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April 2012 Archive for From the Editor

RSS By: Brian Grete, Pro Farmer

Pro Farmer Editor Brian Grete takes time to talk with Pro Farmer Members about some of the key issues in each week's Pro Farmer newsletter.

Corn spreads go crazy!

Apr 27, 2012

Chip Flory

From The Editor

April 27, 2012

Hello Pro Farmer Members!

Wow... May corn futures go into delivery next week and the May-December spread went absolutely nuts today. May corn futures had a last tick on the day session that was up 30 1/2 cents; December corn futures were up 2 3/4 cents on the last tick of the day. That's a 27 3/4 cent move in the old-new corn spread in one day. Moves like this don't happen very often...

But the wacky spread action doesn't end there. May corn 11 1/2 cents on July corn futures today and the old-old corn spread ended at a record 28 cents. That's the kind of price action that can only happen in a tight-supply, strong-demand market. Which is exactly what the corn market is dealing with right now.

China bought more old-crop corn this morning... 120,000 MT for delivery in the current marketing year. That pushes China's total old-crop corn bookings well past USDA's current estimate of 4 MMT. That certainly suggests USDA will have to increase the corn export estimate in the May 10 Supply & Demand Report. That should drag 2011-12 corn carryover below the Fe b.-Mar.-April carryover estimate of 801 million bushels.

BUT... USDA could raise the export forecast and offset a bigger export number with a cut to another usage category. Specifically, USDA could cut feed & residual use. Specifically, USDA could cut the residual component of the feed & residual category.

I've argued several times USDA is already working with a negative residual use estimate for corn. Maybe as much as a negative 200 million to 250 million bu. negative residual. That means feed use is actually 200 million to 250 million bu. bigger than the 4.6 billion bu. estimated in the April S&D Report. It's not much of a stress to imagine USDA's May 10 S&D Report including an even bigger negative residual use component, which would allow 2011-12 corn carryover to hold steady at 801 million bushels.

In reality, supplies of 2011-crop corn are tighter than that. But, because of the negative residual and expectations that more than 900 million bu. of 2012-crop corn could find their way into the Sept. 1, 2012, corn stocks estimate, don't look for USDA's corn carryover to dip much more than it already has.

We're not exactly sure how much more the old-old or old-new corn spreads will continue to widen. But combined with very tight exportable corn supplies at the Gulf (see News page 3 of this week's newsletter), stronger-than-expected demand for old-crop corn and talk that Argentina's corn crop estimate is headed someplace south of 20 MMT, odds are the bull spreads will continue to widen in next week's trade.

Another topic we spent plenty of space on in this week's newsletter was the BSE find. We're looking for confirmation of this, but we're hearing the Commodity Futures Trading Commission (CFTC) has asked USDA to provide a timeline of how the BSE alert was released to the industry. Because live cattle futures were limit-down on rumors of the BSE case ahead of confirmation from USDA, the CFTC just wants a timeline of who knew what and when they knew it. That seems fair... but keep in mind, there is no such thing as "insider trading" in commodities.

In the commodity world, it's generally a "first to know wins; last to know loses" world. But, if somebody inside of USDA mishandled market-sensitive information, they should at least get a "wrist-slapping" for their mistake. We're sure this will be a topic of market discussion in the week ahead.

That's it for now...

... have a great weekend.

Crazy close in grains!

Apr 20, 2012

Chip Flory

From The Editor

April 20, 2012

Hello Pro Farmer Members!

That was one of the craziest closes we've ever seen in the soybean market. Futures rallied leading into the expiration of the May call and put options on a couple of rumors. The first rumor doesn't make much sense... that Brazil was going to shutoff exports of beans and meal for some reason. That rumor was accelerated by speculation Spain would stop buying from Argentina in retaliation for Argentina taking over a Spanish oil company earlier in the week. Then the final rumor hit... that China was in and buying soybeans for July shipment out of the PNW. The Spanish-Argentine rumor might be true... but wouldn't have a major impact on prices. Regarding Brazil, I don't think that makes a lot of sense. And the Chinese buying could be absolutely true... and it would have a big impact on prices because it was rumored to be for old-crop shipment. Regardless of the reason, beans posted a huge rally into the close.

And then it got even more interesting. The wild rally into the close left a very wide range in the last minute of trade... that's known as the closing range. Then there is a "modified closing session" that determines the settlement for the day. The last tick of the day session in November beans was at about $13.61 3/4. The settlement was at $13.56. It's been a long time since the settlement was that far from the last tick of the day in the bean market.

