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Sep 20, 2014
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January 2014 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.

Is beef a luxury item?

Jan 24, 2014

Hello Pro Farmer Members!

Let's talk cattle. Frankly, the cattle market feels a little like in felt when corn futures crossed psychological resistance at the $8.00 level in the summer of 2012. It kind of makes you sit back and ask yourself, "Is this really good for anybody?"

Well, there's a difference between beef and corn. When the corn market rallies, it is trying to reallocate remaining bushels to the end users that want it most. The realization of this hit me hardest in the 1995-96 marketing year when corn futures rallied to about $5.50 and the cash market kept on pushing into the $7.00 range. And then, ADM shut down an ethanol plant and moved the bushels the plant owned into the feed pipeline. Cattle, hog, poultry and dairy guys wanted that corn more than ADM wanted it to make ethanol. And anyway... there wasn't much of an ethanol market in place at that time. It made sense that corn would move from ethanol into feed channels. And when supplies started to move between end users, that was the end of the corn rally.

In the summer of 2012, similar happenings took place. The market topped well ahead of full-force harvest (although some corn was being harvested when the high was hit) and it topped because remaining corn supplies were being reallocated among the end users.

Cattle - and specifically beef - are different. The market isn't trying to reallocate existing supplies to the end users that want it most. Beef is beef - it is the end-use product. The job of a meat market is to balance supply with demand, right? If beef becomes too expensive for lower-income consumers (or consumers that simply won't pay "that much" for beef), then more beef is left for higher-income consumers who can (and will) continue to buy available supplies. So in a way, corn is like beef. The high price is designed to limit demand from one group (lower-income consumers) to leave more for another group (higher-income consumers).

"Steak is the new lobster."

Jason Britt is the President of Central States Commodities, Inc., in Kansas City, Missouri. I met him face to face at the Commodity Classic either last year or the year before and I follow him on Twitter. His tweets range from highly entertaining to stubbornly bullish to exceptionally informative to gloom-and-doom to intently insightful. In other words, you never quite know what you're going to get from an @JasonlBritt tweet, but they're always worth reading.

He sent two of his insightful tweets on Jan. 22.

1. "Steak, the new lobster."

2. "I like lobster a lot. But sure don't eat it very often."

It's pretty clear what Jason is saying. Steaks on menus at even mid-class eating establishments now carry a price tag of "Market." In the meat case, record retail prices will climb even higher when the record-priced boxed beef that traded this week works through the system. When it does, lower-income consumers may be opting for pork or poultry. And many will be looking to stretch their beef-buying dollars by picking up a $1 can of spaghetti sauce or an 88-cent box of Hamburger Helper so they can feed their families more with less beef.

And even higher-income consumers will likely balk at steak prices when they see them this time next week. It'll be enough of a shock to either back-away completely or to reduce portions on the plate.

Beef has been working on becoming a luxury food item for some time, and that process has accelerated in 2014. That doesn't mean lower-income families won't keep buying beef... they'll just buy less and won't be as quick to throw a couple of ribeyes in the cart when they do have something to celebrate with a nice meal.

Come to think of it... what's happening in the propane and natural gas markets right now is more similar to what's happening in beef. Higher heating bills and restrictions on how much suppliers will deliver are incentive to users (and especially lower-income users) to turn down the thermostat and to throw on a sweatshirt and heavy socks. The price rise is an effort to slow down use (to balance supply with demand) and the delivery restrictions are simply an effort to leave more for everybody.

Now... here's a big difference between corn and beef (or corn and propane): The role of high corn prices is two-fold - to slow demand and reallocate supplies to other end users. The role of high beef (or propane) prices is to lower demand. Yes, some will feel the pinch of higher beef prices sooner than others, but the ultimate goal - because there is a constant new supply of beef (and propane) coming to the market - is to balance supply with demand. Corn doesn't have a constant supply coming to the market... what's there is there until a new crop is harvested. That's why a high corn price has two jobs to do, a high beef price has just one.

Longer-term, high beef prices do have a second job. That's to provide enough economic incentive to a new generation of cow-calf producers to put up fences, seed down some pasture and hay and to reclaim some of the acres lost to row-crop production since 2007. That's a tough job... and a job that will take a long time to complete.

