Closing Grain Market Comments - Crop Conditions - Corn Production 6-10-2013

Markets closed weaker today; we started the overnight session weaker and never really did much to change that. 

When everything was said and done July corn was off 16 cents, December corn was down 12 cents a bushel, KC wheat was down 9 cents a bushel, MPLS wheat finished 8 cents lower in the July contract, CBOT wheat was down 6, July soybeans finished off 16 cents, November soybeans down 11 cents, the DOW was off about 10 points, the US dollar is about unchanged with the Cash US Dollar Index at 81.66, gold was up 2 bucks an ounce, and crude down about 30 cents a barrel. 

Overall an ugly day; we gapped lower on most of the charts Sunday night and most of the grains didn’t even make it back to unchanged on the day.  Technical selling was noted in corn; as we failed to break through resistance areas once again late last week.  The other big headline was weather; warmer forecasts and ideas that the rain this last weekend wasn’t as much as expected. 

The other big negative has to be the market’s perception of our supply and demand.  The average trade estimate for Wednesday’s USDA updated Supply and Demand report is for our new crop corn and soybean carryout numbers to be more than two times what they are for old crop.  That my friends isn’t a bullish headline.  Despite all of the talk of late planting, planting acres being lost, and potential yield reductions the market still has an end game that year over year is very bearish.  Now is that perception of our supply accurate?  I don’t know; but I would also argue that it doesn’t matter today.  If it is wrong it simply means that the market re-acts later and maybe sets the stages for a big over reaction at a later time and date.  When perception and reality come together. 

The above paragraph mentioning a later price spike assumes that the reality is actually that the crop is much smaller then forecasted.  To be clear I am not in that camp; I acknowledge the fact that the crop could get much smaller; but I am in the camp that as it sits today we really don’t know what type of crop we will have.  I still believe that we could have a yield of 120 on the low end to 180 on the high end; to be determined by mother nature.

The bottom line is that the headline that the funds look at isn’t a bullish headline.  Maybe the advisors and market analysts that have carryout numbers forecasted at 1.75 billion bushels will have a rude awakening come Wednesday; maybe they won’t until July or August?  Or maybe they won’t period.  But until we do have that headline news don’t look for the funds to get super excited and drive our markets higher.  Keep in mind the guys that trade these markets are not agronomists; they can’t drive by a corn field and really tell the difference between 150 bushel corn and 200 bushel corn very easily.

Other news today; this a.m. we had export shipments.  Poor for corn and soybeans; only about ½ of what they need to be on a per week basis.  While wheat came in at 24.4 million bushels; above the 17.7 it needs on a per week basis.  This was the first marketing week of the year for wheat so at least we are off to a good start.

This afternoon we had crop progress update.  Corn planting came in at 95% planted; which means we still have about 4.8 million acres left to plant.  Crop conditions were unchanged at 63% G/E but we did see the poor/very poor go up 1% point.  Overall as expected.  Not bullish yet not bearish.  No change in the crop conditions mean no trend change.  I think that is what will be important as we go forward.  The trend of the crop conditions and weather forecasts.  If we see heat and water the market will look to take more risk out of the market; at least until that carryout headline changes. 

The present idea today is that we have most of the corn planted and thus rain makes grain in some areas.  Very similar to the headline most printed today for today market movement.

Soybean planting came in at 71%; which was on the low side of the estimates.  But not new news and I don’t think bullish enough to justify a big rally when the market opens tonight.  Keep in mind that we have already rallied over a buck and quarter on new crop beans.  So even though days like today it seems as though the market doesn’t care; the reality is it has already priced in some of these slow planting yield loss scenarios.  We also need to keep in mind that some still think we could have an increase in soybean acres; plus many advisors have looked at the balance sheet numbers and felt that they could see an even bigger increase.  It was just a month or two ago and some in the industry talked about a bean carryout of 300-500 million bushels.  That’s 2-4 times the present carryout and that is why many advisors talked about sub 10.00 soybeans.  Bottom line is we still have a lot of un-known factors in regards to soybean production; but we need to realize that we have priced some of those un-known factors into our market via the good buck and a quarter rally that we have seen.

