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February 2012 Archive for Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

My Thoughts Regarding Old Crop Corn and Beans

Feb 28, 2012

  

Greece is back in the headlines after the Standard & Poor's ratings agency downgrade the country to "selective default." This follows a similar move by the Fitch ratings agency late last week cutting Greece’s long-term rating to one notch above "default." The market seems as if it was anticipating such a move and has shrugged it off, electing rather to embrace the news that the German Parliament has accepted the latest 130 billion euro bailout and Greece will again avert disaster. The euro is stronger on the news and the US dollar is weaker.   
 
Crude Oil is lower on the morning, but continues to look extremely strong and seems that most breaks are meet with renewed buying interest. You have to figure as long as Bernanke and the  powers the be in Washington maintain their dual-mandate to inflate, then oil isn't going down anytime soon. The average cost per gallon across the US has now reached $3.75, and has risen for 21 straight days. In fact fuel prices are now up over 13% in 2012 and setting their sights on our all-time high average cost per gallon of $4.11 set back in the summer of 2008.  
 
Soybeans continue to be the "frontrunner" as the trade becomes more concerned about tight ending-stocks, reduced South American production and more logistical nightmares and backups occurring at the ports in Brazil. The trade seems most concerned about the fact the USDA has the soybean ending stocks number at 205 million using South American numbers that were calculated back on February 9th. Make sure you understand what I am saying here, the 205 million ending-stocks number recently given this past Friday by the USDA was formulated using the Feb 9th South American soybean estimates. If you recall, at that point in time the USDA had pegged Brazil's soybean production at 72 million metric tons and Argentina at 48 million metric tons. Just yesterday, Brazil Consultancy AgRural lowered Brazil's soybean crop outlook to 68 million metric tons, while some are estimating Argentina's soybean crop could now fall below 46 million metric tons. The point is another 5 million metric tons of South American production could easily be shaved form the USDA's Feb 9th estimates and cause an even tighter ending-stocks number to be forecast. Many sources thinking well below 150 million.  
 
Let’s also not forget major backups at the ports in Brazil, some in the trade now thinking over 5 million tons or close to a 25 day wait, could cause more "switchbacks" from the Chinese to US soybean purchases.
 
From a technical standpoint March soybeans closed above its 200-day moving average for the first time since September.
 
On the flip side, many of the "bears" are thinking this bullish news is already factored in, and with an early plant almost guaranteed in the Western corn belt (because of limited snow-pack) soybean prices could actually be the ones that start leading us lower. Not only leading prices lower, but as more producers make a late switch to more soybean acres we could also see the basis start to weaken as well. I am not trying to scare anyone, but with prices quickly approaching $13.00 in the new-crop getting yourself to 50% sold seems like a wise idea, considering these are extremely profitable margins. Those who like to play the board may want to take a look at buying $13 puts and selling call premium to help finance the floor rather than selling straight flat price bushels. I personally think we have more upside potential, but these are extremely dangerous waters and the tides could turn at any time, so reducing your risk in some form or fashion looks to be my most prudent advice.
 
I don't see a whole lot of changes in the South American weather pattern. From my perspective Argentina continues to get normal rainfall as of late. While some of the more dry areas in Southern Brazil may actually get some soaking rains this week.  I doubt it will do much to help any real significant portion of the soybean crop, but it might help improve second crop corn or late planted soybeans. 
 
Corn traders are trying hard to digest the fact the USDA is now estimating 14.27 billion in total corn production.  This beats the highest estimate we have ever seen by more than 1 billion bushels. As you can imagine this type of number may take a little time to swallow and actually digest. One thing that is certainly NOT helping is the fact that we are sitting on at least an extra 4 million barrels of ethanol surplus.  Traditionally it seems as if we like to sit on about 17 to 17.5 million barrels of ethanol as we head into the prime driving season.  This year we are sitting on about 21 million barrels of excess surplus.  The way I see it we need to chew through about 4 million barrels of ethanol, just to get back to normal.  I think several plants are starting to realize the issues and I am hearing more and more about run times being cut and plants actually being closed for extended periods.  This certainly has me worried about "old crop" bushels, and I continue to encourage producers who have been enjoying strength in the basis to pull the trigger and look for ways to re-won the board with limited risk type strategies..i.e. cheap "out-of-the-money" calls or "bull-call spreads" of some type. Be careful getting carried away with long-term thoughts of over-supply, as all it will take is a green-light from those in DC in regards to a 15% blend rate to chew through the excess in  real hurry.  
 
I have had several calls asking me my opinion about the USDA's recent unexpected and aggressive move higher with the "feed/usage" numbers.  As most of you know the USDA took their estimates from 4.6 billion to 5.2 billion an increase of 600 million. Many in the trade are thinking either the USDA had the numbers extremely screwed up in 2011 or the latest 2012 numbers are way too high. I personally wonder if there isn't some political jockeying taking place as the USDA lowered the estimated corn being used for ethanol and raised the feed usage numbers above most all ethanol grind possibilities.  My point is, the press started to run wild with the "food-for-fuel" rhetoric when the USDA released estimates last year that corn being used for ethanol had actually surpassed the amount of corn being used for feed. The 5.2 billion number seems to be just out of the reach of corn used for ethanol even if production starts to ramp back up.  From a purely "political" stand-point it might be best for all of us if corn used for feed outpaces corn being used for fuel...at least on paper.  
 

