Grain Update – July 19, 2018

7/19/18

Its All About Politics & Weather. Are Your Ready When Grain Prices Rebound?

The USDA was out with its July crop report last Thursday and indicated a tighter corn scenario but a weaker bean scenario for the upcoming crop year.  Let’s look at the details.

For old crop corn, the USDA cut feed usage by 50 M bu down to 5.45 B bu, but increased corn exports by 100 M bu up to 2.4 B bu.  The other major change was an increase in corn used for ethanol by 25 M bu up to 5.6 B bu.  When the dust settled for old crop corn, ending stocks were reduced by 75 M bu down to 2.027 B bu.  Many in the industry are wondering why feed usage is going down, especially when you consider how much the price on corn has dropped in recent weeks.  The increase in exports makes sense as the US has the cheapest corn in the world now, and with Argentina having a drought and Brazil having reduced yields due to a lack of rain, the world simply does not have an excess of corn, except for the US.  However, old crop corn carry out still starts with a “2”.  This generally puts the market in comfort mode.  But looking right around the corner at the new crop picture, and things tighten up considerably.

For new crop corn, the USDA raised the corn production by 190 M bu up to 14.23 B bu.  They left the yield at 174 bpa but increased planted corn acres by 1.1 M up to 89.1 M acres.  On the demand numbers, they increased the corn used for feed by 75 M bu, and increased the amount of corn exports by 125 M bu up to 2.225 B bu.  The other change for new crop corn was a decrease in ethanol by 50 M bu down to 5.625 B bu.  When the dust settled on ‘18/19 corn, ending stocks were reduced by 25 M bu down to 1.552 B bu.  Thus, when you compare the ending stocks from the ‘17/18 crop year to ‘18/19, ending stocks are roughly 500 M bu less for the upcoming year.  This is a big deal, and this has the market’s attention.  The corn fundamentals clearly do not justify the recent 79 cent slide in Dec ’18 corn futures.  However, we all know that politics, the trade war with China, and the funds going short corn futures are the reasons the corn market has fallen lower.  The good news is that within the last week, much of the tariff information is already factored into the price of corn, and this market has stabilized, and now is bouncing back.  The real question is how far will it rally back before it resumes the dominating down trend.

Unlike the tighter corn situation, the bean supply is getting bigger and bigger.  Obviously, the major factor is the lack of bean buying from China.  China has virtually stopped buying any US beans since April when the US tariff policy was starting to be implemented. On July 6th, the first tariff went into effect, and China placed their tariff as well.  So old crop beans are not being shipped to China, and beans are starting to stack up in the US.  The real question is whether China will come to the market and buy US beans during the October time slot when normally they have been a huge buyer of our beans.  This is a critical factor because it will have a huge affect on harvest operations this fall.  Normally, huge quantities of beans are shipped to the gulf or PNW each October as elevators ship out beans at harvest to make space for corn in their facilities.  All of a sudden if this demand is not there, the beans will back up in the interior like we have never seen before.  This is what the market is fearful of, and this helps explain why beans have crashed in the last 2 months since Memorial Day.  If China does not buy US beans this fall due to the tariff situation, beans will stack up in the interior like we have never seen before.  This means very low prices, very wide basis levels, huge bean carries, and beans being put in unusual places and piled outside.

On old crop beans the demand for bean meal continues to be very robust.  This is especially true since Argentina normally supplies the world with huge amounts of bean meal, but their country is out of the picture this year because of their drought.  Thus, the world, less China, is coming to the US to buy bean meal.  This has allowed the bean crushers in this country to capture incredible bean crush margins.  Bean crush margins continue to stay around $2.00 a bushel, and crushers are processing beans at full capacity.  Its all about the bean meal, not the beans.  With Argentina out of the picture, the world is coming to the US for meal.  This helps to explain why old crop bean stocks are shrinking even though China is not buying US beans.  Let’s look at the numbers.

