Jul 23, 2014
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Recon Ag Marketing

RSS By: Greg Wagner, AgWeb.com

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

dec2014corndaily


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

dec2014cornweekly


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

may2014cornsoybeans


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.


 

Tune In Today for Pre-Report Analysis of June USDA Reports

Jun 11, 2013

Greg Wagner – Guest Analyst on AgriTalk Radio TODAY 10:30am CT

AgriTalk and host Mike Adams will be broadcasting live from the CME Group Grain Trading Floor to discuss markets and tomorrow's (6/12) USDA June crop reports live at 10:30 am CT. You can join this lively and insightful discussion TODAY at 10:30am CT.

Or tune in on your local radio station.
 

Greg Wagner – CME Group Analyst Outlook Forum - USDA Crop Reports TODAY 2:30pm CT

The CME Group will host a pre-crop report briefing today at 2:30 pm CT on which I will be a panelist. Media and market participants are welcome to join in the briefing via a live webcast. A short Q & A session will be included. View the briefing via webcast here.
 

USDA's April WASDE - A Surprising Fundamental Dust Up and Work Over

Apr 11, 2013

Going into Wednesday’s USDA April WASDE report the trade was laser focused on two line items – US corn and soybean ending stock levels. Specifically, just how USDA was going to handle the "residual" issue which arose over the utterly unexpectedly large physical supply of corn and soybeans found in the March Grain Stocks report.  Trade interest in the mechanics of tinkering with other line items on either the supply or demand side of the balance sheets was secondary to the impact on the residual issue. Just about every other aspect that is contained in that report was expected to be "side-dressing". We now know otherwise.  

However, the report has proven to be a fundamental game changer going forward. The increases in world corn, soybean and wheat end stocks have altered the supply-side landscape.  And to an extent is functioning to near-term overshadow US 2013 production prospects in each of those commodities. The price impact of Wednesday’s April USDA WASDE crop report has been relatively benign, thus far.

It was the sheer magnitude of the trade’s underestimation of the US Grain Stocks numbers that likely contributed to a rush to the other side of the boat, i.e., end stock levels were now going to have to be driven up substantially to accommodate this fresh mother lode of physical supply. So, some gaping statistical space was created between the trades’ pre-report estimates and the actual numbers USDA presented in the April WASDE. It was like the March Grain Stocks report - deja-vu all over again.

The variance between pre-report trade estimates on US corn & soy end stock numbers would have been handful to deal with in and of themselves. However, throw in a cluster of lightning bolts in some world S&D forecasts and the variance between expectations and actual numbers was seen across the board. The cumulative impact is rather far-reaching and does not project a longer-term price constructive scenario.

The table below details the major variances:

April 2013 WASDE Expectations vs Actuals             

CORN:  As cited earlier, old-crop corn stocks did not as large as the expected. The rather modest post-crop report rally seen in old-crop contracts is in part "relief" as the trade was braced for a more substantial increase in end stocks. The focus on USDA’s handling of the "Feed & Residual" component was the driving factor. The 150 Mil Bu decrease from March in the feed/resid category to 4,400 Mil Bu appears modest. However, we think it’s a well-considered approach in light of larger hog numbers that were seen in the Quarterly Hogs & Pigs report, as well as uptrending broiler egg sets and finished weights. Hog weights have picked up recently, too.

Actual and anticipated increases in feed offtake into the foreseeable future were the drivers functioning to restrain an even larger expected larger jump in carry-out. Consider the fact the dramatic price breaks experienced in old-crop corn contracts since March 28th. July corn broke an even $1 Bu from $7.15 Bu to a low of $6.15 Bu. And it traded at $6.17 Bu within 12 minutes of the release of the April WASDE.  Despite a lower than expected end stocks number, old crop corn will limited in its ability to sustain rallies of significance.