Our Grain Marketing Seminar last Friday here in Kansas City, MO went really well. It's not too late to get signed-up for a DVD of the show, we have a few left! Just give us a call and let us know. (816) 322-5300

  If you like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

 


 

"Macro" Events Set the Tone in the Grains

Feb 21, 2012

There have been several significant "Macro" type events over the weekend that could set the tone for trading early this week, I have listed them in no specific order below:

  • Euro zone finance ministers strike deal on second Greek debt package. Greece’s cabinet accepts a final set of austerity measures over the weekend. Greece will now finally be granted the new $130 billion in bailouts, and it could eliminate the fear of a "default" for the remainder of 2012. The deal should give Greece a debt-to-GDP ratio of just over 120% by 2020. In addition Greek bondholders will take a final "haircut" of more than 53%. Some already projecting the $130 billion will not be near enough and they will need closer to $245 billion before it is all said and done. To further complicate issues the German finance ministry seemed to be actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks.
  • Massive protest in Spain this weekend in regards to labor reforms and deep spending cuts. I suspect a bailout for Spain will be the next major "headline." Many are calling this one of the largest protests since the economic crisis in Europe has begun. It was estimated early Sunday that a half-million people joined in the protest. The people are simply tired of the tax hikes and spending cuts. From what I can gather, the new government came in back in December and has already increased taxes and made close to $20 billion in across the board spending cuts. The problem is the new government still needs to raise taxes even higher and make at least another $50 billion in spending cuts just in order to meet their deficit targets. We need to remember, Spain has the highest "unemployment rate" in the modern developed world at 23%, and a youth "unemployment rate" of close to 50%. This place is in big trouble and in my opinion is ripe for some type of massive political melt-down. 
  • Iran announced they would be halting the sale of their crude oil to all British and French companies upping the stakes in the geo-political crude oil game. In addition, there are confirmed reports that an Iranian destroyer and a supply ship have passed through Egypt's Suez Canal into the Mediterranean Sea, allegedly heading to the Syrian coast. There is also now some talk amongst the world's elite that as Iran is forced to move towards some type of "non-dollar-based" international bartering system that the long standing power of the US dollar may soon be in jeopardy. We know China as well as several other nations would love to see the world move away from a US dollar dominated marketplace, as more countries begin to "barter" with Iran for gold and crude oil the US dollar may become less of a leader. 
  • China cuts banks' reserve requirement ratios in effort to spur economic growth. At first glance the market will digest the news as "bullish," but smart money seems to be concerned about the "defensive" nature and monetary stance China has had to take as of late. With exports looking grim and rising domestic inflation China may soon find themselves caught between a rock and a hard place. Chinese policy makers certainly seem concerned about a possible deeper slowdown in domestic growth. I have been tracking their so called "housing bubble," the most recent data shows home prices during the month of January fell in 47 of their 70 major cities. In addition I have heard recents reports from Volkswagen, Europe’s largest carmaker, that new vehicle sales in China, the company’s biggest market, fell by almost 5% last month. The market should be happy to see China taking the necessary steps to hopefully avoid some type of economic melt-down, but for the bears they will argue this is even further confirmation of the slowdown. 

As you can see, cards in the "outside" markets have once again been reshuffled. With the "Greek Deal" now behind us the trade is left to focus on the continued slowing global economies and rising crude oil prices. The "outsides" seem confused to say the least. Will Europe continue to spiral? Will the Chinese be able to turn it back around? Will tensions in the Middle East push crude to new all-time highs and further setbacks in global growth?

Most grain and soy traders will not just be watching global weather this week, but they will also be eagerly awaiting information rolled out by the USDA in their Annual Outlook meeting scheduled for Thursday and Friday. The data should give traders a more defined starting point for 2012 US crop production. I have heard "Supply & Demand" numbers for 2012/13 will be released Friday morning before the open.

Cash Corn continues to support the market, but obviously the trade is eager to get a glimpse of this week's USDA numbers. Most in the trade seem to be thinking the USDA will bump planted corn acres north of 94 million, and estimating a trend-line type yield of around 162 bushels per acre, with a carryover of at least 1.5 billion bushels. If the numbers come in less than anticipated, I would suspect traders will immediately start to add more premium to the Dec 12 corn contract. Any type of significant rally may be an excellent opportunity to make a few more new crop sales.

I should point out that respected global Ag lender "Rabobank" is now thinking US corn prices have more room to the upside. I heard they are projecting a yield of just 156 bushels per acre, on only 93.5 million acres. It seems their analysts are thinking corn prices will average about $6.10 per bushel in the 4th quarter of this year. They are not so bullish on wheat however, thinking new crop prices will struggle to stay above $6.00. They seem to be thinking soybean prices will peak in the April, May June time frame then fall back in the later half of 2012.

Global Soybean demand continues to look towards US supplies as a solution to South American setbacks and logistical constraints. With the cash basis remaining firm and "fund" interest continuing to rise, the market seems to have the magic $13 level well within its sights. My only fear is that many respectable sources in the industry as of late have estimated "fewer" soybean acres will be planted in 2012. Some seem to be thinking we could loose a million soy acres, going from 75 million planted last year down to around 74 million this year. I am NOT on the same page with these estimates and I am fearful the USDA may not be either. I personally believe we will plant 75-76 million soybean acres. If the USDA ends up being on a similar page, "new" crop soybean balance sheets may need to be quickly readjusted. In any event, more acres will mean supplies may not be as tight as some in the industry now anticipate. Be careful heading into Friday's USDA news aggressively long soy, I believe the short-term risk is to the downside following the release of the numbers. I don't see a lot of potential bullish soy news coming out of the USDA data.

