheat acreage is estimated at 46.8 million, and spring wheat is forecast at 14.3 million. The winter wheat crop is currently 45% good to excellent condition, compared to 64% at this time last year. 21% of the crop is rated poor to very poor, primarily in the Texas and Oklahoma wheat country, but conditions are improving.
Globally, wheat production is increasing with better crops and crop conditions, along with increased acreage due to higher world wheat prices. Production for 2007/08 is estimated at 606.7 million tons and use for the same period is forecast at 619.1 million tons. The continued high demand and corresponding prices are shifting wheat from livestock feed to human food. Ending stocks are estimated at 112 million tons, up slightly from higher production and lower use.
US export trade for the current marketing year continues to climb because of reduced competition and an increase in overall world trade. March shipments, for example, were 20% higher than March of 2007. While the continued pace of exports for the balance of the current marketing year will slow from tight US supplies, USDA is expecting June shipments of new crop wheat to be strong. The Australian wheat exports are being restricted to ensure supplies are sufficient for domestic demand, and Argentine wheat export estimates have been cut because of the uncertainty in domestic export regulations. However the high world price for wheat has resulted in increased exports from China and Brazil.
US average wheat prices, which had nudged the $4 mark for 2006 production, pushed well toward $12 for the 2007 crop.
Summary:
Domestic supplies of wheat are at 60 year lows. World supplies of wheat are at 30 year lows. But prices have responded, encouraging more production. Wheat prices are half of what they had been, but are still well above typical prices, driven both by short supplies, and by increasing world wealth and corresponding buying power. Major suppliers in the global wheat trade have both curtailed exports for domestic reasons and others have expanded exports to take advantage of the high priced demand.
Posted by Stu Ellis at 12:43 AM | Comments (0) | Permalink
April 24, 2008
True or False: Ethanol Can Be Credited For The Current Price Of Corn?
There are some people who like ethanol and there are others who do not like ethanol. While it is wrapped in the American flag, it has its detractors, and there are an increasing number who blame ethanol for higher food prices. That is a jump over a sizable chasm, since the price of corn is in the middle of that leap. While higher corn prices may or may not have lead to higher food prices, ethanol demand has lead to higher corn prices. But by how much?
Ethanol production has grown exponentially in the past several years, and thanks to higher oil prices, ethanol refineries can remain profitable despite $6 corn prices. The 20% share of the US corn crop that went into ethanol last year will reach 30% in the coming year. However, the demand for corn to feed ethanol plants has created hardships for other users of corn. An estimate of the impact of ethanol on corn prices has been calculated by University of Wisconsin economists T. Randall Fortenbery and Hwanil Park.
Quite a few recent economic estimates have been offered:
1) 154,000 acres of North Dakota corn could be obtained for ethanol with an 11¢ premium.
2) 4.67 billion gallons of ethanol production by 2010 would raise corn prices by 18%.
3) Corn prices are 12.5¢ higher at ethanol plant sites.
4) Corn prices might increase 5¢ as much as 150 miles from an ethanol plant.
5) Corn prices would average $3 per bushel in 2014 if 14 billion gallons are produced.
Nevertheless, the Wisconsin economists look at the supply and demand factors in the corn market to develop the ethanol impact, by identify how each of the demand factors such as feed, seed, and exports individually affected the corn price. They determined that a 1% increase in ethanol production causes a 0.16% increase in the corn price in the short run. Applied to current prices, they said, “Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41¢ per bushel. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed.”
While $2.95 is much lower than corn prices actually were last fall, the economists believe that a competing demand from a hot export industry also contributed to the higher prices of last winter and spring. During that period, corn exports grew 15% over the prior year as USDA had to continually raise its estimates, and that added another 10¢. But that still does not account for the entire price.
The Wisconsin economists suggest that speculative traders, who increased their long positions, helped push up the prices of corn to levels seen today. Some farmers may not be surprised at that, but critics of rising food prices may be surprised.
Summary:
Rising corn prices in the past year have been attributed, in part, to the increasing demand for ethanol. Looking at the impact that all uses of corn have on its price, ethanol can take credit (or blame) for about 41¢ per bushel, raising the price to nearly $3.00 per bushel. However, other factors, including a strong export demand has added only 10¢ to the price, leaving the increased price of corn to the credit of speculators who take long positions in the market and push up prices as they buy futures contracts.
Posted by Stu Ellis at 12:35 AM | Comments (2) | Permalink
April 14, 2008
Your Marketing Seat Belt Protects You During The "Tractor Seat Bounce."
Did you tell USDA a month ago that you were going to plant more soybeans because beans provided a price advantage over corn? If so, look again, because corn now has an advantage over beans. Some of your neighbors have decided to make the shift since the Prospective Plantings Report two weeks ago, hoping to cash in on the rising corn market and fading bean market. Before our total focus turns to planting, let’s make sure our marketing plan is current.
With the help of Extension Marketing Specialist Chris Hurt at Purdue, we’ll review his April 12 corn newsletter.
The market will be watching the same thing Cornbelt farmers are watching and that is the weather. Ethanol plants are also watching the margin between production costs and corn prices, and Hurt says there is a 30¢ cushion for refiner profitability. Futures prices may push toward $6.40, but cash price increases will need acreage shifts away from corn because of weather delays.
Old crop corn has been costing you storage and interest and may be wearing out its welcome in the next few weeks. Hurt suggests a marketing plan that allows you to keep some old crop for sale in the typical volatile market around pollination time. For the rest of it, determine if a June delivery premium will cover storage costs, plus interest of 8¢ per bushel. If it won’t cover commercial storage, move your elevator-stored corn first.
New crop corn may give you the opportunity to sell at a record price of $6.50. Hurt is recommending about one-third of your new crop being priced by mid-May. Your elevator may be one of many not offering a cash contract. If so, you can probably get a basis contract, then use a commodity broker for a hedge. If 2008 corn acreage is relatively small, then ending stocks will decline and the basis will strengthen. If 2008 corn acreage is relatively large, then Hurt believes harvest cash prices may be in the high $4 to low $5 range.
Advanced marketers may want to consider using the options market to set a floor and a ceiling above the market. Buying a $5.70 put option establishes a floor price if the market falls. Selling a $7 call option establishes a ceiling well above the expected market, but the income from the call reduces the total cost to 10¢ per bushel. Keep in mid there will be commission charges and a margin fee for the call option, and before using this plan, ensure you know all of the financial risk.
In his April 12 soybean newsletter, Chris Hurt suggests:
The market has fallen substantially since July futures peaked at $15.96 on March 3 and boosted many farmers plans for increased soybean acreage. The great expense of meeting margin calls caused many speculators to liquidate their long positions and prices fell. Also with higher ending stocks estimated by USDA and good production in South America, the domestic and global supply of soybeans is higher than earlier thought.
