Evening Report (VIP) -- March 12, 2014

March 12, 2014 09:59 AM
 

China cancellation talk hammers beans... Soybean futures were heavily pressured today by unconfirmed rumors of Chinese cancellations. But the talk centered on China canceling Brazilian soybeans, not U.S. purchases. Traders are concerned, however, that any cancellations point to reduced Chinese demand and, therefore, risk of additional washouts of purchases. If China is indeed canceling Brazilian soybean purchases, the situation may run deeper than many currently believe, but we are checking with sources before going into further details. Stay in touch, we hope to have more information soon.

 

Crude oil falls on release of oil from SPR... Crude oil futures were sharply pressured today by news the U.S. Energy Department plans to sell 5 million barrels of oil from the strategic petroleum reserve (SPR), a stockpile with a 727-million-barrel capacity. A spokesman from the Energy Department described the release as a "test sale" to evaluate how the reserve system release works. But the spokesperson also said, the release was "to appropriately assess the system’s capabilities in the event of a disruption." Such a test sale is required by law and is done on a periodic basis.

Traders speculated the release of oil from the SPR was tied to the political unrest between Ukraine and Russia.

 

CME Group to implement variable price limits... CME Group today announced plans to implement variable price limits for grain and oilseed futures and eliminate price limits on grain and oilseed options. Products impacted include corn, soybeans, SRW wheat, HRW wheat, mini-sized corn, mini-sized soybeans, mini-sized wheat, soybean oil, soybean meal, oats and rough rice. Pending CFTC approval, the plan goes into effect May 1, 2014. More info available here.

The new variable price limit mechanism resets price limits in each of the Chicago Board of Trade (CBOT) grain and oilseed futures contract every six months (May 1 and Nov. 1). The first reset date would be the first trading day in May based on the following:

  • Daily settlement prices will be collected for the July contracts for each of the CBOT grain and oilseed futures products over 45 consecutive trading days before and on the business day prior to April 16th.
  • Average prices for each contract will be calculated based on the collected settlement prices and then multiplied by 7%. The resulting number would be rounded to the nearest 5 cents per bu. for corn, soybeans, SRW wheat, HRW wheat and oat futures; $5 per ton for soybean meal futures; 0.5 cents per pound for soybean oil futures; and $0.05 per cwt. for rough rice futures to determine the new initial price limits for futures.
  • CME Group will implement the following price limit floors to ensure the limits will not be overly restrictive: 20 cents/bushel for corn and mini-sized corn futures; 30 cents/bushel for SRW wheat, mini-sized SRW wheat, and HRW wheat futures; 50 cents/bushel for soybean and mini-sized soybean futures; $20/ton for soybean meal futures; 2 cents/pound for soybean oil futures; 20 cents/bushel for oat futures; and $0.50/cwt. for rough rice futures. The price limits implemented each May and November will be the higher of the 7% calculated values and these specified minimum limits.
  • The second reset date would be the first trading day in November. The November price limit reset will be determined in a manner similar to the first reset in May. The only difference would be that December contracts (November contracts for soybeans and rough rice futures) will be observed over 45 consecutive trading days before and on the business day prior to October 16th.

 

The new price-limits system will continue to allow for expanded daily price limits. If a settlement occurs at the established initial price limit, the limit will be expanded by 50% the next trading day (rounded up to the nearest 5 cents/bushel for corn, mini-sized corn, soybeans, mini-sized soybeans, SRW wheat, mini-sized SRW wheat, HRW wheat, and oat futures; $5/ton for soybean meal futures; 0.5 cents/pound for soybean oil futures; and $0.05/cwt. for rough rice futures), and remain at the expanded limit until no listed contracts settle at the expanded limit. The exception is the soybean complex -- soybeans, soybean meal and soyoil. If one of the three components posts a limit close, the limit would expand by 50% (rounded up to the nearest 5 cents/bushel for soybean and mini-sized soybean futures; $5/ton for soybean meal futures; 0.5 cents/pound for soybean oil futures) for the entire soybean complex to ensure the normal trading of the soybean crush.

 

Ethanol production hits two-month low, stocks tighten... According to data from the Energy Information Administration, ethanol production declined 25,000 barrels per day (bpd) to a two-month low of 869,000 bpd during the week ended March 7 due to rain transportation challenges. Meanwhile, ethanol stocks of 15.91 million barrels were down 703,000 barrels for the week and the lowest since December. Stocks fell below the 20-day supply mark for the second straight week.

 

PF midweek marketing game plan update...

Corn: Hedgers have 70% of 2013-crop production sold in the cash market, while cash-only marketers are 60% priced on old-crop. Hedgers and cash-only marketers have 30% of expected 2014-crop production sold via cash forward contract for harvest delivery. Use the price strength to get current. After recommending old- and new-crop sales last Friday, we are willing to wait on signs the rally is running out of steam before advancing sales.

Soybeans: Hedgers are 100% sold on 2013-crop production in the cash market, while cash-only marketers are 90% sold on old-crop. Hedgers and cash-only marketers have 25% of expected 2014-crop production sold via cash forward contract for harvest delivery. Get current with advised sales as price action this week signals a short-term top is in place. Cash-only marketers must continue to hold some old-crop in the bin in case the market takes off again as old-crop supplies are tight. If the sharp pullback proves to be little more than a deep correction, we'll look to reown a portion of old-crop sales for hedgers. After making new-crop sales last Friday, we are willing to give November futures a chance to push further to the upside before advancing sales.

Wheat: Hedgers are 100% sold in the cash market on 2013-crop production, while cash-only marketers are 90% sold. Hedgers and cash-only marketers are 50% forward priced on expected 2014-crop production. We're willing to wait on indications the upside has run out of steam before increasing new-crop sales, especially given rising concerns about the U.S. HRW crop and the Ukraine situation.

Cotton: Hedgers and cash-only marketers 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. Old- and new-crop cotton futures are proving very resilient. Therefore, we'll give the market a chance to push the next leg higher before advancing sales. But topping signs may bring advice to increase sales.

Cattle: Fed cattle producers are long April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings. The April $144.00 call options were exercised into a short position, meaning we are effectively hedged on 1st-qtr. and 50% of 2nd-qtr. marketings at $144.20 (the strike price plus the 20 cents we made on the initial sale of these calls compared to what we spent on the puts). Stick with these positions for now.

Hogs: It's tempting to lock in current historic price levels. But the market is showing no signs of topping as concerns with porcine epidemic diarrhea virus (PEDV) are building. Because it's nearly impossible to pick a top in a market like this, we favor buying puts to lock in a historically strong price for summer-month hogs.

Feed: All corn-for-feed and meal risk is carried in the cash market. We are closely watching the $420 area in July soymeal futures. Be prepared to extend coverage if this area holds as support on the corrective pullback. While the runup in corn is impressive, we aren't willing to chase the market higher. A corrective pullback would also be an opportunity to extend corn coverage.

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