A thin silver lining in the demand picture also appears in corn grind for ethanol as USDA raised its forecast by 50 Mil Bu to 1,4550 Mil. Although the ethanol production pace at the at the moment appears to be lagging the forecast, increased processing margins for ethanol producers on the heels of dramatically lower corn values will stimulate ramped up production. The most recent ethanol production figures, for the week ending April 5th, jumped nearly 6% week over week. We look for this trend to continue as the US is entering a seasonally strong period for gasoline consumption which will be supportive to increased blending rates.   

Positive upward demand adjustments also appeared in the Food, Seed, and Industrial use category, as well. On the bearish demand side, an already lagged pace in exports has crossed the timeframe threshold where they can be reasonable expected to play "catch-up". Particularly, market share competition for foreign end-users from South America will crimp future prospects.  Corn exports were lowered by 25 Mil Bu to 800 Mil Bu – a multi-decade low – and are essentially dropped off the radar as a candidate to be increased for the current marketing year.

The once pressing need to ration corn demand has passed. For the moment, old-crop S&D has achieved equilibrium and the launching of any significant rallies are unlikely, at best. Further erosion in new crop prices is being held in check by the lagged start to corn seeding. There is an unquantifiable trade-off here between the benefits of recharging soil moisture in the WCB and the potential for yield drag if the crop isn’t seeded in a timely manner.

Any opening in the planting window will also be accompanied by pressure on new crop corn prices. While this 2013 growing season is clearly not anywhere similar to 2012, the trade will be mindful of the rapidity in which the corn crop can be seeded. The table below illustrates the 2012 "ideal" seeding pace. (Note: The weekly USDA/NASS Crop Progress report on planting pace reflects acreage as reported in the March Prospective Plantings report. So, in 2012 it is working with initial planting intentions of 95,864 Mil acres. Final planted acreage ultimately increased 1,291 Mil acres to 97,155 Mil Acres. )

2012 US Corn Planting Progress

While 2013 is past the point that will allow for the rapidity of getting the corn crop seeded overriding theme here is how quickly producers can get the corn crop into the ground when conditions allow. Most notable is the three weekly periods between 4/29/12 and 5/13/12. While roughly one-fourth (26%) of the crop was planted on 4/22/12, during the next 7 day period producers planted 25.883 Mil acres. In other words, in a single week more corn was put in the ground then the prior four weeks combined. That weekly spike was followed by a rapid pace during the next two weeks. In a three week period, a total of 58.477 Mil acres were planted which represented 64% of the entire crop. The pace in which the US corn crop can get planted when a real planting window opens is not going to be lost on the market.

A "rule of thumb" is that roughly 80% of the corn crop should be seeded by mid-May; otherwise there is a yield drag correlation. We would advance the idea that there a considerable number of weather variables that can function to mitigate a later seeded crop. Ultimately, the vagaries of weather are the hinges on which yield swings.  After all, the 2012 planting pace trajectory would have the 80% mark hit on May, 10th. And we all know what happened last year to toss that "rule of thumb" right straight out the window.  

SOYBEANS: With 2012/13 soybean end stock levels unchanged at 125 Mil Bu the current S&D disequilibrium remains intact.  Upward revisions in forecasted exports for soybeans – up 5 Mil Bu to 1,350 Mil Bu, soymeal – up 450k short tons to 9,350k, and soyoil – up 200K/lbs. to 13.200 Mil lbs. is uniformly supportive. Likewise, soybean offtake is increased with crush raised 20 Mil Bu to 1,635 Mil Bu. Soybean imports left unchanged at 20 Mil Bu.

The issue of how USDA would finesse the larger than expected physical soybean supply from the March Grain Stocks report was addressed in straightforward enough fashion.  Residual was lowered 20 Mil Bu to 5 Mil Bu. There is an assortment of reasons for lowering the residual. For the time being, the trade will simply accept the number. We have to wait until the next Grain Stocks report on June 28 to see what, if any, reconciliation of the numbers occurs.