With the old crop in mind, the forecast 18% increase in soybean acreage will provide a greater supply than expected, so prices will average closer to the $10.50 mark. With a wet forecast that will shift some corn acres to beans, the bean market is facing several bearish factors. However, the low value of the dollar and high oil prices are offsetting a decline in soybean prices. Hurt believes soybean prices might fluctuate over the next couple of months between $12 and $14.50. He also expects the soybean basis to improve because old crop beans are in tight supply and many farmers would rather plant than deliver beans in the next two months. As a result, Hurt recommends being 80% sold for old crop beans by the end of May.
If new crop planted acreage fades as expected and ending stocks increase, normal yields for the 2008 soybean crop would be met with a harvest cash price in the range of $9 to $10. Hurt thinks November beans may trade from $11 to $13 over the next couple months and provide a marketing opportunity if cash prices reach into the $10 to $12 range. However, the basis is 80¢ to $1.20 because elevator operators are being subjected to a wide basis as well because of expected volatility. A normal crop would reduce that volatility and the basis could tighten by as much as 40¢.
Advanced marketers may want to consider a hedge to arrive contract, if offered by an elevator that would allow the futures price to be set and then await the basis to tighten. Or a futures hedge could be established with a commodity broker on 30% to 40% of expected production by the end of May. An option strategy by buying a $12.40 put option and selling a $14 call option would establish a floor and ceiling for just 34¢ per bushel. However, a marketer should be familiar with the risk of selling an option.
Summary:
The planting season usually means a “tractor seat bounce” in the market which would provide pricing opportunities for both corn and soybeans to take advantage of the market. Corn needs to find more acres and if that can be done with higher prices, then the new crop price will fade into harvest. The soybean market is trying to find its level in the midst of more acreage and higher supplies. However, with many elevators backing away from cash contracts, many farmers will have to utilize a futures hedging strategy with a commodity broker and then write a basis contract at the elevator when the basis tightens later this year. Additionally, options strategies can be used, which will lock in profits at a reasonable cost.
Posted by Stu Ellis at 12:38 AM | Comments (0) | Permalink
March 19, 2008
Is The Churning Corn Market Churning Your Stomach?
Is the corn market making you nervous? If so, you may not be fully protected. Do you make up that protection on the way down, or in the midst of volatility? But with the acreage report due out in two weeks, with spring planting nervousness, and with summer weather issues, is the corn market really finished with its bullish performance?
Most of the commodity market analysts and marketing specialists are not making any predictions until USDA’s Prospective Plantings Report is issued on March 31. And Purdue’s Chris Hurt is one of those who believes the acreage report will have a significant impact on the market. In his recent newsletter, Hurt suggests that the corn market has been in winter dormancy, while the focus has been on soybeans and spring wheat nibbling away at potential corn acreage.
Hurt’s expectation is for 88 million acres of corn, and he says that’s not enough. 88 million would be more than 5 million less than last year, and with a trend yield, the 12.4 billion bushel production would be insufficient to supply the demand. Additional demand will come from more ethanol plants starting up which will require 1.4 billion more bushels than were needed from the old crop. Hurt adds that to the 13 billion bushel utilization from the current marketing year, and that means 14.4 billion bushels of corn will be needed. Subsequently, there will not be enough to go around, and substantial rationing will occur.
Of the ethanol, industrial, export, and livestock industries, Hurt rhetorically asks who is going to get cut first?
1) Ethanol production will be determined by the ethanol margins, and whether it is profitable to refine ethanol at a given price. The profitability will be determined by the price of gasoline and that means the price of crude oil. High crude oil prices means that ethanol producers will be able to bid higher for corn, and Hurt says the futures market suggest that ethanol plants can bid $5.25 to $5.50 and remain in the black.
2) Higher prices for corn-based industrial products such as high fructose corn sweetener can be passed on to consumers. Food and soft drinks may cost a couple cents more, so Hurt believes that industry will get the corn it needs with steady demand.
3) The export sector has been at a high demand level, despite high prices, which are mitigated by the low value of the dollar. The currency value and world economic growth are expected to continue driving export demand for the new crop. It could soften somewhat with Hurts concerns about a strengthening of the dollar and more corn being produced around the world.
4) The livestock industry is the most fragile with its current financial stress, and Hurt predicts feed use will drop 10%.
The Prospective Plantings Report will be bullish for new crop corn, says Hurt, but old crop corn prices could also move higher, with an early spring peak the first part of April. But he suggests continued volatility in the corn market throughout the growing season due to USDA reports, weather issues, and hedge funds shifting in and out of the commodity market.
Hurt believes that the March 31 report will be bullish enough for December prices to move above the $6 mark. But if your elevator is not offering forward contracts to price grain for fall delivery, how do you sell it? The only choice may be to use the futures or options market with a broker or elevator merchandise helping guide you through the pitfalls. There is little time to learn market strategies if you are preparing to go to the field. But one of the issues that you will need to address with a hedge is to meet the margin calls that may be required, if you have sold (gone short) and the market continues to rise. There may be large amounts of cash that are required to maintain a legitimate hedge, and that may require a conference with a lender.
Purdue’s Chris Hurt says the market could turn into a dangerous turmoil for producers, if there are weather problems. He strongly advises against any speculation and to be sure of any risk you are taking.
Summary:
The 2008 corn market could be dangerous for the faint-hearted and unprepared, due to strong demand for a potentially insufficient crop. Increased demand from ethanol, continued demand from the export and industrial markets will more than offset an expected softer demand from the livestock industry. The March 31 USDA report will indicate planting intentions, but so far, intended corn acreage may not be enough to meet the domestic and foreign demand for corn. Farmers may have to finance their own marketing tools, such as hedges and options, but should know all of the risk being taken.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
March 13, 2008
What Impact Would A Drought Have On The Ethanol-Based Corn Market?
You have wondered about the impact of a drought on the tight corn market. So let’s talk about that scenario. We already have $5 corn resulting from ethanol demand, export demand, and hungry livestock. What happens to the price if La Nina brings a short crop? Remember, there are federal mandates that require minimum levels of ethanol production, and that is the elephant in the room.
Getting a good handle on the issue requires consideration of many variables, such as planted acreage, yield, export demand, gasoline prices, and capacity of the ethanol industry. Those issues were analyzed by Iowa State University economists Lihong McPhail and Bruce Babcock in their report on the corn market. They say the corn market has been linked to the gasoline market through ethanol, with the goal being less dependence on foreign oil.