That's it for now...

... I'm headed for Canada for three days next week. Wish me luck! And I'll be in Chicago at the Top Producer Seminar on Thursday... I hope to see you there!

Follow me on Twitter at @ChipFlory

To join Pro Farmer, click here!

The U of Illinois evaluation looks very familiar

Jan 17, 2014

Hello Pro Farmer Members!

No 'smoking gun' was revealed in University of Illinois' evaluation of USDA reports. That'll leave more than a few people disappointed. I'll admit, I haven't read the full 140-page report, I've just gone through the 5-page summary that includes suggestions on how USDA can essentially rebuild confidence in their estimates, and the grain stocks data in particular.

Several of the suggestions are designed to bring more clarity to domestic corn use. Specifically, break the feed & residual corn-use estimate into a feed estimate and a residual estimate and to survey ethanol plants for actual corn use instead of implied corn use based on a bushel-to-gallon conversion rate.

(Editor's note... I stopped writing about 2 1/2 hours ago and went back and started reading "old" Pro Farmer newsletters in which we've discussed some of the issues with the Grain Stocks Reports. Which leads me to...)

I appreciate all the work and the University of Illinois... they do some really good work. But, there's not much new in their evaluation of the grain stocks reports. We've talked about and cussed and discussed the issues many times over the past three years. One issue that didn't get much attention in the U of IL evaluation is the harvesting of new-crop corn ahead of Sept. 1 and making new-crop corn available for use in the old-crop marketing year.

I'm not saying the new-crop bushels harvested in the old-crop year are counted as old-crop stocks. What I am saying is the use of new-crop corn in the old-crop marketing year leaves old-crop bushels sitting in the bin on Sept. 1. It's the displacement of old-crop corn use that helps to push Sept. 1 stocks higher than expected. We'll... at least that one possibility.

Also, the U of IL evaluation did very little to discuss where market expectations come from. Yes, the expectations ahead of the Grain Stocks Report is the average pre-report trade guess. That guess, however, is based on the most recent carryover estimate in the Supply & Demand Report from USDA. We've argued in past issues of Pro Farmer that maybe the problem isn't with the NASS survey of grain stocks, but it's with the WAOB's carryover estimate in the September S&D Report.

Of course, that carryover estimate in the September S&D Report is at least partially based on the stocks of corn NASS said were in place on June 1.

I was also disappointed that the U of IL didn't identify what I think would be a fairly effective way of removing some of the mud from the waters on this issue. Why not move the marketing year on corn to August-July? With more corn planted in the South and higher-yielding shorter-season corn varieties adding to the available supply of corn before Sept. 1, an Aug-July marketing year for corn would make it much easier to draw a hard line between the old- and new-crop corn supply.

That's it for now...

... I just ordered a chicken and an egg from Amazon... I'll keep you posted.

Follow me on Twitter at @ChipFlory

To join Pro Farmer, click here!

In reality, we'll still have plenty of corn.

Jan 10, 2014

Hello Pro Farmer Members!

That was a scramble! USDA reports on a Friday at 11:00 with a noon deadline on the newsletter only means one thing -- a busted deadline to get the newsletter to the printer. The good news is we work with a great printer... so it'll be in the mail yet this afternoon.

Up to 10:59:59.99 a.m. CT this morning, the attitude in the corn market was prices needed to go lower to find demand. In reality, the market found record first-quarter demand at prices that ranged from $5.06 (September high) to $4.20 (November low) in March corn futures.

Also, in reality, there will still be more than 1.6 billion bu. of corn left over at the end of the 2013-14 marketing year. That means price rallies should still be sold in old-crop corn. I'm not sure if that's the case in new-crop corn... not yet. Carryover at the end of the 2014-15 marketing year is still likely to inch higher, but new-crop corn futures posted an upside key reversal today, which should encourage some short covering. Also, long-term trending markets (like the current downtrend in corn) love to establish a trend change with a key reversal.