The other thing to keep in mind for soybeans is the fact that the USDA was more than aggressive in demand for the 2013/2014 year.  In particular China demand; this year it looks like they are going to be near unchanged in imports; but the USDA has them pegged with a 10 MMT increase next year.  The main headline when we looked at last month’s USDA reports and increases in demand year over year for corn and soybeans was the fact that it co sided with lower average on farm price.   With our prices higher can demand bounce as much as forecasted?  I don’t know the answer to that; I know that I hope it can; but I don’t know how price elastic our demand is.

Spring wheat planting came in at 87% versus 96% on average.  With ND at 77%.  Conditions dropped 2% points to 62% G/E versus 75% a year ago.

Winter wheat harvest progress came in at 5% versus 16% on average.  While winter wheat conditions slipped 1% in the G/E down to 31 versus 53% a year ago.

One thing that I was thinking about when I was looking threw stuff was crop conditions versus a year ago for corn.  We are at 63% good/excellent versus 66% a year ago.  Does that mean that the USDA will not drop the yield as much as the bulls think?  Keep in mind last year on the June report the USDA still had yield above trend line; because of the fast planting.  This year they mentioned fact that they dropped yield because of slow planting.  So if conditions are similar to last year and a year ago they made no adjust for our drought.  Will they make no adjustment because of too much water; especially with conditions similar to last year and the fact that they already adjusted things down? 

To me it seems like another possible risk.

The other news out this week will be the report on Wednesday.  As mentioned before in today’s morning comments the market isn’t looking for many changes in the old crop balance sheet.  While new crop ideas are less than last month; they are still big and above last years.

                        Ending                        Ending           

                        Stocks                        Stocks           

                        2012/13                       2013/14          

                         Wheat    Corn  Soybeans          Wheat   Corn  Soybeans

Average trade           0.733   0.759     0.121          0.640  1.795     0.268

estimate                                                               

 Highest trade           0.751   0.919     0.140          0.713  2.200     0.344

estimate                                                              

 Lowest trade estimate   0.715   0.684     0.080          0.501  1.175     0.185

USDA May                0.731   0.759     0.125          0.670  2.004     0.265

                    Global Ending                  Global            

                    Stocks                         Ending            

                                                   Stocks            

                    2012/13                        2013/14                   

                    Wheat    Corn     Soybeans     Wheat     Corn     Soybeans

Average trade      180.395  125.975    62.105      185.144  149.571    73.512

estimate                                                            

 Highest trade      181.550  128.200    63.000      188.500  155.200    76.000

estimate                                                             

 Lowest trade       179.800  124.500    60.500      179.800  141.510    68.200

estimate                                                            

 USDA May           180.170  125.430    62.460      186.380  154.630    74.960

Sunflower planting came in at 29% versus 80% last year.  North Dakota planting came in at 33% versus 76% on average.  Some of my contacts indicate that North Dakota could lose about 20% of the intended acres.  You also have possible canola loss; could that held spark sunflower oil demand?

The birdseed buyers seem to be reluctant; but dehull guys, the confection guys seem to have some added interest as of late.  Now that doesn’t mean that the birdseed won’t follow because it probably will; it just means they don’t have tons of demand out there right now so they are a little slow stepping up to the plate.

I mention above that I don’t foresee major old crop balance sheet changes for our grains when the USDA supply and demand report comes out.  That doesn’t mean we couldn’t have major prices moves; the price moves could come via big old crop changes.  Keep in mind that the funds still own some old crop grain on the board.  So if the report happens to be negative for new crop corn and neutral to old crop corn we could still see old crop corn under some pressure; because that’s where some of the fund ownership is at.

As for marketing ahead of the report that only strategy I have is “get comfortable”.  We all know the risks associated with USDA reports; most of us never ever agree with USDA reports.  But that isn’t new or unknown news.  We all know that the USDA can be spot on or months behind the eight ball before they report what is going on.  So the bottom line is we could have severe price action; up or down.  Put yourself in a comfortable situation for you and your operation.

