Sep 22, 2014
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November 2013 Archive for Recon Ag Marketing

RSS By: Greg Wagner,

Greg Wagner is president of GWX – Ag Advisors. For over 25 years, he has specialized in advising agricultural producers and end-users on marketing and risk management decisions. GWX Ag Advisors integrates fundamental and technical analysis, combined with experienced historic perspectives of agricultural markets in the decision-making process.


Marketing Behind The 8 Ball

Nov 22, 2013

Marketing Behind the 8 Ball

The most daunting task for a grain producer under the best of circumstances is marketing. The 2013/14 marketing year is now presenting producers with challenges not experienced for several years. The corn market is locked in what appears to be an intractable downtrend. Soybean values are being underpinned by relentless strength in domestic demand (soy crush) and sizzling export demand.

Yet, the bottom-line remains that too many producers are holding onto too much unpriced production. Moreover, all too common is that the size of the harvested crops have exceeded their own guarded expectations. Given one of the wackiest of growing seasons in recent memory there was not any bedrock reason to believe row crop yields such as the U.S experienced were possible.

Actually, we’ve chockfull of a string of wacky growing seasons here in the U.S. The remarkably good yields of 2013 are perhaps not so surprising at all. Consider that the severely compromised yields of 2012 yields were in "remarkable" when viewed in the context of the extreme stress the crops experienced. However, for 2013 the unexpectedly good yields have unwittingly raised the percentage of unsold production to even higher levels.

The issue of better yields and bigger crop size as of this writing is by no means the Final Word. With history as a guide both corn and soybean yields and crop size are more likely than not to increase when the USDA/NASS releases its "Crop Production Annual Summary" on Friday, January 10, 2014. Reaching back into 20+ years of history, the odds are roughly 3-1 that the ‘Final’ Crop Production report will increase yields for corn and soybeans when yields have increased from the September to the November Crop Production reports.

And it will be in this timeframe that the trade will have developed a confident trajectory as to the real potential of the South American soybean crop. If seriously adverse weather hasn’t developed between now and then, it can be conservatively projected that SA soybean production will be in the vicinity of 156.0 Mil Metric Tonnes (5.7 Bil Bu). That represents a 9.3 MMT (353 Mil Bu) increase from 2012. No shortage of soybeans for the world. If this potentiality plays out, it begs the questions - at what price level will the March 2014 soybean contract be trading? Above $13 Bu –OR- below $12 bu? This scenario hasn’t played itself out, YET. But the point here is to get thinking about pricing that unpriced production.

Ideally, a market will present you with a steady and invariably uneven escalation in price – aka "uptrend". You sell into strength – "feed the bull" – as it were. But that bull market in corn is effectively over. The evidence to suggest the likelihood of resurgence isn’t compelling, in my humble opinion. So, producers are faced with what only appears as the classical definition of a dilemma - a situation requiring a choice between equally undesirable alternatives. Either sell at present historically "lower values" or wait and sell at even lower values down the road.

Now, the bull market in soybeans is more likely than not to have seen its last hurrah in late August. As noted, soybean values are trying to finesse robust domestic and foreign end-user demand. But again, that minuet is being played out against the backdrop of a developing and yet unthreatened South American soy crop.

Remember, you can still keep yourself in the game IF you do take advantage of current prices by purchasing soybean call options or bull spread call options. If you are not inclined to advance cash sales take a hard look at taking protection with the purchase of soybean put options. Option strategies can be designed for either near or long-term protection. Get proactive. The presently evolving dynamics of the soy market do not suggest a passive "wait and see" approach to your marketing and risk management is warranted.

We’ll revisit the critical matter of marketing corn and soy production in the next post. Also, on revisiting - the last EKAP post (Friday 11/8/13) was released within minutes PRIOR to USDA’s November Crop Production and WASDE reports. There were three charts presented with details of the patterns represented. And the opinion: "Regardless of what may come to pass in the wake of today’s USDA reports – it is unlikely that these basic chart patterns will be meaningfully altered in the long-term." The essence of those chart patterns haven’t changed since then.     


Exceptional Circumstances Precede Nov. 8 Reports

Nov 08, 2013

In less than the blink of an eye, an unprecedented informational vacuum for the grain trade will be filled. Today’s USDA’s November Crop Production and WASDE reports (11 am CDT) mark the first substantive update in 8 weeks. What we have known beforehand is that the USDA has a lot of ground to cover. U.S. producers have certainly covered a lot of ground - in combines - in the period since the September 12th reports. Unlike the USDA they’ve only been periodically idled by Mother Nature, not forcibly shutdown by yet another round of political brinkmanship.

While it’s been said absence makes the heart grow fonder, there isn’t an iota of affection I can discern amongst the trade, in this matter. Being stiff-armed out of receiving timely, critical fundamental information required for the price discovery process is not in anyone’s best interest. We’ll step down from the soapbox now and move forward.