US Wheat continues to remain competitive and actually attracted more global interest this weekend as reports surfaced that Saudi Arabia purchased 330,000 tons of Australian, Canadian, EU and US wheat at a price of $320.44 per metric ton. The problem is we are still sitting on massive global supplies. Obviously all eyes will now start to focus on US and Canadian growing conditions. I would suspect wheat prices will remain shackled to corn as it provides end users and importers with an extremely viable feed alternative. However, because "weather" is still a major concern I doubt the wheat market will suffer much of a major set-back in the days ahead.

As for today's trade, there was some "buy-the-rumor/sell-the-fact" type of selling in the outside markets that seemed to be the theme and added some headwinds today.  
 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of this week, the 24th, here in Kansas City, MO.  It's not too late to get signed-up, we have a few seats left!  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more. 

Click this link to find out more about our Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

   


 

This Week in the Grain Markets

Feb 13, 2012

  

Now that the Greek parliament has "officially" passed a highly controversial austerity bill to secure a second bail-out from the European Union, the "outside" markets will turn their attention to Wednesday's meeting of the Eurozone finance ministers who will be discussing the country’s broader bailout details. In addition, the minutes from the Fed's January 25th FOMC meeting will also be released on Wednesday. After Bernanke's comments, the trade seems extremely eager to see just how close we are to more "Quantitative Easing." Another round of asset purchases focused on mortgages rather than Treasuries could be closer than the crowd is thinking. In any regards, if "QE3" seems to be more of a reality than a pipe-dream and the Eurozone continues to find ways to kick-the-can further down the road, we will see more of a "risk-on" type environment in the days ahead.  
 
On the political front, Mitt Romney makes a comeback by winning the Maine caucuses over the weekend, barely edging out Ron Paul. While president Obama will release his Fiscal 2013 Budget today, calling for $3 trillion in deficit reductions over the next 10 years. The plan is supposedly very similar to the one proposed for Fiscal 2012 and would essentially leave Medicare, Medicaid, and Social Security unchanged. Keep in mind "none" of the major items contained in Obama’s budget are expected to become law prior to the November elections. 
 
The "outside" markets should remain favorable today with little economic news on the calendar. The thoughts of getting one-step closer to a Greek bailout should keep traders somewhat at ease. Tomorrow we will take a closer look at US January "retail sales," then we have US "unemployment" numbers on Thursday along with the "Producer Price Index (PPI)," followed by the "Consumer Price Index (CPI)" on Friday... If these numbers can continue to move in the right direction we may actually see an entire week of favorable tail-winds. 
 
Be careful getting yourself overly "bearish" based on the recent improvements in South American weather. Yes, conditions for most parts of Argentina have definitely improved. In fact, I have heard some rumors that rainfall totals in several areas the past 30-days are now actually running ahead of normal. The problem is I am NOT convinced as of yet that Brazil and some of the other surrounding areas in South America are getting that much better. My fear is that we are going to start heating back up and a few areas are still without substantial rainfall most notably southern Brazil and Paraguay. There is some talk that the USDA soybean production estimate for Brazil needs to be reduced even further (an additional cut of 3-4 million metric tons might be in order), especially if the southern areas do NOT start getting some additional rainfall.
 
There continues to be more talk about China looking to aggressively purchase more soybeans despite the USDA's recent 1 million ton reduction. In fact, I am hearing many sources in China are actually thinking their soybean imports will jump 2-3 million metric tons rather than falling like the USDA has indicated. A few sources actually reporting Chinese imports in 2012/13 well above the 60 million ton mark. 
 
Rumors are China purchased at least 10 cargoes of Brazilian soybeans and 3-4 cargoes of US soybeans just last week. I am hoping we will see even more purchases made this week with the Chinese visiting the US. Remember last year after the Chinese visited, the USDA announced a "promise" of more than 11.5 million tons of soybeans would be prurchased. Don't forget the NOPA soybean crush data for January is out tomorrow, most in the trade seem to be thinking we will see a larger crush number coming out of the data. If we don't get it the market might be a little disappointed. 
 
Several larger players are now also starting to take a closer look at the new crop soybean vs corn spread. The ratio is now out to the highest level we have seen since early summer, as many traders are eyeballing the tight projected 2013 carryover in soybeans (sub 230 million), as compared to what seems to be the potential for a bulging 1.5 billion plus carryover in corn. The thought is soybean acres will need to fight aggressively against corn to make up for the recent losses in South America. Personally, I am NOT on this page as of yet, but certainly believe it is something we must be aware of. It might just provide us with a nice opportunity to get more of our 2012 soybean bushels priced or hedged in the weeks ahead. Keep your eye on it!  
 
US wheat continues to be attractive globally as reports over the weekend showed that Egypt's GASC stepped in and grabbed 55,000 metric tons of SRW out of the US at about $289 (C&F). I heard French wheat was offered at about $301, Russian wheat at about $306, and Argentine wheat at about $307. It is obviously good to see US wheat holding a competitive edge, I am just worried about how long we can hold on. 
 
