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February 2013 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.

Should You Be Selling New Crop Corn???

Feb 15, 2013

   

New crop corn balance sheet numbers continue to paint a vividly bearish picture and the bulls are getting more and more concerned. Several analysts, banks and traders are throwing their hats in the ring in regard to new crop corn balance sheet estimates. The bottom-line is that even an "average" crop is going to produce a huge carry, and ultimately weigh on prices. Those not wanting to price any new-crop bushels are essentially betting on another catastrophic growing season. Below is a very simply and elementary overview of what traders are being forced to consider. Follow along and run your own estimates: 
 
  • Step #1. Estimate your "Planted Acreage" - Most guesses are somewhere between 97 and 100 million acres. Last year we planted 97.2 million acres. Most believe this number is going higher. I also find myself in this camp. As I travel around the country I find more folks wanting to be "corn producers."  For argument sake I will use 98 million as my planted acreage number.
  • Step #2. Estimate your "Harvested Acres" - This is a little tougher as it will depend on insurance, flooding, dry conditions, etc... I am thinking it will be somewhere between 89 to 91 million acres. I like to make it simple, so I am going to use 90 million "harvested acres." Depending on the planted acreage number this could obviously work higher or lower, so don't over complicate these early guesstimates. 
  • Step #3. Estimate your "Average Yield" - Obviously this is a complete "wild-card" as well being this early in the game. Trend-line is somewhere around 163 per acre but as we know it is dry in several areas and we just came off a 122.3 average. Simply take your "Harvested Acreage" estimate in Step #2 and multiply it by whatever you think the "national average yield" is going to be. Play around with these numbers as you see fit.
    • 120 yield = 10.8 billion bushels in total production
    • 130 yield = 11.7 billion bushels in total production 
    • 140 yield = 12.6 billion bushels in total production
    • 150 yield = 13.5 billion bushels in total production
    • 160 yield = 14.4 billion bushels in total production
    • 170 yield = 15.3 billion bushels in total production
  • Step #4. Add in last year's carryout, currently estimated at 602 million bushels, and add in our imports. Currently the USDA is estimating 100 million in imports. Obviously assuming we have more available supplies then we will have fewer imports. Therefore I am using 70 million bushels as my import number.
  • Step #5. Add up your  Total Product + Carryout of 602M + Total Imports to give you your "Total Supply" estimate. 
  • Step #6. Start subtracting your "demand" estimates. The biggest chunk of demand will come from "Food, Seed and Industrial Use." The USDA currently has this number estimated at around 5.867 billion bushels. My hunch is if prices trend lower we will see a jump in overall demand, therefore I am thinking this number moves higher. Some folks believe the FSI numbers will move above 6.0 billion bushels. I would think a number somewhere between 5.9 and 6.4 billion would be safe. I will go with a 6.2 billion FSI estimate. 
    • Ethanol is the largest part of the FSI numbers above and is obviously a major concern. I have to believe if prices trend lower, the ethanol plants will start seeing better margins (assuming crude stays fairly well supported). The USDA is currently estimating we will use 4.5 billion bushels of corn for ethanol production. As you know many believe this number is currently too high considering the recent plant closures and that the number should be more like 4.3 billion bushels. On the flip side, we used 5.0 billion the year before during our peak of ethanol production., and the margins are actually starting to improve a bit. I think with the margins improving ethanol will actually make a little rebound next year, therefore I am going to estimate corn used for ethanol at 4.8 billion bushels. It could certainly be a little higher if we can limit the Brazilian imports, but as of right now this seems like a fair assessment.  
  • Step #7. Feed Usage is another tricky one. One could argue that if corn prices get cheaper the cattle and hog populations are going to start expanding at a much quicker pace. I am not so sure about this one. The poultry industry seems somewhat maxed out, hogs could see a little jump, and cattle profitability makes it tough to expand the herd very rapidly. Moral of the story, yes overall "feed" demand will work higher from the USDA's current corn used for "feed" estimate of 4.450 billion bushels. Some guys in the industry think this number could move above 5.0 billion bushels if corn supplies are plentiful and prices decidedly cheaper. I am not so sure about that, as it seems a little aggressive, but anyway you slice I believe corn used for feed is moving higher, so let's just roll with the 5.0 billion bushel estimate. My hunch is this could be 200-300 million too high, but maybe I am a little low on ethanol usage so it might simply equal out. 
  • Step #8. Exports as we know have been very disappointing. The USDA continues to cut their US corn export expectations (now standing at just 900 million bushels), to levels not seen since the early 1970's. Obviously if prices dip and corn is in ample supply countries like China and Japan are going to try and restock their domestic inventories. This should help create more export business, the question is how much competition will we have from Argentina, Brazil or Ukraine? I am going to be extremely optimistic and say our exports rebound higher by 500 million bushels to 1.4 billion. This might be a real stretch, but I am hoping our quality and logistics can help us rebound. 
  • Step #9. Add up your "Total Demand" numbers estimated in Steps #4, #5 and #6. My "Total Demand" estimate is a very optimistic 12.6 billion bushels. Keep in mind the USDA is currently estimating just 11.267 in "Total Demand." I am hoping for a a gain of more than 1.3 billion bushels. This could obviously be a bit excessive. 
  • Step #10. Subtract your "Total Demand" number from Step #8 up above from your "Total Supply" number in Step #4, and you now have your "Total new-crop Carryout Number." For you fans scoring at home my new-crop carryout number is just over 2.0 billion bushels. OUCH!!! That is assuming a yield of 155 bushels per acre. Obviously if we have a repeat of last year, prices could make all-time new highs ($9 plus), unfortunately any type of normal growing season that produces  even below trend-line yields of 143-163 and prices are more than likely moving much lower in the months ahead. Make certain you are preparing your operation based on the numbers you are projecting. 
 

