Evening Report (VIP) -- February 5, 2014

February 5, 2014 08:50 AM

Ethanol production slips again... The Energy Information Administration (EIA) reports ethanol production the week ended Jan. 31 of 895,000 barrels per day (bpd) was down 5,000 bpd from the previous week. The four-week average is now at 892,000 bpd for an annualized rate of 13.67 billion gallons. Ethanol stocks, however, at 16.74 million barrels were down 193,000 barrels from the previous week.


Attache says Ukraine corn exports could reach 20 MMT... The U.S. ag attache in Ukraine says between July 2013 and the beginning of January 2014, the country exported 6.8 MMT of wheat, of which 5.5 MMT is milling wheat, over 2 MMT of barley and around 9.5 MMT of new-crop corn. The attache says talk is building that corn exports could reach 19 MMT to 20 MMT this season, although quality of the grain could be an issue.

The attache says the record 2013 corn crop of 30.9 MMT has set Ukraine "firmly among the top five corn exporters in the world." The attache adds, "Area expansion and improving yields meant that corn drove total grain output upward, too, even as another main crop, barley, has seen declining production. Unfavorable world market prices for agricultural commodities have producers in Ukraine concerned about recovering their production expenses." Click here for more.


Cordonnier: Argentine farmers holding grain amid economic turmoil... South American crop consultant Dr. Michael Cordonnier says economic turmoil in Argentine has forced many farmers to hold off selling any more of last year's crop, as they view the grain as a hedge against inflation that is estimated at 30% and climbing. He believes farmers are still holding around 8 MMT of last year's soybean crop and 9 MMT of last year's wheat.

"In the wake of the recent devaluation of the Argentine peso, farmers are going to hold onto their grain until they feel the devaluation process has run its course. Over the last two weeks, the government has allowed a partial devaluation of the currency, but most observers feel there is still the possibility of further devaluations," says Dr. Cordonnier. "Until that process is complete, farmers are going to be very reluctant sellers."

Dr. Cordonnier says once new-crop harvest reaches full swing in March, farmers will be forced to make sales to generate cash flow. Meanwhile, the government is desperate for additional revenues and rumors are swirling it will try to force farmers to sell grain by implementing levy fines on farmers, creating a national purchasing bureau or increasing the export tax.

"The government is running out of hard currency and basically agricultural exports are the principal way for hard currency to flow into the country. If any of these measures are instituted, the farmers in Argentina are certain to stage mass protests similar to several years ago when they forced the government to back away from a proposal to greatly increase the export taxes," he says.


Roberts concerned PLC will distort production... One of the major reforms of the 2014 Farm Bill is it offers farmers a safety net choice between a revenue-assurance program known as Ag Risk Coverage (ARC) and Price Loss Coverage (PLC) program based on reference (target) prices. Senator Pat Roberts (R-Kan.), former ranking member of the Senate Ag Committee, has expressed strong opposition to the PLC option. Roberts explains, "I cannot support a bill that marches backward towards producers making decisions based off of government subsidies, retaliation against our livestock producers, and once again agriculture taking a disproportionate cut in spending compared to federal nutrition programs."

Roberts spent some time explaining his opposition to the new PLC program that "sets high fixed target prices and subsidies for all commodities and regions of the country." He says this will encourage growers to plant the crop that guarantees the highest subsidy payment from the government, not the market. In fact, Roberts asserts that price guarantees of PLC are so high that some are at or above a producer's cost of production, essentially subsidizing producers so they are guaranteed a profit if they have average yields.

He elaborates, "The early analysis that I have seen shows that the target prices are high enough that rice, peanuts and barley growers will receive a subsidy payment at least 75% of any given year, likely triggering a payment four out of the next five years. Other commodities are not treated as favorably, with wheat prices likely to trigger a payment on average only 35% of the time and soybeans less than 15%."

While this could obviously prove fodder for World Trade Organization (WTO) challenges, another concern is that high price guarantees that encourage growers to plant certain crops will eventually result in higher production than global demand. Read more farm bill analysis and reactions from Roberts and others.


PF midweek marketing game plan update...

Corn: Hedgers have 60% of 2013-crop production sold in the cash market, while cash-only marketers are 50% priced on old-crop. Hedgers and cash-only marketers have 20% of expected 2014-crop production sold via cash forward contract for harvest delivery. We are still of the mindset that rallies need to be sold -- both for old-crop and new-crop. Recent price action gives us a stronger feeling that a low is in place. But the rally will need to be rewarded with sales if buying interest dries up.

Soybeans: Hedgers are 100% sold on 2013-crop production in the cash market, while cash-only marketers are 75% sold on old-crop. Hedgers and cash-only marketers have 10% of expected 2014-crop production sold via cash forward contract for harvest delivery. With the clock ticking on the export window for U.S. soybeans, we're looking to use the price rebound to trim old-crop inventories for cash-only marketers. Also, we are looking to advance new-crop sales on price strength.

Wheat: Hedgers are 100% sold in the cash market on 2013-crop production, while cash-only marketers are 75% sold. Recent price action gives us some hope a market low is in place. But with that said, an extended price rally is unlikely and futures have done little more than post a correction to the extended price plunge. Therefore, be prepared to advance old- and new-crop cash sales when the corrective rally shows signs of stalling.

Cotton: Hedgers and cash-only marketers now have 75% of 2013-crop production sold in the cash market and 25% of expected 2014-crop production sold via forward contract for harvest delivery. Bulls are maintaining a slight upper hand technically, but old-crop futures must extend the uptrend from the November low soon or the market is at risk of rolling over. Hedgers and cash-only marketers should be prepared to advance old- and new-crop marketings on signs of a top.

Cattle: Fed cattle producers are long April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings and are short the same number of April $144.00 call options at $1.525. We feel the market has topped for now, but we don't see sharp downside risk due to tight supplies.

Hogs: Carry all risk in the cash market until the market signals a top is in place. Seasonally, the market will strengthen into summer, but much of that price strength is already built into deferred futures. Given spring and summer price levels, we'll look to lock in strong prices once the market signals the rally is complete.

Feed: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80. Be prepared to claim profits if yesterday's upside breakout turns into a bull trap. While corn futures are making a stronger case a low is in place, there's no urgency to add long corn coverage as the upside is limited.

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