Grain Update – August 23, 2018

Written August 16, 2018

The USDA Gives The Industry A Bearish Outlook.  Corn Demand Remains Stout, But No Trade With China Is Causing Beans To Stack Up.

The USDA released its August monthly crop report last Friday, and shocked the industry with its findings.  Starting off with corn, it left last years supply and demand table the same as last month and made no changes.  However, for the ‘18/19 crop year, the USDA raised the corn yield 4.4 bpa up to a whopping 178.4 bpa.  Many times the USDA raises the yield in the August report based on the weather and crop conditions during the summer months.  However, the increase from 174 last month to 178.4 this month was a rather large one month adjustment, and it surprised many in the industry.  This increase in corn yield caused total production to increase by 357 M bu up to 14.587 B bu.  The USDA increased feed usage by 100 M bu up to 5.525 B bu and also increased corn exports by 125 M bu up to 2.35 B bu.  All of these adjustments caused the ending stocks for next year to grow by 132 M bu up to 1.684 B bu.  Obviously, the increase in yield was the over riding change and even though feed and exports improved, they were more than offset by the yield.

The corn market is moving from a market of excess to a market of less surplus and more demand.  Last year’s ending stocks were 2.027 B bu and this year’s carry out is down to just 1.684 B bu.  The US has the cheapest corn in the world, and the current demand structure in corn remains stout.  There are no world tariff issues to deal with, and since Brazil and Argentina had drought’s to reduce their corn production, the world is coming to the US to buy corn.  This is allowing the corn basis to remain relatively firm, and it will likely allow spreads to not widen as much as compared to last year.  Gut slot corn basis will still probably get weaker, but it should snap back relatively quickly right after harvest.  I also get the sense that Chicago corn futures will not be pressured lower like beans will be.  The reduced carryout, the huge demand structure, and the world interest in US corn will keep corn futures supported.  Thus, the downside risk in corn is relatively limited.

Everything I just said about corn is about completely opposite when talking about the bean market.  Looking at last year, the USDA increased crush by 10 M bu up to 2.04 B bu, and increased exports by 25 M bu up to 2.11 B bu.  When the dust settled, last year’s bean carryout was reduced by 35 M bu down to 430 M bu.  However, this is only ½ of the story.  This year’s bean supply and demand table shows a very different story.

The USDA raised this year’s bean yield by a whopping 3.1 bpa up to 51.6 bpa.  The record yield is 52 back 2 years ago.  As expected, this increase in yield pushed bean production up by 275 M bu up to 4.585 B bu.  The USDA increased crush by 15 M bu up to 2.06 B bu, and also increased exports by 20 M bu up to 2.06 B bu.  At the bottom line, the final bean carryout number was increased by 205 M bu up to a huge 785 M bu!  The USDA did not include any bean exports to China in next year’s supply and demand table.  Obviously, this is the big factor that is causing new crop beans to stack up in the interior.  Without China buying our beans, our bean complex is getting very heavy.  If the US and China can get trade relations worked out, this whole scenario will reverse in a moment’s notice.  However, this is precisely the risk.  No one knows when trading with China will return to normal.  Timing is critical here.  Will it be in Oct or Nov or later?  If nothing can be resolved prior to Oct 1st or so, this will continue to put tremendous pressure on Chicago bean futures levels, new crop bean basis levels, and spreads.  New crop bean basis levels can easily be the weakest we have ever witnessed in any particular area if we are forced to go through harvest will no deal with China.

All of you who grow wheat need to be paying attention to next year’s crop.  The recent strength in nearby September wheat futures has also pushed next July wheat futures higher as well.  Now is the time to consider planting more wheat in September and October, and forward contract your wheat before it is planted.  There is nothing like locking in a nice profit before the crop is planted.  Today’s cash price for July / Aug ’19 wheat for delivery into Readfield is at $5.22. Looking at the July ’19 Chicago wheat chart, the contract high is at $6.09 less our current basis of 70 cents under Chicago, would put the cash price at Readfield at $5.39.  Thus, we are very close to the contract highs now, and this deserves your full consideration.  I would place targets at the $5.30 level and contract another 10% of your anticipated production each 15 cents higher and reward this market strength.  I can build a case for significantly lower bean prices as fall harvest approaches.  Locking in wheat for next year diversifies your portfolio and helps to reduce your total risk.  If you want to see where our cash bids are trading, please click here.  If you would like to speak to one of our grain originators about setting up a marketing plan for your farm, please click here.  We can come to your farm or make an appointment to visit you.