Similar things happened in all the bean contracts and (to a lesser extent) in the corn market, too. That's about as crazy as a close as you can get for the week.

What's it mean for next week? Tough call, but the volatility of today's last few minutes of trade are likely to carry over into the start of next week's trade on Sunday evening.

Be sure to check out Jim Wiesemeyer's Inside Washington Today. It includes the Senate Ag Committee's summary of their farm bill package and a "few" comments about the farm bill from Jim.

That's it for now...

... have a great weekend.

Already a 'critical' weather weekend?

Apr 13, 2012

Chip Flory

From The Editor

April 13, 2012

Hello Pro Farmer Members!

It rained a bit in northeast Iowa this morning, but now it's just windy and cold. We've got a chance for more rain tonight and tomorrow, but so far it's been a bust. There is some rain in northwest Iowa, S. Dakota and in Minnesota right now, but it's been mostly light so far. A nice rain made its way across Missouri and is now in downstate Illinois.

That little radar update is to emphasize how important this round of rain chances really is. I know... we're not going to make or break a corn crop on April 13, but some rain now (actually... a good soaking rain) would be a strong signal the pattern is starting to allow some more moisture into the Midwest. And by the looks of the U.S. Drought Monitor, better than one-third of the U.S. corn crop is experiencing "abnormally dry" conditions or drier. So... a sign that "good rain" can make its way into the Corn Belt would be a relief.

And heads up this weekend. The risk of severe storms in the Central Plains is very high for tomorrow and the risk of severe weather extends into the central Corn Belt.

Getting a clear picture of just how much rain fell... and where it fell... on Sunday night/Monday morning will be absolutely critical to the price performance in corn futures next week.

Spread action in the corn pit this week continues to be bullish with nearby corn futures at least holding onto a premium over deferred futures. And by the end of the week, the bullish spread action in corn was joined by strength in the basis market in some key areas. It certainly suggests corn prices are back down to levels that are attracting additional export demand... and probably from China. We made quick mention of this on the front page of Pro Farmer this week, but Chinese old-crop corn bookings are already on the top side of USDA's projection in this week's Supply & Demand Report. That means USDA should increase estimated exports in the May S&D Report... but don't be surprised if that means another cut to estimated feed & residual corn use. As I explain on page 4 of this week's newsletter, the last time USDA held corn carryover steady for three consecutive months, it started a string of higher corn carryover estimates that ultimately led to last year's official carryover of 1.128 billion bushels. We could be headed back to close to that level again this year. Where USDA will cut the demand from is a tough call... but the analysts there have made tough calls in the past and will probably do so again in the future.

That's it for now...

I've got a busy weekend ahead. First, the trap-shooting club I coach will have its first league shoot tomorrow! (Great weather for it, huh?) On Sunday, we've got a trip to Ames to watch the ISU National Ag Marketers Association (NAMA) practice for competition coming up in Kansas City. Should be a fun weekend!

Deja vu all over again

Apr 10, 2012

Chip Flory

From The Editor

April 10, 2012

Hello Pro Farmer Members!

After thinking through the details of today's S&D Report and digesting some of the commentary with the report, I had a Yogi momment... "Deja vu all over again."

The following is some of our analysis from the April 9, 2011, Pro Farmer newsletter. It talks about USDA's World Board anticipating an early harvest (and increased summer wheat feedings) to help hold up 2010-11 corn carryover.

Again... this is from April last year!


At least USDA’s World Board is telling us what they’re thinking! Normally it’s a guessing game when we try to figure out confusing USDA reports — especially the Supply & Demand Reports from the World Board.Reason: USDA’s National Ag Statistics Service supplyside data "telegraphs" S&D changes. When it doesn’t...
that’s when the guessing normally starts.

Situation update —
USDA’s March 31 report of March 1 U.S. corn stocks came in about 170 million bu. to 180 million bu. below trade expectations. That sent a message of stronger-than-expected first-half 2010-11 corn use and the likelihood of an April corn carryover estimate below the March peg of 675 million bushels. Instead, USDA delivered an April carryover estimate unchanged from March at 675 million bushels. USDA made no change to the supply side of the balance sheet for corn, but did move some bushels around on the usage side —

Important messages in commentary —
Well... it’s official. USDA’s World Board has learned some lessons from Federal budgeteers — they are borrowing from the future to make the present appear brighter. Think we’re kidding? From the S&D summary:

• "U.S. corn feed and residual use is lowered 50 million bushels as increased prospects for 2011 SRW wheat production and higher year-to-year corn plantings in the South reduce expected corn feed and residual disappearance during the second half of the 2010-11 corn marketing year."

