Cold Start to the New Year
As we start a new year, the market is dealing with several items that have moved to the surface. First is the extreme cold temperatures across most of the Corn Belt. This has the market worried about the winter wheat crop and how much damage will be created since many of the acres in the US do not have a snow cover to add protection. For months, the wheat market has been in a downward slide. For now, it looks like we might have hit solid support, and are bouncing back. For those of you who have wheat planted, I would keep my eye on new crop wheat values in the coming weeks. I believe the wheat market has shifted, and is now on an uptrend, and could move significantly higher.
The USDA released its December crop report last Tuesday, and it adjusted several items on the supply and demand tables. On corn, the bright spot was a 50 M bu increase in corn used in ethanol production. Last weeks ethanol production was the second largest on record as the relative lower cost of corn is stimulating additional usage. Although true, the ethanol industry is struggling with slimmer margins than in the past. Current ethanol margins were 6 cents per gallon last week, and the average conversion rate now is one bushel of corn will produce 2.82 gallons of ethanol. The USDA left exports unchanged at 1.925 B bu. Even though corn exports have really been struggling as of late, there are signs that this situation could be changing. Last week, the US did sell one cargo unit of corn to China, and Morocco and Mexico have also been recent buyers. As corn makes new lows, our corn becomes more and more competitive on the world stage. When the dust settled, corn ending stocks were reduced by 50 M bu down to 2.437 B bu. Even though we are moving in the right direction, this is still a huge amount of corn that will continue to weigh on the market.
The USDA will be out with its December monthly crop report on Tuesday at 11 am. As the old saying goes, “big crops generally get bigger,” there is a decent chance that both corn and bean carryouts could grow slightly after the numbers are released. Why? Because our exports are lagging the original projections from the USDA of 1.925 B bu of corn exports and 2.25 B bu of bean exports. When the grain does not leave the country, its starts to stack up in the interior. The Chinese have been aggressive buyers of US beans, and we have made recent corn trades with Mexico and possibly the Chinese as well. However, the current low price of corn and beans are starting to stimulate demand, and we are getting to the time of year where Brazil can no longer be the lowest cost world supplier of corn. The second best option is the US and I expect the corn export pace to ramp up considerably next month.
One item that might offset the lagging exports is the huge quantity of corn being used for ethanol this year. For several years, the amount of corn used for ethanol production was at the 5.0 B bu level and it stayed relatively constant. However, as the world becomes more comfortable using the 15% ethanol blend in their gasoline for their cars, or burning E85 which is 85% corn ethanol, the amount of corn consumed by the ethanol industry has grown in recent years. In 2016 we used 5.224 B bu of corn for ethanol, in 2017 we used 5.439, and this year I believe it will be over 5.5 B bu when the dust settles. This increase in ethanol production will offset the lagging exports to a degree and might leave corn ending stocks unchanged. We will all find out at 11 am today what the government’s opinion is on these categories.
The market is becoming very concerned about the weather in Argentina. Brazil was plagued with wet weather several weeks ago, but that situation has improved. Argentina is dry, and the market is adding risk premium due to this situation. The world is counting on a large bean harvest from Argentina. If this dry weather continues, the world bean carryout could be cut quite significantly. However, it is early in their growing season, and there is time for the situation to improve. Friday was the first day of the month and the funds decided to buy bean futures and add to their existing long bean position. On Monday, they continued to buy bean futures and pushed beans higher through the day. It is normal for beans to rally during the Thanksgiving holiday, so the strength in beans was not unexpected.
It is interesting to see that even though beans and wheat rallied significantly on Monday, corn could do very little amongst the strength in the other grains. Corn is still being weighed down by the huge carryover of roughly 2.5 B Bu. In addition, corn is struggling to rally as there are a huge amount of farmer sell orders just above the market. Any attempt for corn to rally and these orders squash any rally attempt. The farmer generally sold his beans for cash flow at harvest, but is storing his corn in any where possible. Our US corn exports are also struggling to keep pace, and it is very likely that the USDA will need to lower corn exports by approximately 100 M bu on the next Monthly Crop Report on December 12. If this happens, we could see corn carryout be raised by this same amount to nearly 2.6 B Bu, a truly huge amount of excess corn.
In A Carry Market
As most of you are now done, or almost done with harvest, I would like to take a minute and start looking at new crop levels for next harvest of 2018. It is no secret that we are in a carry market with huge amounts of corn and bean carryouts each year. There is a large quantity of farmer selling orders above the market, and any market rally attempt is quickly stalled by selling orders from the country. I don’t see this changing anytime soon, especially in the corn market. The farmer is undersold on corn in a large way, and the market knows this. This situation creates huge board carries. This means the market heavily discounts the front end, but rewards the producer for locking in deferred values now. My guess is that cash corn will stay close to the $3.00 level over time, but the carry will slowly grind out of the market over time. What do I mean by this? Let’s go back two months ago. The cash price for corn delivered into Readfield for July 2018 delivery was roughly a 50 cent premium over the cash price. Today, this premium has been reduced to only 27 cents. If we wait another month, it will likely drop to 20 cents, and until we eventually get to almost even money. The point is that the market is willing to pay you a premium if you are willing to step up and write a contract to lock these premiums in. However, you only get these premiums if you contract the grain. If you do nothing, once we get to July, the cash price of corn will be the same as it is today, roughly $3.00, and that entire 50 cent premium has just vanished over time. This is a text book definition of big carry markets and how the carry gets “ground out” as we move through the crop year. Big premiums are available for those who take the time, create a plan, and are willing to forward contract their grain. One cannot receive this big premium by waiting until July 1, and selling cash at that point, but forward contracting those levels NOW for delivery THEN.