I still believe the "Big Bear" hiding in the closet could be in the wheat market, as we battle record global supplies and a 40% plus stocks-to-use ratio. In my opinion, some type of major production glitch will need to take place if we are to sustain any type of significant longer-term rally. We have the makings for potential setbacks in Russia, Ukraine, parts of the US and throughout Canada, for this reason "weather" will become extremely important for the wheat market during the next several weeks and may keep us somewhat supported.  If the weather continues to cause production concerns the market will obviously add additional premium. On the flip side, if these fears begin to waver and weather conditions improve... lookout below! 
 
Everyone is obviously concerned and keeping their eye on the December 2012 corn contract and in particular the February average (as it pertains to crop insurance). A good way to monitor this is to track the 20-Day Moving Average. Right now the 20-Day Moving Average for Dec Wheat is around $5.66, while our actual February 2012 closing average to date is just a little over $5.74. Unless something completely out of left filed hits the market, I am fairly confident in saying that our 2012 insurance guarantee for corn will be close to $5.50. Keep in mind, even though it is significantly lower than last year's $6.01 guarantee, it will still go down as the second highest insurance guarantee on record. With this type of number, I believe we almost guarantee ourselves close to 95 million plus corn acres going in the ground.    
 
Though US ethanol demand may be slowing temporarily, there is talk that DDGS demand may continue to surge in the months and years ahead. One big reason is because China is said to be implementing a five-year plan to slash the production of "grain-based" ethanol. At first glance this would seem to definitely be bearish domestic Chinese grain usage (especially corn), but it is highly likely it will quickly increase the imports distillers dried grains (DDGS) during the next five years. There is some talk that DDGS from the US may actually jump to over 7 million metric tons within the next couple of years. This is something we certainly need to watch. 
 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO.  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more. 

Click this link to find out more Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

 


 

A Few Thoughts on Thursday's USDA Report

Feb 08, 2012
It is extremely quiet in the Ag markets as of late with all eyes focused on the upcoming USDA report.  As I have mentioned, most are anticipating an extremely "bullish" report.  Some of the "bulls" however are uncertain about the USDA and rather than risking their short-term profits, they are electing to square up some positions ahead of the numbers. Though we may see some of the short-term weather bulls pulling out prior to the USDA data, I have to imagine the corn market will stay supported at the $6.30 level, soybeans supported at around $12.20, and wheat at around $6.50.   
 
South American weather seems to certainly be improving, as it has obviously gotten much wetter. I am of the belief the soybean crop should be "improving," while the  secondary corn crop in Brazil will also be benefiting from the rains.  Remember, Brazil's second crop corn now makes up over 50% of their total corn production, so  weather is still a major factor moving forward.  
 
I continue to remain apprehensive in regards to the "bull-spreads" in corn, as I am becoming more fearful each day about the basis slipping.  Some of my better ethanol contacts are telling me that several plants are starting to back off of their Feb-Mar bids, and some smaller plants are starting to slip back into the "red."  I am also hearing talk about run times being reduced and capacity concerns on the horizon. To make a long story short, just as I mentioned late last week, the ethanol plants may quickly STOP bidding up for the bushels.  Obviously, if this happens it will zap the basis and cause the front-end to tumble.  I continue to urge producers to pull the trigger on old crop bushels and build some type of limited risk re-ownership strategy on the board.  
 
One thought is that producers who make cash sales on the improved basis could simply buy the July $8.00 calls for about $0.10 cents. This is a "lottery ticket" type play, but allows you to participate to the upside should the US run into a major production stumbling block during the upcoming growing season.  I like re-owning the July contract. The May contract is simply to early, while the September contract  will act more like "new" crop if the US producers actually do get into the field early.  
 
Another play you might like heading into the USDA report is playing the "weekly corn options."  You can consider buying the Feb "Week-2" $6.30 put for around $0.03 cents giving yourself a floor through the report, as these options expire the following Friday. If you need an extra week of time you will need to look at the Feb "Week-3" options that expire the following Friday (2/17). 
 
If you are thinking about a spec play, and believe this report is going to produce some real extremes following the numbers you can enter into a Feb "Week-2" Straddle at the $6.40 strike.  This play would cost you about $0.15 cents to enter and could produce some nice returns should you breakout in one direction or the other. Just something to consider as we head into the report. 
 
As for soybeans, I am starting to hear there is a little more movement taking place in Brazil and the harvest seems to be picking up momentum despite the recent rainfalls. Technically speaking, the soybean market continues to be unable to breakthrough the Jan highs of $12.44^6, but downside looks to be somewhat supported (pre-report) in the $12.20 range as mentioned above. I still think looking for an opportunity to "bull" spread soybeans might be the best bet.  Especially with more talk circulating that China will soon be looking for more US soy in the weeks ahead as South American weather and infrastructure issues become a concern.  
 
The wheat market seems to be hanging on with a couple of prominent weather services now indicating that about 50% of the US Hard Red Spring Wheat and about 70% of the Canadian Hard Red Spring Wheat are in drought stricken areas. There is also a lot of debate still regarding just how much wheat in Europe and the Black Sea Region have been affected by "winter-kill." Some in the trade thinking it could be as high as 10-15%. There is also some talk in the trade that the USDA might just surprise a few folks by raising US wheat exports, ultimately reducing US wheat ending stocks by more than most are anticipating. Keep your eye on this tomorrow morning.  
 