Federal energy policies have continued to raise the target for corn ethanol production, which now stands at 15 billion gallons by 2022, but at the end of 2007, the ethanol industry was halfway there. That has pushed corn above the $5 level with increased market volatility and the latter affects the decisions of players in the marketplace. The corn market had been used to supply shocks of drought or acreage setasides, but market shocks now come from export demand, ethanol production and the price of gas. And today the price of gas determines the price of ethanol and that affects the price of corn.
The Iowa State researchers say current corn prices are sensitive to planted acreage and yield because stock levels are relatively low and the demand for corn is strong, helped by the declining value of the dollar. Estimating a 90 million acre corn crop in 2008, a $4.97 corn price, 82% ethanol production capacity, and a continuation of the 51¢ blenders’ credit for ethanol, the researchers applied that baseline to the potential variables. They found:
1) The federal ethanol production mandate increased the average corn price to $5.32, with an average ethanol price of $2.37 per gallon.
2) Corn price volatility is directly correlated with the volatility of gasoline prices.
3) With the prospect of a La Nina drought affecting 2008 production, a 113 bu. national yield (1988 style drought) would push corn prices to $6.42 and only 27% of the ethanol plants could operate and the ethanol production mandate would not be met. If the mandate was enforced, corn prices would reach $7.99 and ethanol plants would require a $6 billion subsidization to continue operating.
4) A 169 bu. national yield would mean a $4.06 corn price and 99% of the ethanol refineries would be operating, producing more than the target amount of ethanol.
5) Removal of the 51¢ tax credit reduces the price of ethanol by 51¢ and corn prices average $4.15 per bushel, but only 54% of the ethanol plants can afford to operate and the ethanol production target would not be reached. If the 51¢ tax credit was replaced by a variable credit that encourage ethanol refiners to produce the target amount of ethanol, taxpayers would not pay as much to subsidize ethanol production.
Summary:
The relationship between corn, ethanol, and gasoline prices has resulted from the federal ethanol production mandates, and they will have an impact on corn prices particularly if a short corn crop results from weather issues. The reduction in production will raise corn prices to levels that ethanol refineries cannot afford to operate, and either the ethanol production mandates will have to be relaxed or refineries will have to be heavily subsidized to be able to buy corn at nearly $8 projected prices.
Posted by Stu Ellis at 12:41 AM | Comments (1) | Permalink
March 4, 2008
Get A Congressional Grasp Of The Wheat Market.
The average price of wheat in the current marketing year will take a nearly 50% jump from the prior all time high of $4.55. USDA’s projected range for all wheat in the marketing year that ends in May will be $6.45 to $6.85 per bushel. Over the past 30 years wheat has only averaged $3.33 per bushel. So what has suddenly overtaken the wheat market, even pushing futures for certain varieties above the $20 mark in Minneapolis?
The Minneapolis issue seems to be a trading problem and is entirely different from the supply and demand scenarios that have consumed the world wheat market. But the goings-on at the Minneapolis Grain Exchange are indicative of the fervor that has pushed wheat prices higher. In response to Congressional inquiries about the wheat market, the Congressional Research Service has summarized the issues. (This document is not yet available on the Internet.) CRS analyst Randy Schnepf outlined several factors that have contributed to the higher wheat prices that began in 2007.
Major producing countries. Many of the nations that typically supply the world’s wheat demand began having crop shortages late in 2006. Following the Australian drought, an Easter time freeze in the US, and heavy rains in Europe cut the quality and quantity. Then in the summer, the northern crops in Canada and the Ukraine were also found to be short because of adverse weather.
Limited exports. Early in 2007 some countries began halting sales to foreign buyers, and Europe halted the practice of subsidizing its exports to get rid of surplus wheat. Late in 2007 the only exportable supplies of wheat were in the US and Russia, but they were tight.
Strong demand. With the world demand up and supply down, buyers were coming to the US with orders for wheat unseen for more than 30 years. Even though wheat prices and ocean freight costs were up sales were strong, to both wealthy and developing countries. The typical decline in US wheat exports that occurs in the spring did not occur and monthly sales exceeded the prior month. By last August and September wheat prices had reached record levels, but so had export volumes.
Low stocks. By July, global stocks are expected to reach a 30 year low, while consumption continues to exceed production. And the three decade US trend of fewer acres will contribute to the least carryover in 61 years.
Price premiums. Because of shortages of milling wheat, prices for wheat with 13% to 15% protein have risen faster than standard protein wheat. Additionally, USDA’s wheat seedings report in early January indicating acreage was under market expectations. That ignited interest in owning wheat, as well as sending a message for more spring wheat acreage. Futures contracts for hard spring wheat reached $24 at the Minneapolis Grain Exchange a week ago in unprecedented trading activity. Prices have also risen for other preferred varieties as buyers search for limited supplies.
Competing for acres. US wheat acres have declined for the past 40 years because of higher revenue potential from other crops. Even short season corn and soybeans have forced wheat out of the Northern Plains, and the spread of ethanol plants has continued to increase the value of corn where it can be grown.
2008 outlook. High commodity prices will encourage planting expansion. USDA is expecting wheat acreage up 6%, soybeans up 12%, and corn down by 4% from 2007. With normal weather, wheat production could rise by 13%, and globally wheat plantings are expected to increase. If that is the case, demand for US wheat will decline as world stockpiles are rebuilt, as will be US supplies. That means prices will decline from their recent highs, but are expected to remain in the $4-$5 range over the next five to ten years.
Domestic food price impact. 2007 saw food prices increase by 4% due to higher commodity and oil prices, and the forecast for 2008 is another 3%-4% more. Products made primarily with wheat are rising slightly faster. This situation is causing inflation fears to rise, but most economists are blaming oil prices as the primary cause.
International food price impact. Countries dependent upon food imports are at a greater risk of higher food costs, but the impact depends on how much consumers typically spend on food out of their income. In the US that is about 10%, but low income consumers will spend higher amounts, and in importing countries that problem is magnified. Humanitarian groups have been expressing concerns about that issue. Typically, US food aid programs might be of assistance, but because the federal budget fixes dollar amounts, purchases for export donations will be limited.
Summary:
Poor crops, short supplies, and strong demand have caused the wheat market to scream to higher price levels than ever before. Domestic and foreign wheat acreage is expected to increase this year, helping to rebuild stocks and that will soften the prices. In the meantime domestic and foreign food prices have risen, particularly those made primarily of wheat and food deficit nations have had to spend a lot more money for food than would normally be expected.
Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink
February 25, 2008
This Little Piggy Went To Market, A Long, Long Way Away.
