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This Week in Grain – 2/24 AM commentary

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This Week In Grain (T.W.I.G)Good morning friends!

Corn (H17) 365’4  unch

Soybeans (H17) 1015’4  +4’0

Chi Wheat (H17)  436’4  -1’4

KC Wheat  (H17)  456’0  -1’6

Cotton (Z17) 74.02   +.13

A lot is going on this morning.  Ag forum presentations have begun in DC this morning after the baseline acreage numbers dropped yesterday. Weekly exports were released (good for wheat and cotton, neutral for soybeans and poor for corn)  and March options expire today.  We should see some action today.  I have included the updated balance sheets from USDA on the blog so if today is a day you want to click through via the link below.  There is a lot to get to so lets get rolling.
Starting with corn, markets are slightly lower in the overnight with little news out of the overseas markets to push the trade.  Ag forum projects 90 million corn acres with a 170.2 yield. After some demand reductions through exports, the carryout is projected to come in around 2.2 billion bushels against the 2.3 billion we had at the end of 16. I see a lot of potential for bullish price action in 2017 given these numbers. I look at these more from a “what if” scenario.  What if planted acreage comes in less than 90?  What if yields fall 2-3%? USDA is projecting a lower stocks to use number even with a 170.7 yield.  That blows my mind. Remember, its not about where we end up- its about the road getting there.  If the road is bumpy I think the charts will reflect good upside price action along the way.
Moving on to soybeans… the acreage will obviously be the headline.  There is little bullish about 88 million soybean acres.  For the first time in my records, it looks like we will harvest more bean acres than corn acres. But here is the kicker, with 88 million acres the USDA projects soybean carryouts will stay the same!  I understand that yields were 52.1 last year  and the USDA is using 48 for their trend number but even with all of the extra effort by the US farmer to plant more this year we will see production fall by 130 million bushels and stocks to use push back toward 10%. Again, think “what if”.  What if we lose acreage to planting problems? What if we have a 47 yield instead of 48?  The double edge sword to high acreage is if yield falls, it affects the carryout more.  And considering demand is projected to continue to rise, stocks to use will fall even more quickly this year than in previous years.  Obviously, if we have another 52 bpa year, the carryout jump. But its about how smooth the road is getting there.
There is not a ton of great news about the wheat balance sheet that wasn’t already known.  Using their trend yields at 47.1, they project production will fall below 2 billion with a trend. Use is near 2.2 billion so we look for the carryout to fall back to near 900 million which puts stocks to use back closer to levels we saw in 2014.  There is a lot to like about the US balance sheet in wheat going forward, yields will be a big input to this as usual.  If we see something sub-45 million we could see carry outs fall back to 5 year lows!  There is still a lot of supply to clear in the short term but I remain bullish wheat from a longer term perspective.  Low prices are doing their job.  Now the US producers need some help from the foreign markets to get some demand back and the bulls will be cooking.
Lastly, cotton…its a story of two markets. Consumption is out stripping supply on the global stage but here in the US we will see the opposite unless demand increases. This is where the Trump/trade war talk could make things a little more tricky.  The US is the only export producing nation dramatically increasing production.  So if the world needs cotton, the thought would be its coming from the US shores. Acreage increases of 14% from 2016 and over 25% from 2015 should bring the supply to the forefront.  USDA projects prices to fall somewhat in the years following but call for next year to stick near 70 cents.  I would remain hedged in 2017 cotton right now given the long outlook for the trade, but the increase in world consumption has me nervous.  I mentioned this to a client yesterday, the tough decision is not whether or not to lift hedges here, its what to do in the high 60’s.  Yields will need to perform for the balance sheet to stay loose.
I think we continue to chop in all of these markets through spring. Rallies will have a tough time seeing follow thru unless we get some problems in SAM, which we do not right now. But after watching cotton, funds appear to be in this for the longer haul.  I would be buying liquidation breaks in corn, wheat and new crop soybeans. Maintain new crop cotton shorts.
 Hedge ideas:
– Buy March short dated Bean puts to protect crop insurance prices-  ROLL OR LIFT SOYBEAN SD HEDGES.  I DO NOT WANT TO BE SHORT FUTURES HERE AS THIS WAS A CROP INSURANCE PROTECTION PLAY
– Sold March corn near 370 –REMAIN SHORT THROUGH FIRST NOTICE.  WE WILL LOOK TO GET LONG AT THE END OF FEBRUARY- LET EXPIRE WORTHLESS
– Hedged Dec 17 cotton at 70-71 cents.
-Sold another portion of Dec 17 production on Friday near 73.50.
-Bought Dec 17 cotton 73 cent puts for 4.50
––Sold April Wheat call options ahead of March delivery- WE WILL LOOK TO BUY THESE BACK AFTER MARCH 1
–Buy May soybean OTM puts as a spec or hedge ahead of USDA ag forum and March reports- TAKE PROFIT ON POSITIONS
Spec Recommendation:
– Sold June Hogs at 77.00 REMAIN SHORT
– Sold October Hogs- 67.00- REMAIN SHORT
– Buy July corn- Sell Dec Corn (see Turner’s Take)- REMAIN LONG SPREAD
UPDATES ARE IN BOLD. Please call or email if you have any questions.

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About John Payne

John Payne is a Senior Futures & Options Broker and Market Strategist with Daniels Trading. He is the publisher of the grain focused newsletter called This Week in Grain, along with being a co-editor of Andy Daniels’s newsletter, Grain Analyst. He has been working as a series 3 registered broker since 2008.

John graduated from the University of Iowa with a degree in economics. After school, John embarked on a 4 year career with the United States Navy. It was during two tours in Iraq and the Persian Gulf where John realized how important commodities are to the survival of society as we know it. It was this understanding that brought about John’s curiosity in commodities. Upon his honorable discharge in 2007, John’s intense interest in the world of commodities inspired him to move to Chicago and pursue his passion in a career in the futures arena.

After a three year position with a managed futures firm specialized in livestock trading, he was given the opportunity to join the team at Daniels Trading. Being in the business and seeing how other IB’s operated, it was the integrity and straightforward approach of the Daniels management team and brokers that attracted him to make the move. Since joining Daniels, John has broadened his fundamental and technical analysis of the markets even further. John has been writing his newsletter This Week in Grain under the Daniels banner since 2011.

Working in high pressure industries like the military and capital markets, John has learned the value of preparation in times of stress. He believes that instilling within his clients the value of a good plan and a cool head for dealing with the day to day swings of commodity markets. He treats every client as a teammate, understanding that his job is to help clients achieve their goals, whatever they may be.

John is a proud supporter of the Iraq and Afghanistan Veterans of America, the Veterans of Foreign Wars and the National Corn Growers Association. When he is not working, he enjoys athletics of all kinds and spending time with his wife and their two kids.

John’s commentary is featured in the following publications:

* All Ag Radio – Sirius Channel 80
* AM 880 KRVN – Lexington, Nebraska
* RFD TV
* Wall Street Journal
* Barron’s
* China News Daily (English version)