China Buys Corn
The big news this week was that China was in the market place buying corn and ethanol. We have seen the Chinese purchase soybeans for many years, and frankly, we count on them to buy huge quantities of beans during the fall harvest. They are a cornerstone of our US bean export program, and help to add stability during a time when prices in beans could get quite sloppy. So when we see the Chinese looking at buying corn and / or ethanol, the market pays attention, and it causes some unique things to happen.
The funds currently have a huge net short position in corn futures. They are so short that last week’s Commitment of Trader’s report showed that they broke a new record on the size of their short position. Previously, the record short for managed money was 229,000 contracts of short corn futures. Last week’s report had them short 231,000 contracts, or a new record. The funds are short because the fundamentals tell them to be so. The corn crop is huge. Our corn export program is in the tank. The crop seems to be getting bigger each month, and there is a huge amount of farmer selling just above the market. All of this is weighing on corn, and they see this and are putting their money where it counts.
The USDA came out with its November crop report on Thursday and shocked the market with their interpretation of the current crop. Most believed that bean yields would be lowered and corn yields would be raised slightly from the October report. This was not what the USDA had in mind, and their report dramatically altered the markets going forward.
In the case of corn, the USDA raised this year’s production by a whopping 3.6 bpa which took their final corn yield to 175.4 bpa. This is a huge yield and beat last year’s average yield by .9 bpa. Production was raised by 293 M Bu from last month’s total to a jaw breaking 14.578 B bu. In addition to the yield increase, the USDA also increased exports by 75 M Bu to 1.925 B Bu. Many traders are scratching their heads about this number as we are having a very difficult time making increased export sales to foreign buyers today, yet the USDA is projecting a big increase. Time will tell on whether the USDA is right or not. But the only way for our exports to increase is through lower prices which none of you will like to see. When the dust settled, the carryout for the 17/18 corn crop was raised 147 M Bu to 2.487 B Bu. This is a tremendous amount of corn carryout and an amount we have not seen for decades since the glut of corn in the mid 80’s. With this amount of corn hanging over the market, it will be very difficult for the market to rally anything significant. Any type of strength will be met with a huge amount of selling from the country.
USDA Crop Report
The USDA will be out with its November Crop Report Today, November 9, at 11 am. I get the feeling that we could see the USDA raise the corn yield by 1-2 bpa and leave the bean yield either unchanged or lowered by up to ½ bpa. We have seen some extraordinary corn yields across the Corn Belt this fall as harvest has progressed thus far. Consequently, later bean yields have not improved like corn throughout the entire Corn Belt. If the above changes in yield are pegged by the government tomorrow, we could see the corn carryout approach 2.5 B Bu which we have not seen since the huge CCC days in the mid 80’s. However, beans are another story. If their yield gets trimmed, we could see carryout reduced from 430 M bu down to something less than 400. Folks, if this happens, we will see fireworks tomorrow at 11 am. The market is, and will continue to be, very sensitive to any reduction in bean carryout. This is especially true since Brazil and Argentina are having weather issues with either being too dry or too wet for optimum bean planting conditions down there. Any sort of change in the bean Supply and Demand table and the market will react accordingly, and possibly very violently depending on the scope of the change.
We are constantly looking for ways to add value and profitability to your farming operation. One way we can do this is by offering unique contract alternatives that will allow you to diversify your grain marketing portfolio, spread out your risk, and add another layer of pricing protection to your operation. We are again offering the CHS ProAdvantage grain contract this year. This contract is a very simple approach to allowing our trading professionals at CHS to market your grain for you. Basically, you will hand over a portion of your grain to them to squeeze as much money out of the market as they can. They will do many trades behind the scenes to generate as much profit for you as possible and when the program is over, their profits will be added together and given back to you in the form of a price that should be higher than the prevailing price at that time. You don’t have to worry about the trades that they do, or any complex marketing strategies to learn. This is easy folks. Just give them a portion of next year’s grain production, and allow our marketing professionals to make money for you.
Many of you have interest in storing your corn or beans at the co-op, and I thought I would take a minute to summarize our storage programs again for this fall as many are asking about specific details. Please remember that Delayed Price is your most economical choice for us to store your grain. For grain placed into Delayed Price, the grain is only shrunk down to 13.0% on beans or 15.0% on corn, the storage rate is cheaper, and the monthly storage charge follows the grain and is not invoiced monthly. Monthly storage charges are simply taken out of the settlement when the grain is sold. The biggest disadvantage to Delayed Price is that you give up title to your grain in exchange for the above benefits. This allows us to move your grain out of our facilities if you have not priced it yet, and it keeps us from plugging up with grain. There is no time restriction for grain placed into Delayed Price. You may keep your bushels in this program for as long as you wish. There is no “dumping” fees or any other service charges associated with Delayed Price. Here is a summary of what storage programs we are offering this harvest:
DELAYED PRICE: Beans will be shrunk and dried to 13.0% moisture and corn will be shrunk and dried to 15.0% moisture. Delayed price charges will be 4 cents per bushel per month until 10/1/18, and deducted from grain settlement.
OPEN STORAGE: Beans will be shrunk and dried to 12.0% moisture and corn will be shrunk and dried to 14.0% moisture. Storage charges will be 5 cents per bushel per month until 10/1/18, and invoiced monthly.
GRAIN BANK: TO BE USED FOR FEED ONLY. Beans will be shrunk and dried to 12.0% moisture and corn will be shrunk and dried to 14.0% moisture. Storage charges will be 5 cents per bushel per month, and invoiced monthly.