For years agricultural organizations have been promoting policies that will enhance exports, pushing the government to press for more market access, and conduct promotional campaigns in food markets around the world. Suddenly the world has come to the US for food, and in just 12 months export business exploded with a nearly 20% jump. $101 billion in 2008 export business was projected last Thursday at USDA’s Outlook Forum. Unbelievable!
It may have been little surprise to the worldwide audience at the annual event, but higher prices for feed grains, wheat, and soy complex products have pushed the estimated export value up $10 billion just since the last estimate was computed in November. The overall projection resulted from high foreign demand, low overseas stocks, sharply higher prices, and the exchange rate that favors the buyer.
Economic Outlook. The weaker dollar favors export growth, and even though domestic growth has slowed, global economic growth will remain about 3% for the year. Crude oil prices are expected to be 10% higher than 2007, with a 7-9% rise in fertilizer prices. US growth is expected to slow from the home mortgage financial problems and a recession. The dollar is expected to depreciate against the euro, yuan, peso, and real, but unchanged against the Canadian dollar and up slightly against the yen.
Export Products. Feed and grain exports for 2008 will be $32.7 billion, up more than $5 billion from last year, due to wheat and corn prices, as well as worldwide demand. But volume will increase along with value, since competitors have little to export and US supplies are ample. USDA says the record prices have not dampened export demand. In the soybean trade, both value and volume are up from last year, helped by growing sales to China, which is taking 40% of US soybean exports. Livestock and livestock product exports should reach a record $18 billion, which is 10% more than last year, with the help of more pork, beef, and broiler meat shipments. Horticultural products will also be up 10% from last year to nearly $20 billion.
Regional exports. Much of the $10 billion increase in the forecast from November is a result of higher prices, which means every region of the world will be sharing in the higher value of export trade. China will buy $8.4 billion in agricultural products, primarily soybeans and higher valued products. Japan will buy $11 billion in products, primarily commodity grains and processed foods. About 25% of exports will be going to Europe, Africa, and the Middle East, which is a 22% increase from last year. The Western Hemisphere will be buying nearly $40 billion, with 70% of the business destined for Canada and Mexico. They are the top 2 US markets and will buy more than $30 billion guided by NAFTA rules.
Import products. On the return trip, ocean freighters will be bringing back foreign foods for the US market, projected to total $76.5 billion in 2008, only a slight increase from last year. The greatest amount is an estimated $35 billion worth of horticultural products coming into the US, followed by $15 billion worth of sugar and tropical products, and $12 billion worth of livestock products and meats. On a per capita basis, Americans are consuming nearly 24 gallons of imported wines and beer, as well as 800 pounds of imported fruits, vegetables, and nuts, which make up 36% of the imported products. The pork producer would be interested in the changing dynamics with the Canadian hog trade. Southbound pork shipments will decline by $80 million, replaced by hogs for slaughter. There are disincentives in Canada for hog slaughter, and with higher feed costs, the hogs are coming into the US for finishing and slaughter. But the shipments are more than offset by lower beef and pork imports. USDA says the average price for imported food products was up 8% in 2007, and that will likely be the trend during the first half of 2008.
Changing dynamics. In the 1990’s the top US trading partners were Japan and the European Union, but the inception of NAFTA in 1994 has resulted in a shift to Canada and Mexico as our current top trading partners. Growth of exports to Asian is trending upward. The reasons for change include governmental policies, and shifting preferences for bulk commodities and for high valued processed products. Over 90% of imported agricultural products are processed and high value products. One of the increases is in grain products, such as biscuits, wafers, flours, and milled grains.
Summary:
Foreign economic growth and buying power, combined with diminished grain supplies abroad have brought the world to the US grocery store, and it will be carrying home more than $100 billion worth of agricultural products in 2008. That is a 20% increase from 2007, due to increases in both value and volume of US products being shipped. Some of the changes have resulted from government policies such as NAFTA, the growth in the Chinese economy, and the shifting of market preferences between bulk grain commodities and high value processed products.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
February 21, 2008
If You Have Made Your Cropping Plans, It Is Time To Book Your Profits.
Are you planting more corn or more soybeans than last year? Are you planting equal amounts? Are you changing your cropping patterns at all? The market is certainly bidding for your acres, based on a variety of fundamental forces that are pushing and pulling on Cornbelt crops.
Cash corn is at the $5 mark at some locations. March soybean futures are nudging the $14 mark, which Purdue marketing Specialist Chris Hurt says is overpowering the corn market. In his latest newsletter for soybeans, Hurt says expected returns per acre are nearly $30 higher for soybeans than corn on average Midwestern soils. Subsequently, he’s expecting the USDA’s Prospective Plantings Report at the end of March to show excessive soybean acreage planned for 2008. If so, that would be bearish for the bean market, and would make farmers who forward contracted beans prior to March 31 look pretty smart.
Some of the fundamentals to be watched in the soybean market include exports, which are running ahead of last year and the old crop carryout which is down to only 19 days of supply. Reports about the South American soybean crop will soon be confirmed, along with reports of adverse weather that may hurt the crop size.
Sellers of soybeans have usually had good opportunities in the March to May window, and Chris Hurt recommends moving to 40% of old crop beans sold by that time, moving up to the 80% level before the end of May. For the new crop, Hurt suggests being 30-40% sold by June. While Hurt has suggested that soybean prices may reach $15, he urges farmers to utilize crop insurance to protect that revenue opportunity, despite higher premium costs.
As noted previously, Purdue’s hurt believes corn prices are too low, relative to soybeans and he believes corn acreage will drop 5% from last year if it does not increase 20¢ to 30¢ per bushel. But right now, he’s betting the March 31 plantings report will predict corn acreage to be far too low, according to his latest corn marketing newsletter.
The export market remains positive for corn despite the current prices. While the livestock producer has financial stress, there are few signs of a cutback in production. And Hurt says the carryover into the 2008 marketing year will be tight and will keep prices high.
To take advantage of those prices, Hurt wants farmers to consider using the February to May period for reaching the 80% sold level, and having 30% to 40% of the new crop forward contracted by planting time. He’s concerned about the potential for warmer and dryer weather this growing season. Given that fact, Hurt is pushing farmers to consider revenue style crop insurance to protect pricing opportunities, despite premium costs.
Supporting Chris Hurt’s concerns about having sufficient supplies of the right type of grain is Missouri marketing specialist Melvin Brees. In his latest marketing newsletter Brees says the market is trying to reconcile the needs of processors in 2009 with acreage and yield yet to be determined in 2008. And that debate over acreage will impact every corn and soybean producer in the Cornbelt. Brees also points to the March 31 Prospective Plantings Report as an indicator of how well the market has convinced farmers of how much acreage to devote to corn and soybeans. But the success will not be known until the report is released.
