Closing Comments - nice bounce for grain prices - corn production matrix
Markets closed stronger today in a turn-around Tuesday price
action.
May corn was up 16 ½ cents a bushel, July corn was up 12 ¾,
Dec corn was up 8 ½ , KC wheat was up 9, MPLS wheat was up 12, CBOT wheat was
up 10, May soybeans were up 16 ½, November soybeans were up 12, the stock
market bounced with the DOW up 158 points, crude is unchanged, gold is up 12.50
an ounce, and the US dollar is down hard with the cash index at 81.79.
Overall not a bad day at all for the grains; with old crop
corn gain more then it lost yesterday despite the outside markets not having
near the bounce with the stock markets gaining about ½ of what it lost and gold
gaining under 10% of what it had lost yesterday.
Technically a good close for corn; and if we can bounce
above last week’s report day highs we could open the door to some higher
prices. Wheat and soybeans look to be
range bound as do some of the other corn contracts. A little negative for corn is the fact that
most cash bids have rolled to the July from the May contract; so cash corn
price didn’t gain as much as the nearby futures did today.
Also to note is technically yesterday May corn had a bearish
reversal taking out Friday’s highs and lows and closing below Friday’s
lows. Well today the opposite happened
as we left a bullish reversal or bullish outside day on the charts; taking out
yesterday’s and highs and then closing above yesterday’s highs.
News today for the grains wasn’t much different they
yesterday; but the funds were not selling everything like they did
yesterday. Weather is still supportive
with field work very slow and the outlook continues to be that some acres might
be getting lost or switch from corn.
Weather is also very supportive wheat with damage done and potentially
more damage to happen in the next few days and then you have spring wheat planting
which isn’t happening either and might not for a while given the recent
forecasts. Overall I still think frost
damage to the wheat is unknown and it also seems like the areas that got hit the
hardest were not the areas that had the most to lose. The areas with decent winter wheat crop
potential didn’t get nor are forecasted to get hit super hard.
Demand was also noted on the wheat strength today; as I seen
a couple more articles talking about the fact that China might need to buy some
more wheat. Also many to arrive spring
wheat bids rolled to the July last week; but today stuff on the spot floor
still traded against the May and basis on the spot was surprisingly firm.
Yesterday we did have crop conditions and progress. Most considered the info friendly with wheat
G/E unchanged, corn only at 2% planted, and spring wheat at only 6%
planted.
The one comment I would add is that many of the areas that
are really behind in planting are areas that were in the hardest hit part of
the drought so moisture delaying areas like ours really isn’t super
bullish. I am sure everyone in our trade
area would take the moisture we have had the last couple of weeks and hope to
get the next couple days over having all of their spring wheat planted. So really how bearish is the slow
planting? Now if the calendar gets into
early and the middle of May and corn isn’t getting planted then you could see
some fireworks because there is a good correlation between yield and what is
planted.
I read some place that typically corn yields start to lose
about a bushel a day after May 20th.
So overall I think it is friendly that the US isn’t getting corn
planted; but I don’t think today it is enough for new crop corn to explode
higher and if we do get a 2-3 week window I also think the updated American
Farmer will get the crop planted. So we
need to keep in mind that what is helping us bounce today might be a risk in a
few days or weeks.
When we look at the overall picture and less corn acres; we need
to keep in mind that we almost have to have less corn acres or our balance
sheet potentially gets very ugly. Think
of it this way; this current marketing year we are expected to use about 11
billion bushels of corn. If we plant 97
million acres with 90 % harvested and yield of 150 bushels we will have
production of 13 billion bushels of corn.
Now if we only plant 90 million acres and have yield of 150 with 90%
harvest we will still have production of 12.1 billion bushels. Which means that we need to find another
billion bushels of demand to have a similar carryout to what we have this
year. Can that happen yes; and it has
happened in history. But 2 billion
bushels has never happened; the biggest usage increase I can see scanning threw
the history of the corn balance sheet is from 06/07 to 07/08 and that was about
1.5 billion bushel increase in demand; most of it came from ethanol usage. We all have seen the comments about the
ethanol usage not going straight up year over year anymore; the comments are of
a blend wall because we just are not using enough gasoline via more efficient vehicles
and just consumer trends.
Below here is a corn production matrix. It is showing production with 90 million
acres to 98 million acres; with a harvest percentage of 91.6 which is the
average since 2007 and yields ranging from 140 bushels to 160 bushels. The point here is that even with only 90
million acres planted and yield of 140 we still likely produce about 500
million more bushels then we will use this year. Now I think we could find that demand fairly
easily just via exports; but keep in mind we are no longer the first place
buyers go for corn. We are far more
expensive then some of our competitors.