In old crop beans, the USDA increased crush by 40 M bu up to 2.03 B bu and increased bean exports by 20 M bu up to 2.085 B bu.  China is sucking every bean from Brazil and as a result, the bean price in Brazil has screamed higher by the equivalent of $2.50 per bu.  Thus, other countries who normally buy Brazilian beans are now coming to the US instead.  So we have been selling beans to some unusual buyers as of late.  This helps to explain why old crop exports have perked up this month.  When the dust settled, old crop bean carryout was reduced by 65 M bu down to 465 M bu.  This change was mostly expected by the market and not a huge shock.  Old crop carryout is still close to 500 M bu and this keeps the market in comfort mode.  The market was shocked not by old crop ending stocks, but by the increase in ‘18/19 ending stocks.

For new crop beans, the USDA increased production by 30 M bu up to 4.31 B bu.  They left the yield at 48.5 bpa but increased the bean acres by 600,000 up to 89.6 M acres.  On the demand front, they reduced bean exports by a whopping 250 M bu down to 2.04 B bu.  They also increased crush by 45 M bu up to 2.045 B bu.  Obviously, they are trying to anticipate that the tariff war will reduce beans flowing to China, but they also see the US continuing to crush big amounts of beans to satisfy the world demand for bean meal.  When the dust settled, new crop ‘18/19 bean carry out increased a whopping 195 M bu up to the huge number of 580 M bu.  Additionally, there is a real possibility that if the trade war continues and China only buys a fraction of beans from the US, and if the final bean yield comes in anywhere close to 50 bpa, bean carryout will approach 800 M bu.  This is a real possibility, and this is what the market is fearful of.  This totally explains the market action of the last 2 months where Nov bean futures have crashed lower by $2.34 from a high of $10.60 to a recent low of $8.26.  Fortunately, the markets have stabilized over the past week and we are now rebounding.  The drier weather forecasts and the heat are providing support.  The volatility is reduced, and the markets seem to want to move higher.

After a huge move, it is very normal for markets to retrace between 38% to 62% of the recent move before resuming the dominant trend.  In our case, I believe the corn and bean markets will bounce up to at least a 38% retrace before turning lower and then trading lower into harvest.  These actions can be quick and decisive, and if you miss it, the opportunity will be gone.  I believe we will have an opportunity to sell better levels in the upcoming month that will give all of you who need to put on sales for new crop the opportunity to get caught up on grain sales and protect your farm before things turn ugly once again.  If you are in this position, I would firmly get my arms around what bushels you need to sell yet, and then put target orders in our system to execute once the market gets there.  Again, this opportunity will be short lived and the growers who have their orders resting at Chicago will be rewarded.  Those who are indecisive, unsure of what needs to be done, or unwilling to pull the trigger will be left in the dust.  Now is the time to put a plan in place and protect your operation.

So, how far will the markets rally before turning significantly lower once again?  For Dec ’18 corn futures, the 38% retrace will put Dec futures back up to $3.80 before turning lower.  Our basis for new crop corn into Readfield is 40 under Dec futures.  Thus, I would put targets to sell new corn into Readfield at $3.40.  I would simply figure out how much more corn that you need to sell for harvest, and then either call us or enter the target yourself to sell new corn at $3.40.

On beans, the 38% retrace will put Nov ’18 bean futures back up to $9.15 and our new crop basis into Readfield is 70 cents under November futures.  This puts the cash price for new crop beans at $8.45 for new crop delivery into Readfield or Center Valley.  If you still have new beans yet to sell, I would figure out how many you need to sell, and then put a target in our system to sell new beans at $8.45.  Again, either you can enter this order into our online trading system, or you can call us and we will enter it for you.  Please click here to show you how to enter your own targets in our system on your own.  If you would like on of our grain originators to put a customized marketing plan together for you, please click here for the originator closest to you.  We would be happy to come out and help you create a tailor made plan for you to protect your farm.

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.  The new Delayed Price rate is now 60 days FREE, and then 3 cents flat per month thereafter.

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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