For the rest of the story including more insight into what traders believe are influencing market prices currently, sign-up here to receive a RISK-FREE 30-Day trial of my daily Grain and Livestock commentary. So many advisors want to tell you exactly how to market your crop, I want to teach you to better understand the markets and how you should respond.  If you are looking to be educated and not just told what to do, simply click here and get started!

Van Trump Report

 

Inside Look at South American Crop Production

Feb 11, 2013

   

South American production continues to be questioned. Argentine weather was as expected over the weekend. If anything the 6-10 day looks to have gotten a little wetter and cooler. Many bears are saying the bulls have overdone the "hype" and weather related risk premium associated with the crop. The USDA seems to agree, as they simply chose to offset the small Argentine crop reductions with an increase in Brazil's production. If you paid close attention to CONAB's numbers released last week for Brazil you would have seen the "planted acreage" numbers are much higher than most in the trade have been estimating. In fact total South American planted acreage is up by some 12 million acres. Personally I believe the "production" itself is going to be there,...BUT I question if it will be as strong as the USDA is currently estimating, and what type of logistical or political snafu's will take place as we move further down the road and more exclusively dependent on South American supplies?
 
Argentine inflation is now running at close to 30%, and the government is already taking steps to lock down and freeze prices. I am thinking we may actually start to see fewer export licenses granted in order to build a larger surplus of domestic supply to help keep a lid on domestic prices. There are also talks of port strikes in Brazil (maybe as early as Feb 18th or 19th) that could start to become more of a concern as well. Let's also not forget Brazil's government just upped the ethanol blending levels from 20 to 25%, which should create another 320 million gallons plus of ethanol demand. To help increase supplies Brazil is putting in several corn based ethanol facilities. As we all know, this will chew through more of their domestic corn, in turn allowing less of a percentage for exports. This is why I do NOT agree with the recent USDA numbers that actually lowered Brazil's domestic corn usage by 2 million metric tons in order to raise Brazil's corn export numbers to 19 million metric tons.
 