Now on the other side of if we end up with only 94 million
acres and get the yield of 160 which is less than the Ag Outlook we produce
about 13.7 billion bushels of corn.
Which means that we would need to find increased demand of 1.4 billion
bushels just to only have a 2 billion bushel carryout and that has only been
done once as mentioned above. Now
perhaps we are already pricing in a 2 billion bushel new crop carryout? I don’t know; but I do know this is why so
many advisors have been so bearish for new crop corn and beans for some
time.
|
planted acres
|
harvest percentage
|
Yield
|
Production
|
|
90,000,000
|
91.6%
|
140
|
11,541,600,000.00
|
|
90,000,000
|
91.6%
|
150
|
12,366,000,000.00
|
|
90,000,000
|
91.6%
|
160
|
13,190,400,000.00
|
|
92,000,000
|
91.6%
|
140
|
11,798,080,000.00
|
|
92,000,000
|
91.6%
|
150
|
12,640,800,000.00
|
|
92,000,000
|
91.6%
|
160
|
13,483,520,000.00
|
|
94,000,000
|
91.6%
|
140
|
12,054,560,000.00
|
|
94,000,000
|
91.6%
|
150
|
12,915,600,000.00
|
|
94,000,000
|
91.6%
|
160
|
13,776,640,000.00
|
|
96,000,000
|
91.6%
|
140
|
12,311,040,000.00
|
|
96,000,000
|
91.6%
|
150
|
13,190,400,000.00
|
|
96,000,000
|
91.6%
|
160
|
14,069,760,000.00
|
|
98,000,000
|
91.6%
|
140
|
12,567,520,000.00
|
|
98,000,000
|
91.6%
|
150
|
13,465,200,000.00
|
|
98,000,000
|
91.6%
|
160
|
14,362,880,000.00
|
The real hard thing is going to be determining what the
funds or money flow think fair value is based on various production and carry
out levels. As example is 5.00 corn
expensive or cheap with a 1.5 billion bushel carryout and production of 13
billion bushels? What about a carry out
of 2 billion bushels; is that priced into the markets today already or is there
some weather / risk premium priced into the markets?
In the Ag Outlook the USDA used yield of 163.6 giving us
production of 14.5 billion bushels and a carryout of 2.3 billion bushels. The one thing they did is have a usage of 13
billion bushels. We all know how they have
told us we will and can curb demand like we have never done. Take a look at soybeans and the crush pace
needed for the next few months. But the
USDA also told us that next year we will find more corn demand than ever. I question that; but I also think the way it
plays out is that on the May S & D’s which will be our first looks at the
2013/14 balance sheets we see demand come in higher than the trade estimates. Yield is probably too high; but those two
things probably come together. Our risk
is really that we got too high; curbed too much demand, and then finally raise
a good crop and we can’t flip on a light switch and get the demand back or give
the funds a different reason to want to push our prices higher.
I guess the reason to point all of this out; which really
should be old news is because it feels like we could get a decent weather rally
if the funds want to jump on the boat of slow plating progress. If the rally does come it might just be good
business to take a little risk off of the table.
Else were the birdseed market seems to be a little quiet;
but orders are good and it feels like we have a small uptick in sunflower
values today. Milo is needed as is
millet. Too much milo went into the
ethanol plants so I remain very friendly old crop milo basis as it just doesn’t’
feel like we have the needed supply for the demand; but keep in mind we also
have a huge inverse between old crop futures and new crop futures. For sunflowers we have a couple locations
that are nearly out of flowers and that hasn’t happened in a while and I view
that as a good demand sign.
As for marketing overall I remain friendly and look for a short
term pop; but I think yesterday’s price action in the outside markets along
with the above corn production talk should remind us that we are in a business and
in business it just makes sense to do the right thing. The right thing in marketing is probably
going to be to take some risk off the table on the rallies as no one is smart
enough to know exactly what the future prices hold. So spreading out the risk when you can make
sales that are profitable is simply a good and correct business decision.
How one takes the risk off the table should really come down
to what makes a guy comfortable. Making
sales is the easiest, but purchasing puts or selling the board can help achieve
some of the same goals; and with implied volatility rather low re-ownership via
calls can be an option too.
Please give us a call if there is anything we can do for
you.
Jeremey Frost
Grain Merchandiser
Midwest Cooperatives
800-658-5535
800-658-3670
605-295-3100 (cell)
605-258-2166 (fax)