Evening Report (VIP) -- Advice -- January 27, 2014

January 27, 2014 09:11 AM
 

Cotton producers: Increase 2013-crop cash sales, make initial 2014-crop sale... Cotton futures rolled over today after an extended price recovery. Therefore, it's time to reward the recent rally with sales. We advised hedgers and cash-only marketers to make a 25% 2013-crop cash sale to get to 75% priced on old-crop. We also advised hedgers and cash-only marketers to sell the first 25% of expected 2014-crop production via cash forward contract for harvest delivery.

 

Martell: Southern Brazil trending drier… Meteorologist Gail Martell of MartellCropProjections.com says drier weather last week across Brazil's key southern growing area of Parana and Rio Grande do Sul are worth watching, especially since the forecast favors a drier pattern again this week. She says January rains have somewhat improved the drought situation there, but the key pod-filling stage begins in late January.

Meanwhile, Martell says too much rain in Mato Grosso could slow harvest, although early yield reports are quite good and no quality damage has yet been reported.

In Argentina, Martell says crops saw some relief from dryness and heat last week. "A massive dry air mass took control of the grain belt over the weekend, producing very low humidity and exceptional cooling," she says. Click here for related maps.

 

Canadian grain transportation issues continue to linger… Pro Farmer Canada Editor Mike Jubinville says transportation issues associated with shipment of the record Canadian wheat crop will linger for quite some time, but says there is hope the 2013 harvest will be moved in time for the 2014 crop. In the meantime, he says rail car traffic is dedicated to east-west movement and cars aren't available for movement south into the U.S. He also says truck freight is expensive.

Jubinville says Canadian producers are rightly frustrated with the situation. "Growers have bills to pay and can't deliver grain. Prices are under extraordinary basis penalties," he says, noting that he encourages his subscribers to sell wheat across the border if the opportunity is available.

He recently talked to a farmer with land on both sides of the Saskatchewan/Montana border that was selling HRS wheat at a $1-per-bu. premium in Montana. "But some of the co-ops closest to the border were less inclined to take Canadian grain so as not to offended their local U.S. clients/shareholders," he says. "But there were instances where U.S. flagged/licensed trucks ran up to Saskatchewan to pick up wheat so as to disguise Canadian wheat in U.S. trucks in the elevator line-up."

He also says the freight is available, but rail companies can make much more money shipping crude oil. "I suspect in three or six months' time, we may see some loosening up of the current congestion, which is probably the worst we have ever seen, though poor basis and delayed delivery will remain a key marketing feature for the remainder of the current marketing year and likely into the start of 2014-15 at least," he says. Click here for more details.

 

Highlights of likely new farm bill... As reported in "First Thing Today," while there are still a few issues being hashed out, the farm bill is expected to be called up for House chamber vote Wednesday. The following are likely key features of the forthcoming farm bill. (For a more detailed breakdown, click here.)

  • Duration: Crops years 2014-2018.
  • Direct Payments: Eliminated, although there will be so-called "transition payments" for 2014 cotton producers due to the cotton program safety net, called STAX (stacked income protection plan), being unable to be implemented until at least 2015.
  • Basis for payments: Base acres, with a yield update option for producers impacted by consecutive very low yield years.
  • Chance to reallocate bases: A one-time option based on 2009-2012 plantings.
  • Cotton base acres: Generic base -- annual option to plant other crops on cotton base acres and qualify for safety net provisions (ARC or PLC) for that crop, but not STAX for those acres.
  • Conservation compliance/crop insurance linkage: Yes, but no adjusted gross income test or cap on crop insurance payouts.
  • Farmer safety net program choice: Producers will have a one-time chance to choose between a revenue (Ag Risk Coverage, ARC/Shallow Loss) or Price Loss Coverage (PLC, target/reference price) program.
  • Marketing loan eligibility: Yes, for both ARC and PLC.

 

Details on farmer safety net program choice... Payments for the Ag Risk Coverage (ARC) program will be triggered once prices fall 14 percentage points below the prior five-year average. The subsidy covers a narrow band from 86% to 76% of revenues. Payments are based on a five-year rolling Olympic average of revenue, with an optional yield/price plug. The payment factor is 85% at the county level and 65% at the farm level.

With the Price Loss Coverage (PLC) option, fixed, government-set target prices will be paid on 85% of base acres. Farmers who sign up for PLC will also have available to them a new, lower-cost version of revenue insurance based on countywide losses called Supplemental Coverage Option (SCO), designed to parallel ARC in that it also will have a 14% deductible and is intended to cover only that band of losses down to where the farmer has more conventional buy-up crop insurance coverage. Following are the likely reference/target prices for the program:

  • Corn $3.70/bu.
  • Wheat $5.50/bu.
  • Soybeans $8.40/bu.
  • All rice $14/cwt.
  • Japonica rice $16.15/cwt.
  • Sorghum $3.95/bu.
  • Barley $4.95/bu.
  • Other oilseeds $20.15/ton
  • Peanuts $535/ton

 

The Supplemental Coverage Option (SCO) is available for those choosing PLC but not ARC. It will begin with the 2015 crop for those electing to participate and offers coverage up to 86% and a premium subsidy of 65%.

 

Likely crop subsidy provisions... A farmer would be allowed to collect up to $125,000 in subsidies a year, $250,000 for a married couple, and there would be no change in the definition of what it means to be "actively engaged" in farming for purposes of qualifying for payments. The cap would apply to either the PLC or ARC program (whichever the farmer signed up for), plus any marketing loan benefits farmers receive. The unified adjusted gross income limit is $950,000.

Actively engaged language remains subject to last-minute changes, but focus is on multiple growers who qualify for the management-only option. The goal is for "rational reform, targeted at abusers."

 

CPI holds steady in December... USDA's Economic Research Service (ERS) recently reported that a key measure of economy-wide inflation, the all-items Consumer Price Index (CPI), held steady from November to December at 1.5% above the year prior. The CPI for all food rose 0.1% from November to stand 1.1% above year-ago levels. Get more details.

 

Beef and veal prices to rise notably in 2014... Looking ahead to 2014, ERS expects the food, food-at-home and food-away-from-home CPIs to rise 2.5% to 3.5% in 2014. ERS expects food price inflation will return to a level more aligned with the historical norm.

Of note, ERS now expects beef and veal prices to rise 3% to 4% from 2013 levels. Beef and veal prices rose 2.0% annually in 2013. "Recent periods of unusually cold weather across the country have disrupted cattle flows throughout the supply chain and increased production costs. Additionally, cattle inventories, which have been very low since the 2012 drought, are expected to decrease slightly in early 2014, further restricting supply. Many retail beef prices are at or near record highs across the country, even after adjusting for inflation," ERS explains.

Also of note, ERS expects cereals and bakery products to decline 1.5% to 2.5% in 2014, which compares to a 1% annual increase in 2013. "This adjustment is based on current projections for wheat production in the U.S., as well as recent decreases in fuel prices. Energy is a large cost component for prices in this category, due to the processing required for many of the products," according to ERS.

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