This is a sample entry from John Payne’s newsletter, This Week in Grain, published on Friday, January 17, 2014.
This “post WASDE” week was a bit disappointing for those who love big price swings. Soybeans saw some the follow-through price action to the upside but ran into trend resistance near 1330. Late this week it backed off toward 13 but held support. Wheat and corn traded in their post WASDE ranges all week, but got weaker as we went on. Wheat was especially brutal on Friday, but did hold its WASDE lows. Corn made lower highs and lower lows all week, breaking the 10 day MA today.
Corn has found itself without much of a catalyst right now. Producers are sitting on a record amount of grain, which is limiting any upside follow-through. But the fact producers are not being forced to move grain to raise capital (those storing can afford to hold) has many playing the carry. This has tightened the basis in many areas as companies like Cargill are scrambling for grain out west. I do not expect corn to break below pre-WASDE lows until after the USDA comes to a conclusion on plantings for next year, which happens in February. I think we could see a down move ahead of corn planting in March/April, as cash strapped producers will be moving grain to pay for next year’s crop inputs. After that, I think we go back into a holding pattern. Corn traders need to be ready for boredom.
Beans were a different story this week. I feel the market has been trying to anticipate Chinese bean shipment cancellations unsuccessfully, covering shorts whenever they do not come through. We have been saying for weeks that holders of old crop need to be ready for such announcements. Until we get them, beans will maintain their strength as crushing margins remain positive across all months (stronger in the back). Throw in a tight carryout and we have a cash market that should stay strong until the funds get nervous and dump long positions. Again, keep your ears open for Chinese cancellations.
Wheat has been the dog of the grain complex for weeks and that doesn’t appear to be changing anytime soon. We heard early in the week that Ukraine’s wheat crop was very large and that Argentina saw more wheat harvested than expected. Until we get something on the supply side to stem the tide (maybe a drought out west) wheat will remain a weak market. Keep your eyes on the KC wheat; I think that leads the complex higher as spring arrives and we see what this winter did to the crop that is in the ground.
Informa released their acreage projections today, they looked like this:
- Corn: 93.3 million
- Beans: 81.3 million
- Winter Wheat: 41.9 million
- Spring Wheat: 12.1 million
THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.
Check out the links section below as I break down the acreage/supply situation.
LINKS OF THE WEEK
-Brazil Opts for Bold Interest Rate Hike despite Weak Economy
My take: This news will get buried by many in the ag media, but it may be one of the bigger macro announcements affecting soybeans we have seen over the last few months. For those who do not farm or don’t consider themselves financial savvy, interest rates are the measure of opportunity cost. When interest rates are low, people who produce commodities are more apt to hold on to product because low interest rates cause currencies to weaken and producers are not missing out on much in the form of interest payments they would receive on the cash they get from sales. As you can see in the chart section of TWIG, the real has lost almost 1/3rd of its value against the dollar since 2011. This exchange rate change has given tremendous export advantage to the US. If this interest rate hike were to reverse this trend, Brazilian farmers may look to change strategy and move out of stored grain and into cash over the next few months. Over the longer term, this is a positive development for grain priced in USD vs the Real. But in the short term, because of the large amounts of unpriced new and old crop beans in Brazil, we could see a rush to move a lot of product at once. This would be negative for bean prices in general, especially this Spring.
-Northern US Farmland Values Leveling Off
My take: This is a bit of “no brainer” for folks who follow price. The fact that prices have not plummeted is a good sign. Corrections in markets can come via price corrections or time corrections. Hopefully for US land owners, this correction will be the time version via sideways price action. Interest rates will have a say in this over coming months.
-Dropping Corn Prices have US Farmers Looking to So- Fox News and Informa
My take: The Informa numbers released today show that trend is happening. That said, I don’t think Informa’s numbers are enough to break the bean market in the long term. Let’s break out the abacus and see what these projections do to forward carry outs:
Corn: 93.3 mil acres
Beans: 81.3 Mil acres
I estimate 10% of the corn planted gets lost, as this is historical average. Historically, beans usually see very little prevent plant or major crop loss:
Corn: 84.5 mil x 164 bu per acre (trend) = 13.8 billion bushel crop.
Our forward demand is projected at 13 billion bu. and we currently have 1.6 billion bu. left over from last year. If the US farmer could achieve Informa’s projected levels of production, our carryout levels would grow from 1.6 billion to an estimated 2.4 billion by next year at this time, if demand is held constant. In the past, this kind of carryout has brought prices well below the cost of production. If the USDA would match Informa in February projections, producers should be looking at hedges on 2015 corn production as well and 2014.
Beans: 81.3 x 44.5 bu per acre (trend)= 3.6 billion bushel crop.
Currently, demand for US soybeans this year is 3.3 billion. A 300 million bushel surplus (based off Informa projections) will bring supplies up from their bare bones level of 150 million, but are still low when we compare it to historical levels. In my opinion, the amount of acreage swap is not enough to move the ratio back to historical norms (2.2) in the 2014 year. This means that bean prices should remain elevated over corn well into 2015. Now, I am not counting the South American crop which is heavy, heavy soybeans this year. The world stocks to use levels for beans are incredibly high and the market is still inverted. This tells me that US beans are best in breed and forward pricing depends on the US supply situation. Because of this, I am not encouraging producers to aggressively hedge beans yet. I think there will be moves in new crop beans over coming months that will give you ample opportunity to sell at profitable levels.
-Bunge to Close Soy Processing Plant in Southern Brazil
My take: Brazil needs more processing plants, not less. The fact that meal cannot be purchased as readily as whole soybeans out of Brazil is an issue for the Chinese. It will keep them coming to us as seller of last resort. It is also not helpful to the idea that Brazil is going to increase livestock production. Without better infrastructure and processing capabilities, South American growers will not be able to compete with the US on a longer time frame.
*Monday is a holiday here in the US, with Grain markets closed until the regular 7 pm central evening open.
There were no major USDA announcements this week besides a solid export report for corn and beans. The macro side news releases were mixed as core retail sales continued to show a recovering consumer, while Producer Price indexes were off. The other important number, US CPI showed very little inflation in the economy right now. This is good and bad. It is good because low inflation allows the Fed to continue to pump money into the economy, supporting markets and land values. It’s bad because without any inflation in the economy, any hike in interest rates will be more detrimental to US growth. Throw in a disappointing weekly jobless claim number and one should probably operate under the assumption that recent Fed policies are here to stay. This should keep interest rates from getting too high in the short term.
March Soybeans – November Soybeans
MAY KC WHEAT – MAY CHICAGO WHEAT
NOVEMBER BEANS/DECEMBER CORN
BRAZILIAN REAL- Is the 2 year selloff in the Real vs USD over? If so, SAM producers may be looking to move more grain sooner.
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