Maybe the best news for new-crop corn futures is that February is right around the corner. The average of December corn futures in February is the coverage price for revenue protection policies. If we can get some additional short-covering in new-crop corn futures and then even steady trade through February as the market frets over a potential decline in corn acres, we've still got a chance of a $4.50 spring price for crop insurance.

The spring crop insurance price on soybeans is also established in February, and new-crop beans seem to be building fresh downside momentum as we get to the middle of January. The one-tick close under $11.00 in November bean futures will make funds comfortable on the short side of the market for the near-term.

By the way... take another look at the old-crop bean S&D balance sheet. Yep... there is a chance carryover won't go up from last year's 141 million bu. finish to the 2012-13 marketing year.

The wheat market can't seem to take its focus off old-crop fundamentals. The unexpected uptick in wheat carryover not only overshadowed what looks to be a significant drop in wheat acres for the 2014 harvest, it evidently completely hid it from wheat traders' view.

We're headed for Lincoln, Nebraska, this weekend! This is going to be our only western Corn Belt Profit Briefing Seminar this winter. There's still time to register for the two half-day seminar in Lincoln, but you're running out of time. Call Shelley early Monday morning (1-800-772-0023) and we'll get you in. You can get more details of the meeting here.


That's it for now...

... I hope to see you Monday in Lincoln!

Follow me on Twitter at @ChipFlory

To join Pro Farmer, click here!

Cheerios will make consumers question GMO safety.

Jan 03, 2014

Hello Pro Farmer Members!

Happy New Year!!

2013 was a challenging year for many... no doubt about that. And 2014 is here with what is sure to be a new set of challenges for us all. Pro Farmer will do the best we can to help you have a happy and prosperous 2014!

Is "bad news" "good news" again?

Egypt booked a bunch of wheat today... and none of it will originate from the U.S. That is not good news... and wheat futures led a round of short-covering in the grain markets today. There's some speculation that some hard red winter wheat might be vulnerable to some winterkill over the next several days as really cold temperatures move across the country. That speculation did also get a mention for spurring the short-covering in the wheat pit today... but there is always some HRW and SRW wheat that's vulnerable to winterkill. The winterkill "reasoning" doesn't seem to hold much water.

It's probably most accurate to chalk up today's gains in wheat to a short-term rally in an established bear market. Wheat futures were seriously oversold after posting a new contract low yesterday, so some short-covering today will give market bears more ammunition to come back on the short side of the market next week. I won't ignore some of the bullish issues in the wheat market, but until the downside momentum is broken by a series of higher closes, I can't call today's bounce any more than a blip in the longer-term downtrend.

And corn futures even participated in the short-covering surge and closed near session highs after posting a new contract low earlier in the day. That's despite what appears to be improving growing conditions in Argentina and Brazil. Some South American crop estimates were trimmed a bit by some crop-watchers, but recent stress on South American crops has clearly been factored into market prices.

And lets throw some Cheerios in the mix. General Mills says it will start making non-GMO original Cheerios and will label the product as non-GMO. Of course the main ingredient in Cheerios is non-GMO, but General Mills will start making original Cheerios with non-GMO corn starch and sugars. This move is a notch in the belt of the anti-GMO crowd, even though General Mills says original Cheerios will be the only non-GMO product they'll offer. General Mills says it was an "easy" move to go non-GMO on original Cheerios because they already make the product for the European market. Which is probably right...

... but why label it as non-GMO? All General Mills is doing by labeling original Cheerios as non-GMO is opening the company to questions about why their other products aren't non-GMO. And if they get questions about the non-GMO issue, any dip in sales resulting from an uninformed consumer shying away from General Mills products that are not labeled non-GMO will... you guessed it... result in General Mills offering more non-GMO products.

Short-term, the General Mills move won't have much impact on the market. But if the non-GMO label issue snowballs like food issues have in the past (think lean finely textured beef), General Mills will have turned an iconic food brand into a lightening rod.

If USDA Secretary Tom Vilsack is paying attention, he should probably head to Minneapolis to have a talk with the decision-makers at General Mills about how to maintain confidence in the safety of General Mills' (and the U.S.) food supply.

That's it for now...

... STAY WARM!!!

Follow me on Twitter at @ChipFlory

To join Pro Farmer, click here!

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