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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.

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 


 

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