Tuesday, February 7, 2012

Pre-USDA Crop Report comments - projections- close grain market thoughts comments

Markets closed weaker in the grains today despite outside markets that turned positive. 

Corn was down 2 in old crop, new crop corn was off 6 cents, old crop beans where down 1, new crop beans where up 2, KC wheat was off 7 cents, MPLS wheat was off 2-3 cents, CBOT wheat was off 6 cents, crude was up about 1.50 a barrel, metals higher, the dollar weaker with the cash index off 541 at 78.527, and equities ended higher with the DOW up 33 points.

Rather quiet and somewhat disappointing day for the grains; disappointing from the fact that despite the outside turning around the grains struggled.  There is a crop report out on Thursday and it appears the trade is once again setting up for a bullish crop report.  (Anyone remember the January crop report that saw us with an unchanged carryout in corn yet we traded limit down because the market was anticipating a cut to the carryout?)

Here are the pre-report estimates.

                                 U.S. ending stocks 2011/12
                                                          Wheat      Corn   Soybeans
Average trade estimate           0.867     0.791      0.273
Highest trade estimate             0.935     0.846      0.300
Lowest trade estimate              0.836     0.680      0.245
USDA January estimates          0.870     0.846      0.275

                             Global ending stocks 2011/12
                                                     Wheat    Corn     Soybeans
Average trade estimate      208.963  124.896    61.380
Highest trade estimate        210.000  128.140    63.770
Lowest trade estimate         205.000  120.000    58.000
USDA January estimates     210.020  128.140    63.430

The above estimates really should be pointing out some risk; or let down potential if we don’t see cuts like expected.  The cuts being expected on the other hand do have very sold logic behind them and I wouldn’t want to make a big bet that the report doesn’t see cuts.  After all ethanol usage is ahead of pace on a weekly basis and exports have picked up and both could allow some positive demand revisions. 

Now the methodology as to how the USDA goes about its carryout projections is up in the air and always will be kind of an unknown with some going as far as to say that the powers to be won’t allow too tight of a balance sheet because of higher food cost implications.  Along those same lines one has to ask themselves how much weight does the USDA put into future demand over present usage pace? 

As example presently I have seen reports the past couple of days where ethanol margins are in the red “near record negative for modern times”, domestic unleaded gas demand at a 10 year low, S Plains replacement cattle crude margins at a negative $125 a head, and prompt chicken moved to the red last week.

So if we take our two biggest users of corn; feed usage and ethanol usage and we see that many of them lose money if they buy today will economics allow them to keep their current pace.  How will the USDA look at their numbers; the present pace that says we should up our exports and ethanol usage or will the lack of margin that eventually will curve demand cause the USDA to leave their numbers unchanged or maybe if put in some cuts?

Another positive that has been talked about and reflected in the trade estimates is the world balance sheets from SA crops getting smaller; but it has also been reported for nearly a month now that weather has turned much more positive.  So in my opinion to assume that we get more exports my look good on paper and should happen but I don’t know that I am in the camp that our SA crops got smaller over the past 30 days; not based on what I have read over the past 30 days.  Now I would agree that the numbers we seen in the Jan report left room for them to get smaller as they were not as small as many thought; but I don’t know that weather really has caused a lot more damage since the last report.

The wheat numbers; any way you shake it we still have a lot of wheat in the world; and that is assuming we end up seeing a cut in the world stocks as expected.  The only thing the USDA has shown me over the years is that it doesn’t always stick out numbers that are expected.  Sometimes they are way off and the market gets it handed to them; sometimes the market and the USDA numbers come in line and then they look for a new reason to trade, and other times the opposite happens and we see numbers even more drastic the market thought would happen.  At the end of the day and ahead of each report we will always be left with these unknowns and for us in the grain industry this huge risk so we really have only one logical rational smart business decision choice.  Use good risk management in your marketing with a diversified approach while look to protect against extreme price (profit or lack thereof) swings.

If you need help with some risk management ahead of the report feel free to give us a call.  With a decent basis maybe one should simply look at making some cash sales and re-owning on paper if you are a bull.

Along those same lines don’t forget our weekly marketing meeting that we have in Onida every Wed; including tomorrow the day before our next report.

A couple of other things I am seeing:

ADM closed an ethanol plant in ND or laid plans to close it in the next couple of months.  (Permanently close it)

Basis for grains feels a little top heavy; some ethanol plants in Iowa dropped basis by 5-8 cents today and I have seen an uptick in producer selling.  Many comments about wanting cash flow right around March 1st.   Wheat really lacks export demand and that is keeping a lid on basis for winter wheat and spring wheat.  Locally most ethanol plants seem to have good Feb-March coverage and basis for corn feels defensive overall; it doesn’t help that they can’t lock in a margin in deferred slots.  And overall it still feels like producers still have way too much ownership (hence risk) for a rally to really make much steam with end users losing money when they buy some of our grains.

The sunflower market has been in a free fall; but it is starting to feel like the panic selling is near and end.  Coverage also appears to be light so perhaps if business picks up and producers get back into the field  we have a chance to stabilize or bounce that market over the next couple of months.

Please give us a call if there is anything we can do for you.

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