I would have to believe this will be another non-eventful day as most all traders jockey for position and make final adjustments prior to the USDA report. I continue to urge producers to move "old" crop bushels and re-own the board on the recent strength in the basis. New crop sales of 30-40% should in place with some type of hedges or floor on a small portion to protect additional downside exposure. As we all know the "stakes" are always raised when the USDA pulls up a chair at the table.  If we get a big bullish number in the morning look to pull the trigger on a few more bushels. Spec's should remain conservatively long looking to bank profits on the release of the data. 
 
Below are the latest USDA estimates and trade guesses for the USDA report. 
 
US Ending Stock Numbers
 
Range of Guesses
 
Jan. USDA #s
Feb. Guess
Low Guess
High Guess
Corn
0.846
0.791
0.680
0.846
Soybeans
0.275
0.273
0.245
0.300
Wheat
0.870
0.867
0.836
0.935

Global Ending Stock Numbers
 
Range of Guesses
 
Jan. USDA #s
Feb. Guess
Low Guess
High Guess
Corn
128.140
124.896
120.000
128.140
Soybeans
63.430
61.380
58.000
63.770
Wheat
210.020
208.963
205.000
210.000

Main South American Numbers
 
Range of Guesses
 
Last Years Crop
Jan USDA #s
Feb. Guess
Low Guess
High Guess
ARG Corn
22.5MMT
26.0MMT
21.6MMT
18.8MMT
24.5MMT
ARG Soybeans
49.0MMT
50.5MMT
48.0MMT
45.0MMT
50.0MMT
BRZ Corn
57.5MMT
61.0MMT
59.2MMT
58.0MMT
60.5MMT
SOY Corn
75.5MMT
74.0MMT
71.3MMT
69.5MMT
73.5MMT

 
Below Are Some Additional Numbers of Interest:
 
  • US Corn Exports - Currently estimated at 1.650 billion bushels. The trade seems to be thinking the USDA will increase US exports by 25-100 million due to the production losses in South America. 
  • US Ethanol Usage - Currently estimated at 5.0 billion bushels. The trade seems to have extremely different opinions about this number. Some believe the number should be pushed higher because of continued domestic and global demand. Others see the US ethanol plants backing off their Feb & March bids as some plants profitability slips back into the "red." We are starting to hear more about reduced run-times and capacity issues on the horizon. This leads us to believe the USDA will simply choose to leave the number alone.
  • US Corn Feed Usage - I hate to even address this issue as it has become a complete crap shoot as of late. I am inclined to believe the USDA will at some point have to adjust this number higher, I just wouldn't hold my breath. In any regards, the USDA is currently estimating 4.6 billion bushels for feed. I am hoping we will see this number bumped higher by 50 million. 
  • US Wheat Feed Usage - Currently the USDA is estimating 145 million bushels for wheat feed usage. I also believe their number is too low, and feel that a jump of 10-20 million bushels may be in order.  
  • US Wheat Exports - Thinking the USDA might bump US Wheat exports higher from the 950 million reported last month. A jump of 25-50 million could happen
  • Soybean Oil for Biofuel - There is talk that the USDA will bump their soybean oil used for biofuel number by 50-100 million over the 3.6 billion pound estimate made last month.  
  • Paraguay Soybean Production - Most in the trade are looking for the USDA's current estimate of 7.6MMT to be reduced to 7MMT or lower. 
  • Argentine Corn Exports - Obviously this hinges on the USDA production estimate, but if we assume the USDA comes in close to 22MMT, the Argentine exports may fall to 14.5MMT which is well below last months estimate of 18.5MMT. 
  • Mexican Corn Imports - We have all been monitoring the drought in Mexico, and you have to believe the USDA will be raising their estimate for Mexican corn imports. It wouldn't surprise me to see them push this number from 9.8MMT to 10.8MMT. 

 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO.  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.  

   

Click this link to find out more Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 


 

Important Information In Regards to Old Crop Bushels

Feb 06, 2012

  

 
 
There has been a lot of talk as of late from some of the smarter players in the game that the "800-pound" gorilla in the old-crop corn balance sheet may in fact be ethanol demand being grossly overstated. The exports are starting to slip, gasoline usage is down the past several weeks (in fact the worst in 10 years), margins are weakening, and the DOE numbers suggest we are simply out of storage capacity/space... Net-net there is now starting to be talk that a slowdown in the ethanol grind is inevitable. 
 

Remember, unlike soybeans, US corn exports only account for about 15% of our total usage. Any type of domestic setback in demand would obviously be a significant pinch on the "basis" forcing the front end to fall under serious pressure. I am personally not "sold" on the fact we are going to be seeing "long-term" setbacks in ethanol, but I do believe some seasonal hurdles may now be in the cards, leaving the front-end vulnerable to supply side pressure during the next 60-90 days. If the setback in ethanol offsets the projected gains in exports, the basis could start to weaken across the board. Once again, this is just another reason why I am apprehensive to jump on board the corn "bull-spread bandwagon."  

