Evening Report (VIP) -- January 29, 2014

January 29, 2014 08:44 AM
 

Fed extends its tapering... Chairman Ben Bernake led his final Federal Open Market Committee (FOMC) meeting, which concluded with the committee announcing it is further tapering its monthly asset purchases by $10 billion a month beginning in February. In response to the belief that fiscal policy is restraining economic growth, the committee is further tapering a program that expanded the U.S. central bank's balance sheet to more than $4 trillion.

Saying it will continue to closely monitor incoming economic and financial developments, the Committee said its decisions about further tapering will remain contingent on the outlook for the labor market, "as well as its assessment of the likely efficacy and costs of such purchases." Interestingly, the committee made no reference to the recent sharp drop in several global emerging market currencies, which have been impacted, in part by concerns about the Fed's tapering of economic stimulus. Click here for more.

 

Ethanol production slows... For the week ended Jan. 24, the Energy Information Administration (EIA) reports ethanol production averaged 900,000 barrels per day (bpd), a 5,000-bpd reduction from the previous week. The four-week average for ethanol production is now at 898,000 bpd for an annualized rate of 13.77 billion gallons. Meanwhile, ethanol stocks declined by 86,000 barrels to 16.93 million barrels.

 

House approves farm bill conference report... As expected, the House this morning passed by a vote of 251-166 a conference report on a new five-year farm bill that covers 2014-2018 crops and makes several changes to U.S. commodity programs and other provisions. The Senate has indicated it will pick up the measure during the current three-week work period. For a breakdown of the key provisions of the new bill, see "Key Provisions in Farm Bill Conference Report" and "Farm Bill Vote at End Zone."

 

Government payment 'drought' well into 2015 possible with new farm bill... With approval of a new five-year farm bill just a Senate vote and president's signature away, policy observers are starting to note the shift in farm policy and end of direct payments will mean government payments to most farmers will be absent until October 2015. What may have been the final direct payments to farmers went out in late October 2013 (delayed due to the partial government shutdown).

Observers note that outside of transition payments to cotton farmers for the 2014 crop that would be paid in October 2014, any Ag Risk Coverage (ARC) or Price Loss Coverage (PLC) payments for 2014 crops would not arrive until October 2015. While some say there could be a smattering of Counter-cyclical Program (CCP) or Average Crop Revenue Election (ACRE) payments for 2013 crops, most commodity program payments under the farm bill are simply now gone. Get more details.

 

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. A short-term low appears to be in place, but the market is giving us no clues a big upside move is coming. Therefore, even a modest rally must be used to advance old- and new-crop sales.

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. A drop below the early January low would be incentive for us to trim the amount of old-crop stocks we are willing to hold for cash-only marketers. A drop to a new monthly low in November soybean futures would also be incentive to increase new-crop sales. On the flip side, you must be prepared to advance sales on a price rally.

Wheat: Hedgers are 100% sold in the cash market on 2013-crop production, while cash-only marketers are 75% sold. While the technical picture is weakening, we are willing to hold some old-crop as gambling stocks for cash-only marketers as the winter wheat crop is showing signs of stress, though winterkill issues won't be known until spring. But if the market can't find a bottom soon, we lower the amount we are willing to gamble with. We'll advance old-crop sales for cash-only marketers and also increase new-crop sales for hedgers and cash-only marketers on an overdue corrective bounce.

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. The market feels heavy and therefore, we are prepared to advance old- and new-crop marketings. Increased old-crop sales for hedgers may come via cash sales and/or hedges.

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

Hogs: There are increased signs the hog market has posted a seasonal low. Carry all risk in the cash market unless the market shows signs of rolling over.

Feed: 25% of 1st-qtr. protein needs are covered in long March meal futures at $410.80. Stay in touch to exit this coverage -- either on a challenge of the highs or on signs the upside has been exhausted. There's no urgency to add long corn coverage as the upside is limited.

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