My point is, from a production stand point, South America is going to throw up huge numbers, there is no argument or debate, but they also might use a little more. Regardless of the weather from here on out, they are almost certain to produce an additional 30 million metric tons (maybe even more) of soybeans compared to last year. We may also see new record corn production as well. CONAB is thinking 5MMT's more corn than the current USDA estimate and 3MMT's more than last years record corn crop. This may be a little optimistic considering nearly all of the increase is coming from second crop corn production estimates. A crop that is just now going in the ground in many places, is still yet to be grown, yet to be harvested, and yet to be shipped. Understand this, in many key growing areas the window to plant second-crop corn will soon be closing (late-Feb), if producers plant any later than this they run a big risk of the crop extending out into a much drier period. I am hearing producers in Mato Grosso only have about 20-25 % of their second-crop corn in the ground, compared to 40-45% of it planted at this time last year. With this mind, I believe South American "production" estimates may have peaked and will actually start work lower from here, especially is the weather turns drier during April-May time period. Argentine corn production may be more like 23-25MMT's vs the USDA's 27MMT estimate. Argentine soy production could be sub-50MMT's vs. the current USDA estimate of 53MMT's. I am also deeply concerned about unforeseen political and logistical problems that may arise in the coming months. Bottom-line, I question how many bushels will actually make it out of the country, at what expense, and in what type of time frame.
 

For the rest of the story including more insight into what traders believe are influencing market prices currently, sign-up here to receive a RISK-FREE 30-Day trial of my daily Grain and Livestock commentary. So many advisors want to tell you exactly how to market your crop, I want to teach you to better understand the markets and how you should respond.  If you are looking to be educated and not just told what to do, simply click here and get started!

Van Trump Report

What Producers Should Read Before the USDA Report

Feb 07, 2013

   

Weather??? The question is have we finally seen the last bullish South American weather card come out of the deck. I am not so sure we have seen the last one, but if I am counting cards, I have to believe South American weather related face-cards are becoming much more limited. If the bears start to feel that the deck is lacking many more bullish surprises we might start to see them aggressively up their wagers. Be careful, as the South American weather rally will have eventually ran its course. I am telling you now, once the bears feel somewhat comfortable with the overall "weather-risk" they are going to be quick to pounce. Producers should make certain a portion of your downside risk is protected, and that you are comfortable with the amount of early-sales you have booked. More than likely there won't be another "weather" story for a few months. This could give the bears a clear track and the ability to push the market lower for what could be an extended period of time. Just make certain you fully understand what type of downside pressure could come our way "IF" the South American weather story fizzles out.            
 
USDA's monthly "Supply & Demand" report is due out tomorrow at 11:00am CST. The trade all of a sudden seems to be getting a little more nervous and concerned about what the USDA data may reveal. Most corn and wheat traders are now worried that the USDA could raise ending stocks on further cuts in demand. Soybean traders on the other hand are thinking ending stocks could shrink even further on increasing export and crush estimates. I included the "average" guesses that are currently circulating within the trade down below. Don't forget, I will not release Friday's report until after the USDA numbers come out. As you can imagine, the trade will be extremely quiet until the numbers are released. 
 
Wheat got a little boost on rumors that Russia had recently purchased some US soft red winter wheat. There is also some talk that wheat gained a little support on the funds unwinding long corn and bean positions spread against short wheat contracts. There is also several forecasters calling for longer-term dry conditions over key wheat growing regions in the Central Plains and the western Midwest.  Personally, I am not getting too excited over any of these bullish rumors. Put it this way, I am definitely not buying or re-owning any previous wheat sales on this news.   
 
Brazil could run into a few additional logistical constraints if workers at state ports follow through with recent threats to go on strike. From what our sources are telling us,  union representatives were scheduled to meet with legislators to persuade them to vote against parts of a bill that could threaten many port worker jobs. This is certainly something we need to keep our eye on moving forward, as the world simply can not afford Brazil to run into any type of additional logistical problems.   
 

If you would like to have the USDA data along with my commentary in your email inbox tomorrow immediately after the report come out, hurry and sign-up here to receive a RISK-FREE 30-Day trial of my daily Grain and Livestock commentary. So many advisors want to tell you exactly how to market your crop, I want to teach you to better understand the markets and how you should respond.  If you are looking to be educated and not just told what to do, simply click here and get started!

Van Trump Report

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