A year ago, the market had to flip-flop between the intentions report and planting time, or an insufficient amount of corn would have been produced in 2007. The market adjusted after the report, and Brees says 93.6 million acres of corn were planted with nearly the entire amount expected to be consumed in the current marketing year. He says corn cannot afford to give up many acres to beans in 2008, even though soybean use will exceed production in the current year and more soybeans will be needed in 2009.
In the middle of the corn and soybean acreage battle is the wheat market, which has the smallest supplies in 60 years. But less wheat was planted than the marketing expected, so prices remain high, which Brees says should entice spring wheat producers.
Worldwide, grain stocks are low as economies grow and increasing populations demand more and better food. That dynamic, combined with the low value of the US dollar, has fostered exports to levels that will reduce US stocks to low levels. And Brees says that will signal continued strong prices.
Summary:
Tight world supplies of grain, which result in increasing US export business, have caused domestic stocks to decline as well. The US market is bidding prices higher, buying acres for corn and soybeans in particular, but also for spring wheat. Consequently, prices will remain strong until the Planting Intentions report, which may indicate excessive acreage of one crop and insufficient supplies of another. The timing of the report, estimates of Brazilian soybean production, and the annual spring bounce in the markets will combine to provide farmers good marketing opportunities in the next few months.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
February 13, 2008
Ethanol Is Here To Stay, So What Does That Mean For Acreage, Grain Prices, And Feed Prices?
Nearly all farmers jumped on the ethanol bandwagon when it took off over 25 years ago. They saw its potential to create a new demand alternative for corn that would raise the price. Now that grain producers have been getting a suntan from the ethanol star and livestock producers have been getting a sunburn, it is not hard to see that ethanol has been driving corn prices and its co-product distillers’ dried grains (DDGS) has been driving the feed market.
Government subsidies and mandates, high crude oil prices, and the need to replace MTBE created the perfect scenario to thrust ethanol onto the stage with a fanfare of rising grain prices. Kansas State University economists Kevin C. Dhuyvetter, Terry L. Kastens, and Ted C. Schroeder analyzed the impact ethanol has had on the Cornbelt economy. They note that corn-based ethanol production has expanded six-fold in the past 10 years, but grew more than 33% just between 2006 and 2007, which they say will impact acreage, grain prices, and DDGS supplies.
As a point of reference, one bushel of corn provides 2.8 gallons of ethanol and 17-18 pounds of DDGS. As of December, 135 ethanol plants were operating with a capacity of 7.42 billion gallons per year. Another 74 were poised to begin operations, adding another 6.06 billion gallons of capacity per year. The economists say, “The key points are that the current economic conditions in the ethanol industry are such that rapid expansion going forward is unlikely. Furthermore, current media reports suggest that planned expansion has dampened the last few months.” Parallel to that, Congress has mandated the production and use of 15 billion gallons per year by 2015, but the economists doubt that goal will be much of a challenge to reach.
To have enough corn to reach the goal will be a point of concern. The economists predict total corn use exceeding 14 billion bushels by 2015 and a need for over 13 billion bushels every year from 2011 forward. That size of crop will depend on acreage and yield, and with yields increasing, they say, “The U.S. does not need to plant as many acres in the next several years as were planted in 2007. However, it does need to plant considerably more acres than the 80 million acres or so that has been planted in the past.” But they also acknowledge that a short crop at anytime will result in a significant bidding war for limited bushels.
Addressing the analysts who say we are in the middle of a price run up and it will fall back, the Kansas State economists say the current high prices are on the heals of some of the largest corn crops in history and they are the result of demand, not a supply shock. They predict, “We will continue to have a strong demand and the market will need to “buy corn acres” by offering higher prices than long-term averages.” And they remind us that ethanol impacts all crops, including hay, and that prices are above their long term averages for as far out as are being traded, with the expectation they are here to stay.
The DDGS co-product is offsetting 18 pounds of corn, but not all animals can consume large quantities of DDGS as they can corn. Another economic study at Kansas State calculated that based on the maximum daily consumption of different type of animals, the average livestock inventory could consume 52 million tons of DDGS per year. With the upward rate of ethanol production (and DDGS production) the 50 million ton mark would be reached in 2016. But not every animal will be forced to eat its share of DDGS, so some would be available for export, and prices would likely fall for DDGS supplies to be cleared out before spoilage occurred. DDGS prices rise, to some extent, along with corn prices, however based on prices of DDGS at a variety of US locations, the $40 variation suggests the basis between corn and DDGS is high.
Summary:
A 13-15 billion gallon ethanol production level will be reached in the next 5-7 years, and 86-90 million acres of corn need to be planted annually, even with the growing trend yield. They predict that crop prices will remain higher than long term historical averages, but there will also be increased variability. Prices of DDGS can be correlated with corn prices, so livestock producers will need to be concerned about feed costs.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
February 11, 2008
Did You Hear The Latest Numbers?
The February Supply and Demand report issued by USDA is usually guaranteed to draw more yawns than to raise eyebrows. But last Friday’s World Agricultural Supply and Demand Estimates (WASDE) report was one for the history books. In the volatile market atmosphere of limit moves on the commodity exchanges, USDA’s tweaking of numbers and insights on market fundamentals provides a healthy ration of blog fodder.
The February 2008 WASDE Report caused major swings in market prices, with partial help from the wheat futures market.
Wheat
USDA reduced wheat ending stocks to the lowest level in 60 years, and calculated the stocks-to-use ratio as the least in 61 years. The export market for US wheat continues to be strong, a function of the 30 year low in global ending stocks for wheat. World wheat producers are only adding 0.6 million tons, indicating continued tightness for months to come. Major wheat consuming countries are getting anxious about the supply and while world wheat trade is already at high levels, it was raised again by USDA. The global demand has pushed US wheat prices higher, with season average prices $6.45 to $6.85 per bushel, about $2 higher than the previous record high 12 years ago.
Current production estimates remained at 2.067 bil. on 60.4 mil acres. Food use will be 945 mil., feed and residual will be 110 mil. bu., and exports will be 1.200 bil., with total use at 2.341 bil. bu. and carryout at 272 mil.
Corn
While the market was expecting a slight drop in the corn carryout, USDA stayed with its January estimate of just under 1.5 bil. bu. and kept most of the numbers for feed grains unchanged. The season average corn price was a bit more defined by USDA, which tightened it 5¢ to a range of $3.75 to $4.25. That is a record high, and USDA’s estimates for price for sorghum, barley, and oats are also record highs. Globally, lower corn production was offset with higher production of other feed grains, but Argentine corn production was cut 1 mil. tons from drought. There is also less corn in Mexico from less acreage, but South African production was raised 1 mil. tons from good weather. World trade in feed grains was left unchanged, and ending stocks were raised 400,000 tons.