For those that have the stomach there is nothing wrong with continuing to be patient; just realize that if your forecast for production is wrong and the present USDA forecast is correct the job of the market will be to find demand.  The way to find demand is via lower prices.

Some might look at making some catch-up sales ahead of the report; but personally I would rather make some sales up near resistance on the charts if given the chance.  So maybe short term options are not the worst move in the world.

Last time I looked today you could buy at the money corn puts for 10-12 cents for both the new crop short dated options as well as the July options.  Both expire on 6-21-2013 so all they really do is protect one into this report.  But they should make some guys comfortable should the USDA decide to give us some report similar to the end of March report where nearby corn lost over a buck in just a few days.   The short dated new crop options follow the December board; while regular July options follow the July futures.  The only other real big difference I have noticed in them is the wider bid ask spread for the short dated new crop options; as they are not as liquid as the regular ones.

Above all just make sure you are comfortable for the ride that we could have in the markets in the next 30-100 days.  In my opinion we still have huge potential prices ranges depending on mainly mother nature.  I don’t think we can 100% rule out another test of last year’s highs (I do think it is very un-likely) nor do I think we can rule out a test of 4.00 or below on the corn board.

Below is a range on prices based on possible production.  This is from last week; via the Van Trump Report.

Here is what the Van Trump report said; this is from 6-5-2013

“Corn supply estimates, in my opinion, have to start being tapered bad. Planted acres look as if they will be trimmed back by 3-5 million, and yields will more than likely be moving lower. My gut tells me "harvested" acreage will eventually end up being somewhere around 86 million. In addition the 158 yield currently being estimated by the USDA seems to be more like 155 or possibly even sub-150 on continued moisture problems in key producing states like IA, MN, IL etc...  Bottom-line, despite bearish talk of China finally purchasing Argentine corn, the bird-flu virus hurting demand, Brazil producing another record crop, Ukraine supplies being much more competitive, and so on, I am going to continue staying in a "holding pattern," opting not to price any additional new-crop bushels until more cards are dealt from the deck. Right now, and for the next 60-days, I think it is ALL about US "weather" and "yields." With 45% of our cash sold and revenue insurance in place, I feel comfortable calling all bets in order to see a few more cards. I would actually move to an even more bullish bias "IF" the corn market could find a solid "demand" story. Below is a simply guide to where I think prices could go according to yields. Keep in mind this formal hinges on harvested acres falling to 86 million. Yields are listed in ranges, Example: a yield in the 150 range will more than likely keep prices between $4.50 and $6.00 depending on what end of the range yields ultimately fall. Hope this gives you a little better roadmap.

•  
• $8.00 per bushel (+) = 86 mil acres @ 120's bpa = 10.3 to 10.9 billion bushels
• $7.00 to $8.00 = 86 mil acres @ 130's bpa = 11.2 to 11.9 billion bushels 
• $6.00 to $7.00 = 86 mil acres @ 140's bpa = 12.0 to 12.8 billion bushels 
• $4.50 to $6.00 = 86 mil acres @ 150's bpa = 12.9 to 13.6 billion bushels 
• $3.50 to $5.00 = 86 mil acres @ 160's bpa = 13.7 billion to 14 billion plus”  

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

Closing Comments - nice bounce for grain prices - corn production matrix

Markets closed stronger today in a turn-around Tuesday price action.

May corn was up 16 ½ cents a bushel, July corn was up 12 ¾, Dec corn was up 8 ½ , KC wheat was up 9, MPLS wheat was up 12, CBOT wheat was up 10, May soybeans were up 16 ½, November soybeans were up 12, the stock market bounced with the DOW up 158 points, crude is unchanged, gold is up 12.50 an ounce, and the US dollar is down hard with the cash index at 81.79.