The bottom-line here is that exceptional circumstance precede the release of today's crop reports. And that has been met in equal measure by diligent efforts be a legion of private sector analysts to develop pre-crop report estimates of USDA's numbers.

Acreage, yield, production - the supply-side of the ledger, will directly impact the magnitude of USDA’s parsing, adjusting, and distributing across the demand-side of the ledger. The bottom-line constant is when everything is said and done how much is left over at the end of the 2013/14 marketing year – end stocks. We can all rest assured all that will be the starting point for the trades ritualistic free-for-all scramble to deconstruct every line item. This is all well and good and proper, but not what we want to focus on here and now.

Enough data has been crunched and ink expended, with another round in the offing. It is as illuminating to approach it from another angle, I believe. We’ll start at a simple maxim, USDA’s forecasts/projections are essentially invaluable to the trade, but ultimately it’s the trump card resides in the markets response to the numbers.

Remember, markets can and do "top-out" on bullish reports. Likewise, markets will "bottom-out" on bearish reports and embark on a price recovery.

So, before the reports are released we offer up the most basic, widely distributed, and historically accurate metric that exists - The Price Chart. So, by the end of today’s trading session prices will have moved higher, lower, or remain little changed. Regardless of the price response it will occur within the confines of a pre-existing price history. And therein lay the value of the price chart.

Granted, all too frequently a strong bias, anchored by some form of vested interest, is present when viewing a chart. Commonly (or perhaps for many not common enough) the charted price is trending in a favorable direction (up or down). The vested interest: either being long or short, futures or options, or the cash/physical commodity OR have a need to acquire the underlying physical commodity. For our purposes here and now it's really essential to set aside personal bias and attempt to view the visual price history (aka Price Chart) as objectively as possible.
Following are three current grain charts – 2 corn charts and 1 soybean chart. Take a good close look at them. They illustrate some classic chart patterns that are well-established. Regardless of what may come to pass in the wake of the release of today's USDA reports – it is unlikely that these basic chart patterns will be meaningfully altered in the long-term.

Chart 1 – December 2014 Corn – Daily


It’s the chart of a crop that has yet to be planted. And perhaps producers are yet to turn a laser beam focus on it at this juncture. Yet, it is history in the making and its price performance is to date is not impressive. One noteworthy feature is the extended four month period, March – June 2013 in which prices found support. A decline into the $5.30 bu level was tested AND rejected on four separate occasions. The latter half of this period, May – June 2013 buying pressure lifted values to three consecutive higher highs – ultimately challenging the $5.80 Bu level. This last rally was powerfully compressed over a three session period. Please note the abject failure that occurred 3 sessions later as the market gapped lower. That gap ($5.64 - $5.6175) is the ONLY gap remaining in the life of the December 2014 contract. Traders’ attention is primarily focused on the December 2013 contract. However, it is important to recognize that at $4.60 Bu AND making fresh contract lows, December 2014 corn is still carrying a $.41 Bu premium to its December 2013 counterpart.

Chart 2 - December 2014 Corn – Weekly


Same contract but presented on a weekly basis. Now those are not eyebrows going across two prominent rounded tops in the chart. Those with a basic knowledge of chart patterns will recognize this as a "double-top". It is a pronounced bearish chart pattern. There will be a price recovery or retracement, but the $5.00 Bu level is going to be one tough nut to crack.


Chart 3 – May 2014 Soybeans – Daily


It’s deja-vu all over again on this very important contract. Once again, we’re not looking at a pair of eyebrows here. It’s a double-top. At this juncture the price pattern has not played itself out. In other words it’s not confirmed as is apparent in the Weekly Chart of December 2014 corn.

However, it’s something to be aware of. The low price dip between the two tops is $11.7550 made on August 7th 2013. A rather important footnote is in order regarding the May soybean contract – any May soybean contract, not just the one depicted here. For South America, Brazil in particular the May soybean contract is the equivalent of the U.S. November contract. It is THEIR new crop soybean contract and their principle vehicle used to hedge.

Another observation on the back month soybean contracts - while not presented in this post, I would encourage readers to take a quick look at the July 2014 soybean contract. It has quite similar pattern characteristics as seen in the May chart – only weaker. The secondary top is well-defined with the exception being it is formed at a lower price range than the first.

In summary, primarily this price chart exposition is provided so that corn/soybean producers and end-users can take a peak over the horizon to see what has been developing. I am quite acquainted with the fundamentals and actively seek input from those whose opinions are at variance with that which I hold. And while holding fast in the belief and value of fundamentals, there is a certain peril when not being acquainted with the technical profile of a market. Finally, there are not any hard and fast rules that govern or dictate that any markets price MUST move in this or that direction based on its chart pattern or technical profile. The only thing I can state with certainty is that when it comes to markets it is best to expect the unexpected AND never say never. Ever.


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