 

Producers who are sitting on a large amount of "old" crop bushels should pay close attention and be very cautious as we move forward into Spring. Our good friend Ed Usset (Grain Marketing Specialist from the University of Minnesota), wrote an excellent article last spring about "inverse's" that have been occurring in the "old" crop vs "new" crop spreads, and in particular why producers should be careful holding the bushels too long. I have included a link to the entire article as well as a few of the highlights listed below: "Old-and New-Crop Challenges" by Ed Usset, ran in Corn & Soybean Digest back in April of 2011. Ed makes some fantastic points, and I thought the timing might be right to consider the data. I am not saying the "old" crop run is over just yet, but if past performance is any indication of future results then you need to get your finger on the trigger and be ready to make more sales during the next 90 days:

 

 

 

 

 

 
  • Since 1990 there have been seven years that an inverse of more than $0.05 cents occurred. Meaning the July contract trading at a premium to December. 
  • In each of those years cash prices declined sharply form April to October... there were absolutely NO exceptions!
  • The six-month decrease in the cash price has ranged from $0.31 cents in 1997 to $1.59 in 2008. Understand the decline can be significant. 
  • The price break in the cash market tends to happen extremely quickly, most often within a short three-week time period. 
  • In these "inverted" years, "New" crop pricing was actually better at the discounted price to the July contract in April than it was at a more traditional carry price later in October. Meaning the Dec contract may look cheap in April in comparison to the July contract, but later in the marketing year (October) the odds are the Dec "New" crop contract will be even cheaper. 
 
Despite not being a huge fan of bull-spreading corn, I do however like the thoughts of bull-spreading soybeans. The export basis seems to be firming and there is more outside interest flowing our direction, especially as the line-up in Brazil grows and the wait extends to almost 3-weeks. I am thinking these problems could only intensify once sugar starts to come to port along with the late planted corn. In any regards, you have to believe those caught short the export basis may need to be buyers in the March. Bull spreading in this environment may be a little risky as the funds begin to more aggressively roll out of the front months this week, so you may want to patiently wait for a slightly better opportunity down the road. In any event, I do like the thoughts of bull-spread beans. Timing the entry might be a little tricky. 
 
I hate to sound like a broken record, but any of you who are thinking about "BUYING" premium... either puts to establish a floor, or calls for re-ownership...you should pull the trigger now while the "volatility" is somewhat low. Understand that as more "risk" hits the marketplace the price of both the "puts" and the "calls" will become inflated, ultimately costing a "buyer" more money.
 
In case you didn't hear on Friday, the Russian government changed their tune once again about restricting grain shipments. If you recall they were going to limit exports in some manner after they reached 23-25 million metric tons. Remember, this is an election year, and as I pointed out early last week, I highly doubted anyone was going to pass a measure that would further irritate an already frustrated farming community. Therefore rather than limiting exports, like most had anticipated, the government elected to bump the allowable export totals higher to 27MMT's.
 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO.  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.  

 

Click this link to find out more Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

 

My Thoughts On Pricing 2013 Crop

Feb 03, 2012

US employment data took center stage this morning. Most in the trade were looking for the data to show an 150,000 private sector jobs added, instead the US data showed we added 257,000 private sector jobs! WOW! Once again better than expected US economic numbers trumping almost all expectations. In addition Hong Kong reported another round of good "Retail Sales" numbers overnight, while India's manufacturing data has surged higher for the second consecutive month... Net-net this disputes most worries and fears about a deepening global economic recession. 
 
Interesting to note that the S&P 500 hasn't fallen more than 50bp since late December, as almost every break is looked upon as a new buying opportunity. Crazy to think about, but the spread between the NASDAQ and S&P at 1170.29 is the highest since February of 2001.
 
European headlines are limited this morning, but there are big meetings scheduled in Greece both today and Monday. We will also have the ECB, the Bank of England, and the European Banking Authorities all meeting next week as well.  With very little EU news this morning and better than expected economic data here at home I would suspect strong "outside" market winds to push us higher.  Next week, however, could be an entirely different story as European "headlines" will dominate the markets. 
 
For the option traders in the house you have to believe the "volatility" is bottoming out, keep in mind we have the USDA report coming out next week (Feb 9th, next Thursday), followed by the highly anticipated March Acreage Report. If you are looking to be a buyer of "premium" (either a put or call) this might be the last big winter "sale" of the season. 
 
Australia has seen massive rains the past couple of days, which are causing some serious concerns for their cotton, sugar cane and soybean producers. From what I am hearing New South Wales and Queensland have gotten two and a half feet of rain in two days.  With the massive rains occurring "after" the grain harvest I doubt the trade will add much premium at this point, but we need to keep our eye on the situation. The floods have closed several coal mines, and I am thinking it could lead to some logistical issues and shipping problems for the grain industry. There are also some livestock problems starting to arise. 
 
South American Weather has stabilized but there is still some concern about lack of rainfall in South Central Brazil and too MUCH rainfall in the northern areas. Point being Brazil is not out of the woods just yet! 
 
