Things to Watch: Corn, Catalysts, Complacency
Sep 13, 2013
Milk prices aren’t scary, and they aren’t exciting. Yet even within this range there are opportunities to sell into strength.
By Melissa Heaney, Stewart-Peterson Inc.
Milk continues to trade in a sideways pattern that has become somewhat of a comfort zone for producers. It has been trading in a range of $16.88 on the downside to $19.50 on the upside since about November 2012. As you can see in the chart below, this past week, we definitely saw some strength, most likely due to increased levels of buying interest in cheese Monday – Wednesday. We were up 37 cents on the week.
|2nd Month Milk Continuous Bar Chart
|Source: Stewart-Peterson Inc. and DTNProphetX
This is what we call a "range-bound" market. It is very choppy, not very trendy, and when markets trade this way, people can get complacent and comfortable with the range that it is in. Prices aren’t scary, and they aren’t exciting. Yet even within this range there are opportunities to sell into strength, and we recommend that producers look for these opportunities to sell increments of milk and buy call options, because the market could break out of this range at any time in either direction. Markets do not stay range-bound forever.
Several catalysts could cause milk to break out of its current range:
• A crash in the U.S. dollar would support exports and therefore support milk prices.
• An explosion in the U.S. dollar, which could be devastating to exports and hurt milk prices.
• A dramatic change in the corn price could drive milk up or down, since milk prices are tied closely with corn prices. If the corn price can maintain a "4" in front of the price that could keep the milk market range bound as it is between $16.88 and $19.50.
Speaking of feed prices, the Sept. 12 USDA Supply/Demand Report signaled some opportunity for corn buyers, and yet there is some strength in corn in the big picture. The only bullish news from the report is that old crop ending stocks were lowered 58 million bushels.
The big news is the increase in the yield of this year’s crop from 154.4 bushels per acre to 153.3. Analysts were expecting a ½-bushel per-acre drop in yield, so the increase was a surprise. Those yield numbers flowed all the way over to ending carryout, as the USDA elected not to make changes to the demand side of the ledger.
Ending carryout is 1.855 billion bushels vs. analyst expectations of 1.697 billion bushels, putting the USDA figure at 158 million bushels over expectations. Corn is down as of this writing, and USDA lowered the average farm price received to $4.80 per bu. With current December futures trading at $4.60 and harvest fast approaching, it may be prudent to look at strategies to book near-term corn needs.
Taking a closer look at the chart below of U.S. corn ending stock levels sorted from lowest to highest, you can see that U.S. corn ending stock levels were historically tight for 2012-13, with ending supply at 661 million bushels vs. the 2013-14 estimate at 1.855 billion bushels. Note that 2013-14 ending stocks are estimated as the fourth highest levels going back to historical data from 1995.
Although this can seem extremely bearish to corn prices, when we take a look at the U.S. Corn Stocks/Use Ratio (below), which is calculated by carryout/usage, we can see the overall shift in supply and demand isn't as bearish. What also helps to build some support for corn is the world stocks to usage ratios. The 2012-13 crop posted the lowest ratio in the last 19 years. This has increased for 2013-14 based on current estimates, but still sits at the lower end of the range.
Soybeans were the most watched going into the USDA Supply/Demand Report. U.S. 2013-14 ending stocks came in at 150 million bushels. Trade estimates were 165 million bushels vs. August’s ending stocks of 220 million. U.S. soybean ending stocks for 2012-13 are also tighter at 125 million bushels. As you can see in the charts below, world ending stocks paint a bit of a different picture and could limit upward movement to a certain extent. Outright world soybean stocks are estimated to be an all-time high for 2013-14, while the stocks/use ratio is the third highest in 19 years.
With world soybean supplies tight, buyers are expected to watch the upcoming harvest and aggressively buy when needed.
The growing season is not over and so harvest result is still one of those catalysts that could cause a change in the feed market. Milk markets are tied closely with the corn market. Prepare in advance now what you will do if there is change in the price of milk or feed. Preparing your action plans in advance will keep you from reeling when a catalyst causes the market to break out of what may be a "comfort zone" for you right now.
Melissa Heaney is a dairy market advisor for Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Melissa at 800-334-9779, or email her at firstname.lastname@example.org.
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