Evening Report (VIP) -- December 4, 2013

December 4, 2013 08:47 AM

NO SURPRISE: FARM BILL END ZONE MOVES TO JANUARY 2014... Farm bill veterans predicted for months that the new farm bill saga would be bumped to 2014, and this is the likely case following word from conference chairman Frank Lucas (R-Okla.) that the goal is to reach agreement on key issues over the coming days and then have the final bill drafted over the Christmas recess and ready for floor action in January. Congress returns Jan. 7 and the stopgap spending measure expires Jan. 15. Thus, the rest of December will be mostly staff work and Congressional Budget Office (CBO) scoring -- if a framework agreement can be reached. This would also likely require a short-term extension of the 2008 Farm Bill into January to prevent permanent law from triggering.


UNRESOLVED FARM BILL ISSUES... Although conferees and staff have had a long time to settle differences (several YEARS), they have not been successful for a host of reasons. Unsettled issues include how the bill's new price guarantees will be based, whether on planted or base acreage. Of note, Lucas said he's working with the committee economist "to come up with a way to make base work, to decouple." In addition, sources continue to signal that Senate Ag Chairwoman Debbie Stabenow (D-Mich.) may still linger her compromises into 2014, thinking that she will get more of what she wants (lower food stamp funding cuts, etc.) if she gets into the 2014 timeframe.


CANADIAN WHEAT CROP COMES IN MUCH BIGGER THAN EXPECTED... The final 2013 crop estimate from Statistics Canada showed the wheat crop much bigger than anticipated at a record 37.530 MMT, up sharply from the previous peg of 33.026 MMT. The pre-report guess range was 33.325 MMT to 35.300 MMT. Both harvested area (+9.9%) and average yield (+25.4%) increased compared with 2012.

Stats Canada also raised its canola crop estimate to a record 17.960 MMT, which was at the very top of the pre-report guess range. Huge production came as a result of a record national average yield of 40.0 bu. per acre, up 42.3% from 2012, which more than offset a 9.0% decline in harvested area. The Canadian barley crop estimate came in bigger than anticipated at 10.237 MMT, up just shy of 1 MMT from October and 2.2 MMT greater than last year.

Pro Farmer Canada editor Mike Jubinville says, "Big, big crop numbers all around. With unprecedented large Canadian crops, the biggest question remains concern over the logistical capabilities of moving product through the commercial pipeline. Canadian National and Canadian Pacific railways say they have dedicated more rail cars to grain than usual since the harvest, but grain handlers say that has not been enough to avert a logjam. And logjams will not be going away this year... not with the largest overall crop by far in Canadian history! I believe grain companies are prioritizing efforts to ship spring wheat at the expense of other wheat types... likely because that's where the best margin is."



WEEKLY ETHANOL PRODUCTION SLOWS... According to U.S. Energy Information Administration (EIA) data, ethanol production dropped by 14,000 barrels per day (bpd) the week ended Nov. 29, to 913,000 bpd. The four-week average for ethanol production stood at 918,000 bpd for an annualized rate of 14.07 billion gallons. Meanwhile, ethanol stocks rose by 102,000 barrels to 15.12 million barrels.




CORN: Hedgers and cash-only marketers have 25% of 2013-crop production sold in the cash market. Corn futures are struggling to put in a seasonal low, but we are growing more confident a low is close in both time and price. That's not to say we feel there will be a big rally, but instead, that we feel there isn't a whole lot of downside risk remaining. Therefore, we are content to wait on a corrective price recovery to advance 2013-crop cash sales, though an extended rally will need to be actively sold. We will also use a corrective recovery to start pricing 2014-crop corn.

BEANS: Hedgers have 100% of 2013-crop production sold in the cash market, while cash-only marketers are 75% sold on 2013-crop. With hedgers sold out of 2013-crop production in the cash market, we are watching to see if futures post an upside breakout from the broad, choppy range. A successful upside breakout could trigger advice to reown a portion of 2013-crop sales in long futures or call options, though we don't anticipate a strong, extended rally. Also, be prepared to start 2014-crop sales on a strong push higher.

WHEAT: Hedgers are 75% sold in the cash market on 2013-crop production, while cash-only marketers are 50% sold. Futures appear to be working on a rounded double-bottom on the daily price chart. If that's confirmed, it would suggest a period of price strength lies ahead. But wheat needs the corn market to participate if there's going to be an extended price recovery.

COTTON: Hedgers and cash-only marketers have 50% of 2013-crop production sold in the cash market. If futures drop through the lows posted earlier this month, it would signal another leg down in prices is coming, which would be a sign to reestablish hedge coverage. But the bearish pause on the daily chart is turning into bullish basing, suggesting the market may be working on a low. Be prepared to advance 2013-crop cash sales on an extended recovery.

CATTLE: Live cattle futures have put in a short-term low and appear headed toward the next leg higher. Therefore, fed cattle producers should continue to carry all risk in the cash market. Feeder cattle buyers should be prepared to establish long hedge coverage as supplies are tight and the long-term price outlook is higher.

HOGS: Hog producers have 100% of expected 4th-qtr. production hedged in Dec. lean hog futures at an average price of $83.74 and 50% of 1st-qtr. 2014 production hedged in Feb. lean hog futures at $89.70. Be prepared to lift that coverage as the market typically posts a seasonal low sometime from now until early January.

FEED: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80. We feel prices are ultimately headed higher, but we'll wait to see if futures can successfully break out above the contract highs before considering extending coverage. There's no urgency to add long corn coverage.


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