Here at home the Western and Northern Corn Belt have been enjoying some abnormally warm winter weather (which is coming to a screeching halt). I have gotten several calls the past two days from wheat producers out in Kansas that are telling me the wheat is is starting to "green-up."  This could become a concern in some areas as we move forward, as any type of late "cold snap" in these areas could cause "winter kill" type issues. Below are few winter weather statistic I found interesting: 
 
  • The average temps in Kansas for January have been almost 7 degrees warmer than the 1895-2011 average, making it officially the states twelfth warmest January since 1895. 
  • Canada has had the second lowest snowfall amount in 50 years up to this point.
  • Throughout the continental U.S., last month was the third-least snowy January since comparable data were first collected in 1967. 
  • Austin, TX sets new record Feb, 1st temp at 83 degrees. 
  • Many record temperatures have been set across the central plains. Norfolk, NE warmed to 67 degrees, Lincoln, NE reached to 70 degrees, and Omaha, NE touched 69 degrees. Moline and Peoria both set records at 60 degrees. Peoria's previous record high was 56 degrees on this date back in 1988. St Louis, Mo tied its previous record high of 67 degrees.
  • Des Moines, IA reached 67 degrees for a new record. It was the 2nd warmest day ever recorded in January for Des Moines. 
  • I believe it was the first time ever that the temperature reached 67 in Des Moines twice during the same January.
  • North Dakota has seen temps soar to over 55 degrees, breaking a 1908 record for warmest January day in recorded history.      
These record high temps and abnormally warm conditions are not just limited to those of us in the Midwest. Flowers are now sprouting in New Hampshire, the Sierra Mountains in California are nearly snow-free, and lakes in many parts of the Northern US have still have not frozen. Portions of northern New England, the Upper Midwest, and the mountains of the Western US that are normally under deep snow by now have just a dusting. I have heard the cause of this warm first half of winter is the most extreme configuration of the jet stream ever recorded. Supposedly the conditions have caused the Icelandic Low to draw a strong south-westerly flow of air over eastern North America, preventing Arctic air from plunging southward over the US. Now this morning we are hearing forecasters calling for up to 22 inches of snow from Denver to Eastern Kansas. My point is with a highly abnormal winter now moving from one extreme to the other, I doubt we will see anything but a highly abnormal summer! 
 
US soybeans are starting to gain a little more attention as they had a nice rally today with March finishing up 15 and half cents higher.  November beans ended the week up 13 and a half higher at $12.37 and a quarter.  From what I have heard US soybeans and meal have recently grabbed a little interest from the EU as their crush have improved on stronger meal premiums. As you can imagine this rarely occurs during the South American harvest (US generally gets none of this business). The rumor is the "line-up" in Brazil is now approaching 3 million tons and several insiders are reporting the wait time is running between 2-3 weeks. There is now even talk that US soybeans to China for April deliveries are actually cheaper than those form Brazil. As you may know this is also very unusual.  I had told you weeks ago once we got into March the US would have little if any chance of making US soybean sales to China, as Brazil would win all of the business...looks like I might be eating my words on that one. I am not saying we will ship any huge amounts, but I do find it interesting that we are in fact competitive and in the running. 
 
With the soybean export basis firming and the supply pipeline remaining somewhat limited, you have to believe those short the export basis will soon be forced to buy the March soybean futures. This is one of the big reasons why I believe the March soybean futures has no more than $0.50 cents of downside during the next few weeks. As a spec I like being a buyer at the low end of this range ($11.70's), and as a producer I would continue to hold off on making any additional sales at this juncture. 
 
Corn basis levels seem to also be firming a touch. Spread strength however has been hurt by the recent fund roll's. I have to imagine once the roll's are completed and assuming the basis stays strong the spreads will start to firm back up. Therefore is you have made some profits on the short side you need to be thinking about your exit strategy. 
 
You should note that the US Ag Attaché in Argentina lowered their Argentine corn estimate from 26MMT down to 21.8MMT, many still believe this NOT low enough. They also lower their Argentine soybean estimate form 50.5MMT down to 46.5MMT. I have to believe the next round of USDA numbers will be extremely similar. 
 
 The Inform numbers were released this morning. Below are the highlights: 
 
  •  Argentine corn 22.5 mmt down 1.5 mmt from last month 
  •  Argentine soybeans 46.5 mmt, down 4.5 mmt from January.
  •  Brazilian soybean production 70.0 mmt, down 2 mmt from last month 
  •  Brazilian corn crop estimate at 61.65 million tons
  •  Total South American production down 7.6 mmt from last month.
  •  South African corn 12.0 mmt down 0.6 mmt from last month.   
  •  Ukraine corn increase to 22.5 mmt, up 3.5 mmt from last month (higher area).
  •  Ukraine wheat production 13 mmt down 4.5 mmt from last month.
  •  India wheat production 88.0 mmt up 2.5 mmt from last month.
 
Our friends over at Goldman Sachs seem to be on the same page we are in regards to US corn prices. They reported yesterday that they were bumping their short-term projected corn prices form $6.20 up to $6.90, wheat from $6.20 to $6.80 and soybeans from $12.15 to $12.90.  JPMorgan followed similar suit by moving their Q2 projected corn prices to $7.00.  Both however are looking for corn prices to fall back later in the year.  Goldman in fact has their 12-month corn prices pegged at $5.25.    
 
Many "sharp" producers are becoming more and more concerned about their 2013 crop and just how aggressive they should become in pricing production. Most are making the following assumptions: 
 
Fertilizer will be flat to lower on prices. Retailers as of late allowing producers to book fertilizer for next fall at the same price they purchased it at this year.  $700/ton ammonia, $540/ton Potash, and $600/ton Phosphates.
Most of the best producers have cash rents locked in through 2013.
Machinery costs seem to be stagnant to lower as most have already upgraded.
Diesel fuel is obviously an unknown with risk predominately to the upside. 
 