The resilience of the export/shipment pace to date coupled with a lagged start to the SA exports are the driving factors. Noted is that USDA lowered Argentine and Brazilian forecasted exports of soybeans, soymeal, and soyoil for the current 2012/13 marketing year - that runs from October 2012 through September 2013. Today’s weekly soybean export sales report covering the period ending April 4th revealed old-crop sales of 319,220 MT’s.  That brings net o/c sales to 1,335 Mil Bu or 98.8% of USDA’s most recent upwardly revised target of 1,350 Mil Bu. Net old-crop soymeal sales came in at 227,100 MT’s that’s 96% of the USDA’s upwardly revised forecast.

Now, despite the upward revisions in demand forecasts, coupled with an essentially static supply further begs the question of how the US is going to make it through the 21 weeks remaining in the marketing year without a demand rationing rally? The resolution has to come from an unprecedented scaling back in demand across all categories AND at some point increased imports. We have been of the opinion that this soy S&D disequilibrium will ultimately be resolves without a dramatic demand rationing price rally. We continue to retain that assessment. NOPA will release their March crush report this coming Monday, April 15th. It will provide the next keen fundamental insight into the demand trajectory.  

SUMMARY:

The cumulative impact of the April WASDE is rather far-reaching. However, it does not contribute to a longer-term price constructive scenario. While the positive domestic demand revisions cannot be ignored, overall the large increases in world corn, soybean, and wheat end stocks will serve to limit price advances. Increased SA corn and soybean production estimates will similarly exert a drag on significant price rallies going forward.

Persistently strong basis levels in corn and soybeans reflect the reality of tight supplies. Expect basis levels to firm as cash movement slows when producers become fully engaged in field work/planting.  Producers holding old-crop corn/soy need to keep daily track of their local basis as attractive marketing opportunities will develop.  Both old-crop and prospective new crop corn contracts will have limited upside potential.

 

Greg Wagner's Bullet Points for CME Group Analyst Outlook Forum - USDA Crop Reports TODAY 2:30pm CT

Apr 09, 2013

The CME Group will host a pre-crop report briefing today at 2:30 pm CT on which I will be a panelist. Media and market participants are welcome to join in the briefing via a live webcast. A short Q & A session will be included. The briefing via webcast can be accessed at:

http://www.cmegroup.com/cropreports

Following USDA’s release of the Grain Stocks report on March 28th trade expectations are for end stocks for corn, soybeans, and wheat to be increased for the 2012/13 marketing year. Revisions in Argentine and Brazilian soybean and corn production are also anticipated.

Additionally, the Prospective Plantings report of March 28th provided the trade with a baseline in which to construct production scenarios for corn, soybeans, and wheat.

• What potential price reaction can be expected if U.S. and global stocks/production numbers do not vary substantially from trade expectations? And what if below — or — if above trade expectations?

• At what point does the market discount known old crop fundamentals?

• Price implications of increased beginning stock levels on the 2013/14 crop marketing year?

• Can dynamic soybean sales & shipment pace be sustained as availability of record South American supplies to end-users quickly ramp-up?

• The old-crop soy complex — soybeans, soymeal, and soyoil — are residing at critical long-term price support levels. Can these levels hold and a meaningful price recovery be expected?

• Dramatic $1/bu. price declines following the March 28th Grain Stocks report — are prices now at levels in which demand is uncovered?

• U.S. winter wheat crop condition ratings are abysmal in HRW, better in SRW — how far can the market rally on reduced production prospects?

• As the trades attention pivots to weather for the row crops – what is the likelihood of row crop yields being realized?

• And, if so, the price implications.

 

These are a few of the items that we’d like to address this afternoon. Welcome to the discussion!

Below are trade expectations for USDA’s April WASDE which will be released tomorrow Wednesday, April 10 at 11:00 am CT.

April 2013 WASDE Expectations
 

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