New Arrive Delayed Price Rates have Been Reduced

We have reduced our Delayed Price rates for new arrive corn and beans into Readfield and Center Valley.  These rates are for new arrive bushels only, and the rate will be in effect until Oct 1st 2018 when new crop storage rates will go into effect.  Producers who have October contracts will be able to use these bushels to fill their new crop contracts for Oct / Nov ’18 delivery.

Have You Sold Enough New Crop ’19 Corn Yet?  Make Values Even Better With Cash Plus Contracts

If you still have new corn to sell for fall of 2019, please check out our Cash Plus Contracts.  We can add a premium to your new crop corn sales price in exchange for an offer to sell more new corn if Dec ’19 corn futures close above a certain level on Nov 20th 2019.  These contracts will allow you to sell new corn today with a 11 cent premium added to the new crop cash price in exchange for an offer to sell the same quantity of new crop corn futures at $4.25 if on Nov 20th, the Dec corn futures close at or above this level.  If futures close below this level, you get to keep this entire premium, and you don’t have any other obligation.  So it is a win-win for you.  You get to keep the 11 cent premium paid to you on top of the current new crop corn price, and if on Nov 20th 2019, depending on what Dec ’19 corn futures trade at the close on this date, you might be able to keep this entire premium free and clear.  The worst case is that you would have the same bushel commitment in another new crop sale where Dec ’19 corn futures were locked in at the $4.25 level.  Taking off the basis of 50 cents under the Dec corn futures for delivery into Readfield, which is our current posted new crop ’19 corn basis, you would have a new crop corn contract at 4.25 – 50 = $3.75  The worst case is that you would have another set of new ’19 corn sold at $3.75 for Oct / Nov ’19 delivery into Readfield or Center Valley.  This is a great price considering our posted new crop price is at $3.57 or so today.  Please check this out.  We have been writing many of these contracts as of late, and they work really well.

What Are The Charts Telling Us?

Here are the support and resistance levels for cash and new crop grains.  These are all futures levels as traded at Chicago:

Cash & New Corn – Dec 18 Corn Futures – Support at $3.66, Resistance at $3.88, Place Targets at $3.85

Cash & New Beans – Nov 18 Bean Futures – Support at $8.51, Resistance at $9.22, Place Targets at $9.08

Cash Wheat – Dec 18 Wheat Futures – Support at $5.49, Resistance at $5.75, Place Targets at $5.65

New Wheat – July 19 Wheat Futures – Support at $5.76, Resistance at $5.94, Place Targets at $5.94

To see where grain futures are currently trading, please click here.

Consider New Crop Basis Contracts To Protect Grain Values

Do you still own old corn or beans in the bin at home or on Delayed Price at the elevator?  Do you need cash flow now and want to stop the storage charges?  Maybe you want to protect new crop corn or bean values on bushels that you will deliver this fall.  Please consider a Basis Contract.  A basis contract is where you simply lock in the basis (the difference between the cash price at our elevators and where corn is trading on futures at Chicago.)  Today, new corn at Readfield is trading at 45 cents under the December ’18 corn futures level.  In a basis contract, we would lock in this 45 cent basis level under the Dec futures, but leaving the futures portion unpriced.  You will then have a contract that will trail the Dec corn futures by 45 cents.  Most people will then give us a target to price the futures level to price the contract when corn futures rally 10 or 20 cents higher.  In the mean time, you can deliver against this contract if coming from the bin, or we will allow bushels on Delayed Price or Open Storage to be applied onto this contract with no charge.  Once the contract is filled, if you are paying storage, the storage stops immediately, and we can then advance you 70% of the contract value based on the current market.  The balance of the contract value will be paid to you once you set the final price on the contract.  This is a win-win for all parties.  You get cash flow now to pay bills, you stop the storage from accumulating, and you get to haul the bushels now when you have time.  This is a great alternative vs doing nothing.  On top of all of this, old crop corn basis levels are firm right now.  You might want to consider locking in the basis on new crop soybeans for this fall delivery.  The basis has backed off considerable already, and it looks to weaken even more before harvest.  Please give us a call, and we can explain to you all of the details if you have any questions.

As always, if I can help you with anything, please call me at the grain office in Readfield at 920-667-4955, ext 2 or send me an email at marcus.cordonnier@chsinc.com.

Marcus Cordonnier

 

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