• "Winter wheat conditions are especially favorable in Arkansas and North Carolina where wheat feeding is an alternative for poultry and hog producers."

• "Prospects for early new-crop [2011-planted] corn usage ahead of September 1 are also increased with the largest intended southern corn plantings since 2007 and high expected summer corn prices."

Translation: USDA is "borrowing" from the coming 2011 SRW wheat and 2011 corn crops to "hold down" 2010- 11 corn feed use to "hold up" 2010-11 corn carryover.

Yep... sounds ‘dangerous’ to us, too —
Just look at the National Drought Monitor for the reason. There is "a lot" of corn planted in the South... and "a lot" of that corn is irrigated. But there was also a lot of corn planted in the South simply because of the $6.01 price guarantee on Revenue Assurance (RA) products. (In other words... some of that corn was planted for an insurance payment, not for harvest.)

The ‘ultimate’ message seems clear —
USDA isn’t likely to estimate corn carryover any lower than 675 million bu. — they’ve established "pipeline stocks" for corn. (Another way to look at it: They won’t likely estimate a corn stocks:use ratio less than 5%.) Now it’s up to the market to figure out how to keep stocks:use no lower than 5% at the end of the 2010-11 marketing year. To do that, use still has to slow down. Normally that means higher prices. In the S&D Report, however, USDA narrowed its national average on-farm cash price projection by a dime (up a nickel on the bottom; down a nickel on the top from March) to $5.20 to $5.60. If USDA has "built in" slower use... why didn’t it also increase the projected price to send a clear message that it expects higher prices?

Admittedly, "guessing and speculation" kicks back in at this point. But looking at the mix of on- and off farm stocks in the March 31 Grain Stocks Report suggests it will be difficult to move the national average on-farm cash price much from the current range. Reason: On-farm corn stocks as of March 1 were 3.38 billion bu. — just 27% of the 2010 corn crop. (On-farm stocks were also down 26% from March 1, 2010.) Not only that... "a chunk" of corn stored on-farm has already been priced for summer-2011 delivery.

Corn conclusions —
The April S&D Report reflects an anticipated slowdown of 2010-crop corn use, but not overall corn (feedgrain) use. (Borrowing from future crops.) In reality, the supply of 2010-crop corn will be as tight as it can get (pipeline stocks) on Sept. 1, 2011.


And here we are again... doing the same thing for the 2011-12 marketing year -- borrowing from the expected 2012 crop to help hold up 2011-12 corn carryover to keep the pipeline full. The problem is... I don't remember the 2011 corn crop ever being repaid what the 2010 crop borrowed.

That's it for now... more at the end of the week.


How low is USDA willing to go with corn carryover?

Apr 05, 2012

Chip Flory

From The Editor

April 5, 2012

Hello Pro Farmer Members!

And Happy Easter! What a wonderful time of the year!

It's been an interesting day... started really early this morning so I could get in and get a good start on the front page of this week's newsletter. After that... I was back home by about 8:30 to finish replacing a hydrant up at the barn so we could get water rolling again. Then after refilling the hole, backing the backhoe out of the feed yard and rebuilding some fence, it was back to the office to finish up the letter. Got that done... then Brian Grete and I recorded (after many "technical issues") a segment for use this weekend on AgDay and/or US Farm Report.

I know... that might sound like a normal kind of day for you, but it was plenty busy for me and kept me away from keeping a close eye on the markets (which sometimes isn't such a bad thing).

For the TV work, Brian and I talked about the April 10 Supply & Demand Report. In this week's newsletter, we've got our latest updates to the Supply & Demand tables for corn, soybeans and wheat. In it, we've got old-crop corn carryover estimated at 681 million bushels. Demand is solid enough to drop carryover to that level, but neither Brian nor I are certain USDA will lower carryover from the March estimate of 801.

Last year, USDA dropped carryover to 675 million bu. and just didn't seem to want to drop it any lower than that. This year, it feels like that number is 800 million bushels. But, as Brian says, "We'll find out what the low-water mark is for old-crop corn carryover within the next two reports." That should prevent heavy selling pressure in old-crop corn futures until we know just how low USDA is willing to drop carryover.

Looking to the 2012-13 marketing year carryover for corn, we had to go with our first estimate at just over 1.5 billion bushels. That seems like a big number, but if we harvest 88.2 million of the 95.9 million expected to be planted and after "jacking up" the new-crop usage estimates, that's where we see new-crop supply at the end of the 2012-13 marketing year.

That's it for this week...

Again... have a Happy and Blessed Easter!

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