With the above scenario and assuming a 180 bushel yield, several producers have indicated that by pricing just 25-30% of their crop in the $5.50 to $6 range in the Dec 13 contract it would allow them to sell the remaining 70% at $4.00 and still break-even. Certainly this is a "Defensive" type position, but for many this could prove to be a very smart move. As I have mentioned in days past US yields will ultimately dictate price direction. There is no doubt that any trend-line type yield could add serious pressure to prices. Getting that first 20-30% locked in at a good profit certainly makes marketing the remainder much easier, just don't get carried away with getting too much on too early. 
 
We all know what happened a couple of years back when advisors where having producers lock in profits two and three years out at $4.50. You have to avoid a similar type mistake...

 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO.  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.  

Click this link to find out more Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

 

Thursday in the Grain Markets

Feb 02, 2012

China may start to be the topic of more conversation as a severe drought is starting to gain a little more attention, and is something you should definitely throw on your radar screen. From what I am hearing a lingering drought has caused a severe water shortage in East China's Jiangxi Province, affecting the lives of over one million people, and leaving China's largest fresh-water lake bone dry. The fact of the matter is rainfall amounts have been limited in several crop producing areas and could start to garner more attention from the press as we move forward. If you recall it was the Chinese drought reports that started circulating last year around this time that added a little extra fuel to the wheat fire. Also if you look back to the big run in 2008, it was during the month of February that we made our big run to over $13.30. Point is February can produce some terrific gains in wheat, but also understand it can be the last hurrah before heading back south.    

With thoughts that Russia may once again be limiting their wheat exports and a Ukraine crop that is experiencing some significant setbacks in production, other wheat importing nations may become extremely nervous about the Chinese situation.  Trust me when I tell you NO one wants to be behind China in the "food" line. If countries know they are going to be needing wheat, we may see them step up as bidders now on the breaks rather than waiting until later. Everyone knows IF China where to come to the table prices will jump. 

Extremely cold temps may also be more severe than I have been giving credit. I heard yesterday the "cold snap" has claimed 43 lives in Ukraine, five in Bulgaria and 13 in Romania, as temps fell to a 65-year low in many of these areas. I realize wheat has the tendency to be viewed as "indestructible," but at what point do we acknowledge damage has been done? How severe does the drought have to become or how low do temps need to fall?  

 
Wheat has had one heck of a run these past couple of weeks, and it may be due for some profit taking, but I have a hunch we haven't seen the highs from this weather rally just yet. Producers should continue to remain patient, and look of done last push in February. Understand that I do NOT believe wheat can sustain a long-term rally in our current environment. I believe it  will take some additional production failures from around the world to keep this ball rolling. I do however believe some additional premium may be priced into the trade over the next couple of weeks giving you a better opportunity to make some additional sales, before the market heads back down to compete once again with corn. In summary, despite the recent weather concerns I doubt wheat will travel far from corn for any extended period of time. Therefore I continue to like being a seller of the deferred Wheat contracts against long deferred Corn contracts. Below is an example and a couple of ways you could play the trade: 
 
Buy (1) Dec 12 $6.50 corn call and Sell (1) Dec 12 $8.00 wheat call - collecting $0.20 cents of premium on the trade. You are simply selling the deferred carry in wheat and buying the deferred inverse in corn.  If both markets tank you collect the $0.20 cents in premium. You could also Buy (1) Dec 12 $6.00 corn call and Sell (1) Dec 12 $8.00 wheat call for even money. I like both plays longer-term. You should take a closer look at these.  
Many traders are aggressively touting "Long July vs Short Dec" corn.  Obviously there is fear in the marketplace that the US could ultimately run out of "Old" crop corn right before the US harvest.  You can defend the position by arguing that the USDA has miscounted the total number of bushels and the crop is simply not there, or you can argue that poor "quality" will ultimately become an issue and weigh of the available bushels, or you can take the stance that farmers simply are not willing to give up their grain. All of the above are certainly fair arguments, but I urge you to be extremely cautious betting on any of these horses to "come in."  Obviously a "trifecta" of some sort would pay off in a big way, but more realistically all of the above mentioned horses may end up fading at the wire and finishing just out the money. 
 
Several well respected traders in the industry are in fact now thinking this might end up being one of the biggest "sucker bets" on the board. There is no question that a bullish March stocks report could push the spread north of $1.20, but you have to believe buying in at these levels could be extremely dangerous. Be carefully getting talked into the "Old Crop / New Crop" spread! I agree it is a sexy story, but I am not sure this is the girl you want to take home to Mom. 
 
Weekly ethanol production was reported up 4,000 barrels per day to 939,000. This is a big number and now stops the recent slide in ethanol production that followed the ending of the blenders tax-credit. You have to believe the USDA is currently too low on their ethanol usage numbers. My guess is by 50 to 100. It wouldn't surprise me to see a bump to 5.1 billion coming sooner rather than later. 
 
Remember, Informa will have a world production update for us tomorrow morning, I am assuming at around 10:00am CST. The "outside" markets will be digesting the highly anticipated US jobs report that will be released at 7:30am CST. The expectations aren’t as high for this January report as they were back in December. From what I am hearing most of the traders are thinking we will add +170,000 private sector jobs (down from +212,000 in December), but still a move in the right direction. Do you realize we need add over 21 million net "NEW" jobs to get ourselves back to full-employment. Unbelievable! 
 

Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO.  You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more. 

   

Click this link to find out more Grain Marketing Seminar 2012.  Like this blog and want to read more, sign-up for our free trial of the daily report. Click here 

Van Trump Report.  

   
  
 



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