USDA’s unchanged corn balance sheet has production at 13.074 bil. bu., feed use at 5.950 bil. bu., ethanol use at 3.2 bil. bu., exports at 2.45 bil. bu., and ending stocks at 1.438 bil.
Soybeans
US ending stocks were already low at 175 mil. bu. but USDA further reduced them to a 160 mil. bu. 19 day supply. Part of the reduction resulted from higher export estimates, raising that figure to just over 1 bil. bu. and also raising the crush estimate because of good crush margins and continued demand for meal. Soybean oil stocks were raised from the higher crush and from a higher oil yield than last projected. But soy oil use was dropped from lower estimates of bio-diesel production due to high prices for oil. USDA narrowed the price range for soybeans to $10 to $10.80. Meal prices are expected to range from $305 to $335, and soy oil prices are projected in a range of 47.5¢ to 51.5¢. Globally, lower soybean production will be countered with higher production of other oilseeds.
The soybean balance sheet has 2.585 bil. bu. for production, 1.835 bil. bu., for the crush, 1.005 bil. bu. for exports, and carryout at 160 mil.
Summary:
The global grain trade is on fire with short supplies and high demand for wheat, feed grains, and oilseeds; and the result is higher prices. A 30 year low in global wheat stocks will not be changed much from Southern Hemisphere crops, and that is combined with a 60 year low in US wheat carryout. While US corn supplies are adequate, world feed grain trade is high because of less feed wheat being available and Southern Hemisphere corn producers not increasing mid-year production. US soybean stocks are quite low from meal and oil demand, but bio-diesel production is beginning to fade from high oil prices.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
January 30, 2008
Take Advantage Of Prices Offered By The Soybean Market
21 days. At the rate the US uses soybeans, at the end of the marketing year next August a 21 day supply will be all that exists. When the Soviet Union bought US wheat in 1972, we were left with a similar amount of wheat. In 1973 when there was an international run on US soybeans, a 17 day supply was left when an embargo was put in place. The shortage of supply has driven prices well above $13 per bushel, but how high will the bean market go?
USDA’s estimate of the meager soybean carryout for next August pushed market prices higher, but Purdue economist Chris Hurt believes there is still room for the market to travel upward. Just like in 1973, foreign buyers have continued to purchase, thanks in part to the currency exchange rate that gives them an advantage. Current export commitments are ahead of last year and USDA says they need to be cut by 11%. Chinese purchases are up 14% from last year and Hurt says the Chinese would buy more if there is any weather threat to the South American crop.
The tight supplies will continue, even with an 8% increase in acreage that the market expects, which means high prices will remain into 2009. the $13 level has been a consolidation point for many buyers, who are waiting for prices to edge higher where they can feel comfortable again. But with such uncharted territory, what signals should be obeyed by farmers who may still have unsold soybeans? Hurt says:
1) Watch weekly export sales, since buyers may continue at an orderly pace or begin panic buying.
2) Watch for signals that soybean meal use is being cut back by the livestock industry.
3) Watch for weather indicators that may hint about the size of the South American crop.
Hurt says many years will record the market highs in the March to May time period, and this year may not be any different. He is urging farmers to become 40% sold now, and to reach 75-80% sold by planting time in May. Absent the desire to unload large quantities, Hurt suggests small weekly to daily sales to spread out the risk or use an elevator pricing program that sets prices at the average price over a late winter or early spring window.
Those strategies do not require prediction of a top in the market, which Missouri’s Melvin Brees also says he has no idea where and when it will happen. Brees doubts that market demand can be sustained at current prices, and that is already beginning to show up in the soybean oil market.
So what should be done about selling in Brees’ mind? He says while selling decisions are not easy, marketing at today’s prices is quite profitable, despite the volatility. He also advocates incremental sales, as long as you do not run out of inventory to sell before the market reaches its higher areas. At that point, your soybeans can be re-owned on paper and marketed again with either options or futures, and that might require significant margin requirements. Brees also suggests the use of price traps, which is a signal to an elevator that you want to sell, should prices fall to a certain level. Those benchmarks are set below the market and are moved up as the market moves up.
Summary:
The soybean marketing is climbing with uncertainty about how high it will go, and farmers with unsold soybean may want to work on a calendar, with sales over the March to May period when prices would expect to be at their highest for the year. Small incremental sales will also help capture high prices, and price traps willinsulate against any severe price moves.
Posted by Stu Ellis at 11:00 AM | Comments (0) | Permalink
January 28, 2008
Check The Calendar, Instead Of Corn Market Prices
If you are among many farmers with 2007 corn yet to sell, you may not yet have a price target, but do you have a timetable for pricing your unsold corn? Since corn prices may rise to “who knows where,” should your marketing be based on the same timing principles that have guided you for many years? Let’s think about that for a moment.
The market was not anticipating the changes made by USDA in its final 2007 crop report, in which production was lowered, feed use was raised, and carryout was lowered to just over 1.4 billion bushels. Purdue economist Chris Hurt says that may be a lot of corn, but the way the ethanol market is refining it so rapidly; it will be insufficient as a carryover. His recent newsletter says higher prices and rationing must continue. And he says the market needs to buy 2.5 million more acres than it did prior to the report, which he says points to $5.25 to $5.75 corn and that will cut hard into the livestock industry. Export demand is insulated by the currency rates and industrial use can pass on the higher prices to consumers.
But when will the high prices occur? Chris Hurt says over the past ten years, corn prices have tending to peak between mid February and mid May, which is reasonable to expect this year. So farmers have a 30 to 90 day window to price most of their unsold inventory. For an orderly marketing plan, Hurt says be 40% marketed by now, and 75-80% sold by mid May. He also suggests selling any remaining cash inventory by that time and buying call options to take advantage of additional price increases.
Hurt’s colleague, Melvin Brees at the University of Missouri, also says he does not know how high prices will go, but it is likely that you will not sell at the high in the market, and that downside risk is more considerable because of the increasing volatility. Brees also endorses making incremental sales that spreads sales over a wide time period and helps sell some of your grain before any break in the market.
Brees says option strategies can also work, if you want to sell your cash grain and re-own it on paper, even though option premiums could be costly. Those might include an option “fence” which is the purchase of a put option and sale of a call option to reduce premium costs. Or a vertical strategy of buying an at the money option and selling an out of the money option will also reduce premium cost, but any option sale will possibly expose someone to margin calls.