Overall not a bad day at all for the grains; with old crop corn gain more then it lost yesterday despite the outside markets not having near the bounce with the stock markets gaining about ½ of what it lost and gold gaining under 10% of what it had lost yesterday.

Technically a good close for corn; and if we can bounce above last week’s report day highs we could open the door to some higher prices.  Wheat and soybeans look to be range bound as do some of the other corn contracts.  A little negative for corn is the fact that most cash bids have rolled to the July from the May contract; so cash corn price didn’t gain as much as the nearby futures did today. 

Also to note is technically yesterday May corn had a bearish reversal taking out Friday’s highs and lows and closing below Friday’s lows.  Well today the opposite happened as we left a bullish reversal or bullish outside day on the charts; taking out yesterday’s and highs and then closing above yesterday’s highs. 

News today for the grains wasn’t much different they yesterday; but the funds were not selling everything like they did yesterday.  Weather is still supportive with field work very slow and the outlook continues to be that some acres might be getting lost or switch from corn.  Weather is also very supportive wheat with damage done and potentially more damage to happen in the next few days and then you have spring wheat planting which isn’t happening either and might not for a while given the recent forecasts.  Overall I still think frost damage to the wheat is unknown and it also seems like the areas that got hit the hardest were not the areas that had the most to lose.  The areas with decent winter wheat crop potential didn’t get nor are forecasted to get hit super hard.

Demand was also noted on the wheat strength today; as I seen a couple more articles talking about the fact that China might need to buy some more wheat.  Also many to arrive spring wheat bids rolled to the July last week; but today stuff on the spot floor still traded against the May and basis on the spot was surprisingly firm. 

Yesterday we did have crop conditions and progress.  Most considered the info friendly with wheat G/E unchanged, corn only at 2% planted, and spring wheat at only 6% planted. 

The one comment I would add is that many of the areas that are really behind in planting are areas that were in the hardest hit part of the drought so moisture delaying areas like ours really isn’t super bullish.  I am sure everyone in our trade area would take the moisture we have had the last couple of weeks and hope to get the next couple days over having all of their spring wheat planted.  So really how bearish is the slow planting?  Now if the calendar gets into early and the middle of May and corn isn’t getting planted then you could see some fireworks because there is a good correlation between yield and what is planted.

I read some place that typically corn yields start to lose about a bushel a day after May 20^th.  So overall I think it is friendly that the US isn’t getting corn planted; but I don’t think today it is enough for new crop corn to explode higher and if we do get a 2-3 week window I also think the updated American Farmer will get the crop planted.  So we need to keep in mind that what is helping us bounce today might be a risk in a few days or weeks.

When we look at the overall picture and less corn acres; we need to keep in mind that we almost have to have less corn acres or our balance sheet potentially gets very ugly.  Think of it this way; this current marketing year we are expected to use about 11 billion bushels of corn.  If we plant 97 million acres with 90 % harvested and yield of 150 bushels we will have production of 13 billion bushels of corn.  Now if we only plant 90 million acres and have yield of 150 with 90% harvest we will still have production of 12.1 billion bushels.  Which means that we need to find another billion bushels of demand to have a similar carryout to what we have this year.  Can that happen yes; and it has happened in history.  But 2 billion bushels has never happened; the biggest usage increase I can see scanning threw the history of the corn balance sheet is from 06/07 to 07/08 and that was about 1.5 billion bushel increase in demand; most of it came from ethanol usage.  We all have seen the comments about the ethanol usage not going straight up year over year anymore; the comments are of a blend wall because we just are not using enough gasoline via more efficient vehicles and just consumer trends.

Below here is a corn production matrix.  It is showing production with 90 million acres to 98 million acres; with a harvest percentage of 91.6 which is the average since 2007 and yields ranging from 140 bushels to 160 bushels.  The point here is that even with only 90 million acres planted and yield of 140 we still likely produce about 500 million more bushels then we will use this year.  Now I think we could find that demand fairly easily just via exports; but keep in mind we are no longer the first place buyers go for corn.  We are far more expensive then some of our competitors. 