Melvin Brees also say, “The potential for higher prices exist, but downside price risk is present as well. It seems hard to go wrong selling at current prices, but selling decisions are never easy in volatile markets. While no strategy is perfect and getting the market high is not a reasonable goal, a variety of market tools can be used to manage price risk and avoid missing out on good prices in uncertain markets.”
And Purdue’s Chris Hurt acknowledges, “Marketing decisions are going to be stressful. Try to keep emotions at a minimum by having and following an orderly plan of pricing. As you price new-crop, also consider attempting to lock in input costs. Crop insurance decisions will also be critical, so keep studying your alternatives and talking with market advisors and crop insurance sales agents.”
Summary:
The corn market is in uncharted territory and no one really knows how high it might go, which puts stress on farmers with unsold grain. Instead of targeting price levels that may or may not be reached, an alternative is to sell grain in an orderly fashion over the next 30 to 90 days, which puts it within a marketing window that has seen the highs over the past 10 years. If there is a further desire to profit from the market, that might be achieve with the use of options, and certain options strategies can be used which will reduce premium costs.
Posted by Stu Ellis at 12:03 AM | Comments (0) | Permalink
January 23, 2008
Soybean Market Fundamentals: Will High Soybean Prices Hold?
Wheat and corn prices are high, in part from domestic and foreign demand, as well as low global stocks. On the other hand, soybean prices are high, in part from domestic and foreign demand, but global stocks are not low. Could that impact your marketing plan for soybeans? By the way, what is the big picture for soybeans and oilseeds? We’re glad you asked!
US soybean stocks will be so low at the end of the current marketing year, USDA is forecasting the season average price to be a dime less than a $10-$11 range. The lack of sufficient supplies is only a year removed from record high surpluses, but reduced acres and a mediocre sized crop have occurred in the meantime. However the Brazilian crop estimates are being trimmed ahead of the coming harvest. That is giving rise to strong soybean prices reflected in USDA’s latest Oil Crops Outlook.
The 2007 US soybean crop was the smallest in 4 years, thanks to less acreage and less yield. Since the crop size was determined, prices have been very strong, and have not deterred importers. Shipments are down only slightly despite the lower supply. But those export shipments are fading as reflected in the reduced demand for soybeans at the Gulf and the correspondingly weaker Gulf basis, replaced by a stronger domestic crush. The export trade for the current marketing year is estimated at just under one billion bushels, but would be an 11% decline from last year’s export business.
Crushers are extracting more oil from soybeans, and USDA has raised its projection by 90 million pounds for the marketing year. Carryover stocks are forecast at 2.25 billion pounds, but the demand for oil has taken prices to record high levels. Oil prices recently surpassed 54¢ per pound for the September 2008 contract. The high oil demand and low soybean stocks have pushed futures prices past the $13 mark for the July contract. But the cash market has been slower to move and the basis is about $1, which is two to four times normal levels. Soybean meal prices are also at record highs, causing USDA to forecast a seasonal price range of $305 to $335, compared to the $205 average for last year.
Soybean oil prices are carrying the prices of competing crops higher as well:
1) Sunflowers. Higher yields, more acres, but the cash price for sunflower seed is at a record level of $21.50 per CWT. That results from a high demand for sunflower seed oil, which is selling for twice the price of soy oil.
2) Canola. More acres, but lower yields limited much increase in production. Cash prices have reached an unprecedented $24 per CWT, helped by higher soy oil prices.
3) Peanuts. Higher yield on more acres, but supplies are down because of reduced carry-in. A decrease in beginning stocks, has kept supplies down.
4) Flaxseed. Production was down 46% in 2007 from the prior year due to a 56% cut in acreage. Yields were below the 10-year average and prices are at record highs.
5) Cottonseed. Lower cotton yields and cottonseed availability have contributed to lower supplies of oil and support crush margins.
Globally, soybean production in Brazil has not expanded as much as once thought, but with reasonable weather and crop development yields will be nominal. A lower than expected crop will mean lower than expected exports and declining ending stocks. But Argentine soybean exports may take up the slack at the risk of leaving that nation with low supplies. European imports of soybean will allow crushers to provide soybean oil for bio-diesel and soybean meal for livestock feed that will take the place of wheat. China is on pace to set a record high level of soybean oil imports, but oil consumption rates have slowed from last year.
Summary:
The short crop and high demand for soybeans in the US have resulted in short supplies until next fall, pushing prices higher and pulling other vegetable oils higher. However, expectations for a large, but not record crop, in Brazil and exportable supplies of Argentine soybeans have promised to fill world demand. China will demand large supplies, as will Europe, but the Europeans will make efficient use of both oil and meal.
Posted by Stu Ellis at 12:32 AM | Comments (0) | Permalink
January 9, 2008
Consider A New Method For Grain Marketing
Either your hair is turning gray or falling out, or you have absolutely no involvement in grain marketing. The stress of marketing stems, not only from the volatility in the market, but the unpredictable wide range of prices for corn and soybeans. Since you are trying to market the old crop, write a marketing plan for the new crop, and you say to yourself, “There must be a better way.”
Well, yes, there is and the farm gate has the insight on how to make corn and soybean pricing decisions. Agricultural economists Darrel Good and Scott Irwin at the University of Illinois have published a new Marketing and Outlook Brief. They commiserate with you because in the past 25 years the daily spot corn price ranged from $1.22 to $5.25, and for beans the range was $3.87 to $10.40. Additionally, the unpredictability of prices has worsened, and just in the first 4 months of the current marketing year, the daily spot cash price for corn and beans in Central Illinois varied by $1.30 and $3.70, respectively. How can you create a logical marketing plan under those circumstances? It may be something other than….
The traditional approach. The use of fundamentals and technical analysis tools has long been used to forecast prices. But that process may have failed you because it has a narrow focus on timing of sales. That depends on whether you have information unavailable to the rest of the market, which you probably don’t. A second failure factor is a lack of strategies based on skills, characteristics, and beliefs of individual producers.
Good and Irwin introduce farmers to a new approach to grain marketing, based on a pricing matrix which considers more strategies than traditionally:
1) Selection of a timing window. Planting plans begin after harvest of the prior crop and extend to the storage season for that crop which ends in the late summer after the crop is harvested, and that gives a 20-24 month window. Their marketing research indicates the optimal pricing period runs from April before harvest to May after harvest.
2) Relevant pricing strategies. Instead of booking a forward contract at a given time, or any other marketing tool for that matter, the economists suggest defining your approach to pricing. This can be one of four choices that include the traditional marketing process; a pre-determined timing and volume process; and such external choices where someone else makes the pricing decisions or implementing a pricing plan outlined by a marketing advisor.