Now on the other side of if we end up with only 94 million acres and get the yield of 160 which is less than the Ag Outlook we produce about 13.7 billion bushels of corn.  Which means that we would need to find increased demand of 1.4 billion bushels just to only have a 2 billion bushel carryout and that has only been done once as mentioned above.  Now perhaps we are already pricing in a 2 billion bushel new crop carryout?  I don’t know; but I do know this is why so many advisors have been so bearish for new crop corn and beans for some time. 

planted acres	harvest percentage	Yield	Production
90,000,000	91.6%	140	11,541,600,000.00
90,000,000	91.6%	150	12,366,000,000.00
90,000,000	91.6%	160	13,190,400,000.00
92,000,000	91.6%	140	11,798,080,000.00
92,000,000	91.6%	150	12,640,800,000.00
92,000,000	91.6%	160	13,483,520,000.00
94,000,000	91.6%	140	12,054,560,000.00
94,000,000	91.6%	150	12,915,600,000.00
94,000,000	91.6%	160	13,776,640,000.00
96,000,000	91.6%	140	12,311,040,000.00
96,000,000	91.6%	150	13,190,400,000.00
96,000,000	91.6%	160	14,069,760,000.00
98,000,000	91.6%	140	12,567,520,000.00
98,000,000	91.6%	150	13,465,200,000.00
98,000,000	91.6%	160	14,362,880,000.00

The real hard thing is going to be determining what the funds or money flow think fair value is based on various production and carry out levels.  As example is 5.00 corn expensive or cheap with a 1.5 billion bushel carryout and production of 13 billion bushels?  What about a carry out of 2 billion bushels; is that priced into the markets today already or is there some weather / risk premium priced into the markets? 

In the Ag Outlook the USDA used yield of 163.6 giving us production of 14.5 billion bushels and a carryout of 2.3 billion bushels.  The one thing they did is have a usage of 13 billion bushels.  We all know how they have told us we will and can curb demand like we have never done.  Take a look at soybeans and the crush pace needed for the next few months.  But the USDA also told us that next year we will find more corn demand than ever.  I question that; but I also think the way it plays out is that on the May S & D’s which will be our first looks at the 2013/14 balance sheets we see demand come in higher than the trade estimates.  Yield is probably too high; but those two things probably come together.  Our risk is really that we got too high; curbed too much demand, and then finally raise a good crop and we can’t flip on a light switch and get the demand back or give the funds a different reason to want to push our prices higher.

I guess the reason to point all of this out; which really should be old news is because it feels like we could get a decent weather rally if the funds want to jump on the boat of slow plating progress.  If the rally does come it might just be good business to take a little risk off of the table.

Else were the birdseed market seems to be a little quiet; but orders are good and it feels like we have a small uptick in sunflower values today.  Milo is needed as is millet.  Too much milo went into the ethanol plants so I remain very friendly old crop milo basis as it just doesn’t’ feel like we have the needed supply for the demand; but keep in mind we also have a huge inverse between old crop futures and new crop futures.  For sunflowers we have a couple locations that are nearly out of flowers and that hasn’t happened in a while and I view that as a good demand sign.

As for marketing overall I remain friendly and look for a short term pop; but I think yesterday’s price action in the outside markets along with the above corn production talk should remind us that we are in a business and in business it just makes sense to do the right thing.  The right thing in marketing is probably going to be to take some risk off the table on the rallies as no one is smart enough to know exactly what the future prices hold.  So spreading out the risk when you can make sales that are profitable is simply a good and correct business decision. 

How one takes the risk off the table should really come down to what makes a guy comfortable.  Making sales is the easiest, but purchasing puts or selling the board can help achieve some of the same goals; and with implied volatility rather low re-ownership via calls can be an option too.

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

Jeremey Frost

Grain Merchandiser

Midwest Cooperatives

800-658-5535

800-658-3670

605-295-3100 (cell)

605-258-2166 (fax)

jeremey.frost@chsinc.com

www.midwestcooperatives.com

http://grainmarketingplans.blogspot.com/