3) Allocate portions of the crop to be marketed each way. Grain marketers would decide how much of the crop would be distributed among the four methods. Such decisions are based on i) view on market efficiency; ii) risk preference, iii) financial position; iv) pricing skill, and v) decision-making discipline. These will help define the personality of the marketer, and whether the marketing can make decisions himself, or have the marketing process managed by a professional. Among the four choices previously listed various weights can be assigned to reflect the personality of the marketer.
4) Evaluate the performance. Compute a net price for each of the four choices, comparing them with each other and from year to year.
Summary:
Orderly marketing of grain can be upset by price volatility as well as the unpredictability of the market. Instead of using typical marketing tools to sell grain anywhere from 12 months before harvest to 12 months after harvest, consider changing one’s approach to marketing that will more closely related to one’s personality. Steps in doing that will include a narrower timing window, using a blend of price strategies that are composed of internal and external decision making, varying that blend to more closely reflect one’s comfort with marketing, then followed by an evaluation that compares net prices received.
Posted by Stu Ellis at 12:24 AM | Comments (1) | Permalink
January 7, 2008
$5 Corn, $15 Beans, But When Do You Sell?
Is your marketing plan handy atop your desk? Is it buried below stacks of bills, tax forms, crop budgets, and 3 months of farm magazines? Or is your marketing plan something that is implemented by the seat of the pants when a bill has to be paid? The farm gate will not beat you over the head about having a written, and regularly updated, marketing plan, but let’s at least plug in some new target prices.
The premium prices being offered have been an excuse to not worry about a marketing plan, but if you have worked on any crop budgets for next year and noticed the potential for slim profit margins, your marketing plan might be a business priority. In the past week the all time record for soybean futures was set and corn keeps pushing higher toward its 1996 record price. A visit with Purdue’s Chris Hurt yields some celestial numbers, so let’s methodically explore the potential for achieving those prices.
Chris Hurt’s latest corn marketing newsletter shows how corn and ethanol prices are dancing with each other. He says today’s $2.10 per gallon ethanol price and the $160 per ton distillers’ grain (DDGS) price has raised the breakeven price that ethanol plants can pay for corn to $4.87. With the large number of plant start-ups in the next 6 months, an increased demand will occur with the potential to pay significant prices for corn. He says corn acreage will be a key factor because of potential tight supplies of corn. Yet this winter, Hurt says $2.20 ethanol and $170 DDGS will push the breakeven to $5.23 per bushel for corn.
Export buyers have continued to purchase $4-plus corn at a rate 31% ahead of last year, and Hurt expects total exports to exceed USDA estimates by 150 to 200 million bushels and reach a record 2.65 billion bushels.
Hurt is concerned that wheat and soybean prices will cut 5-6% out of corn acreage and supplies will be insufficient even with trend yields. That will force rationing, and the first to cut back may be the US livestock industry, which is having trouble with red ink already.
For the corn grower, his advice is:
1) Remain optimistic about prices, but periodically reward the market.
2) Cautiously approach the 2008 market.
3) If you aggressively sell the new crop, manage your production, and cover your production costs.
4) With the uncertainty of what good and bad prices are anymore, refrain from taking large steps, and keep your focus on the financial protection of your family.
Chris Hurt’s latest soybean marketing newsletter pursues his contention that $15 soybeans are a possibility, because the market has not shown any technical “topping” patterns. While he acknowledges that a top could be near, he says it could extend over a couple months and be a “wild ride.”
The Purdue economist says the soybean usage base is very large and could stand to be reduced. Contributing to the use are Chinese purchases that are 21% above last year. But China is not the only export market, and the US currency value is contributing to high foreign demand that will buy up our remaining supply of old crop beans in the next 8-10 weeks.
But with the need to ration that supply, Hurt rhetorically asks what the rationing price needs to be. With $13 futures, cash prices will move into the $12 range, and that means there is no historical guideline to follow. He says beans have been making $1.50 swings, and one would put futures at $14.50 and two swings would be $16.00, which seems like a “ridiculous” price if the 2008 crops in South America and the US are large.
With the soybean basis being unusually wide, Hurt says the demand will soon tighten supplies and the basis will narrow significantly. For the soybean producer, Hurt says:
1) Cash beans can be held a bit longer for basis improvement, possibly selling them with a hedge-to-arrive contract.
2) Plan to have old crop beans 75-80% priced by mid-March with sales on $1 intervals.
3) Since the new crop will not move as high, but will still be profitable, consider having 25-30% priced by late winter or early spring before the South American crop dampens the market.
4) If you price more than 50% of expected production, consider pricing strategies that do not commit a volume, or have crop insurance protection.
Summary:
Corn and soybean prices will be going higher, possibly above $5 for corn and $15 for soybeans. Corn demand is high from ethanol and export business, but is hurting livestock producers and rationing may soon occur. New crop sales should be made when breakeven prices are reached, and with crop insurance protection. Old crop soybean sales remain strong and rationing prices may soon be seen. The basis will soon improve but South American supplies will negatively impact the market. New crop soybean sales of more than 50% expected production should be accompanied with production risk management tools.
Posted by Stu Ellis at 12:46 AM | Comments (0) | Permalink
December 17, 2007
Market Your Grain With Confidence, Not A Grimmace
Does it seem there is excessive volatility in the grain market? Wheat make a limit up or down move at least once per week, and the corn and bean markets certainly don’t move in fractions of a cent anymore. The higher the price, the more amplified the moves in the market. If you happen to have grain to sell, you are not only lucky, but challenged on how and when to do it.
The market volatility is quite intriguing and stems from all of the outside forces tugging on the grain markets. The energy markets are driving corn and bean prices and world wheat shortages are pulling wheat upward according to Marketing Specialist Mike Woolverton at Kansas State University. His December 14 newsletter says much of the current dynamics were rooted in action by the Federal Reserve Bank to lower interest rates. That caused the value of the dollar to fall in its relationship to other currencies, and since crude oil is quoted in dollars, the price of oil jumped upward taking ethanol and soydiesel up with it. The Fed action was short of what the stock market wanted, so a sell off in equities caused investors to buy commodities and the resulting demand drove grain prices even higher.
Last week’s USDA Supply/Demand Report tightened US and world grain stocks further and that created more strength in the market for corn, beans and wheat.
1) Corn ending stocks are currently comfortable at nearly 1.8 billion bushels.
2) Wheat ending stocks are the lowest in 32 years and export demand continues at a high level, with the appearance of panic buying by some foreign nations which are also paying record high freight rates to obtain wheat.
3) Soybean stocks were lowered to the point the US will have only a 3 week supply when the marketing year ends, and despite a record South American crop, the global supply will be insufficient until the new US crop is harvested.
Woolverton says market volatility can be expected to continue, and producers should take adva