Evening Report (VIP) -- March 5, 2014

March 5, 2014 08:51 AM
 

U.S. and Canadian cattle/hog inventory below year-ago... Statistics Canada released its livestock reports this morning and this afternoon USDA released its joint U.S. and Canada livestock inventory data. USDA reports the combined hog inventory in December (Dec. 1 in U.S. and Jan. 1 in Canada) of 78.7685 million head was down 299,000 head from year-ago. The combined cattle inventory of 99.945 million head on Jan. 1 came in 2% (1.66 million head) lower than year-ago.

This morning's report from Stats Canada noted total cattle and calf exports in 2013 topped 1 million head and were up 28% from the previous year but down 38% from the 2002 peak. It reports hog exports of 5 million head in 2013, down 12.4% from year-ago, which is a 50% reduction from the 2007 peak.

 

USGC: Instability in Ukraine creates export opportunities... Today the U.S. Grain Council (USGC) said instability in Ukraine creates opportunities for additional U.S. exports to North Africa, the Middle East and China, but said it's important to adhere to strict trade standards to minimize the risk of trade disruptions. It reminds that Ukraine exports corn to the EU and China, both markets in which biotech approval issues currently impede U.S. corn sales.

The group also says producers in Ukraine are holding grain as a hedge against a devaluating currency, which could result in credit issues for farmers hoping to begin planting in 30 to 45 days. Click here for more.

 

More details on possible MIR 162 approval... In "First Thing Today" we alerted that China's Vice Agriculture Minister indicated that while the exact timing is unclear, approval of Syngenta's Viptera (MIR 162) GMO corn variety could take place by the end of June. Sources familiar with the situation indicate the delay in getting the variety approved is in part due to shifts in the approval agency.

One contact noted China permitted the variety during the first year it was in the U.S. grain supply via terms of a memorandum of understanding (MOU) in place prior to that product being planted in the U.S. However, a changeover in the approval process in China is what prompted the need for Syngenta to submit additional information relative to the MIR 162 corn, as the prior MOU no longer applied, contacts explained.

Meanwhile, USDA Chief Economist Joe Glauber told the Wall Street Journal in an interview the problems the U.S. has been having with getting approval on corn varieties is a temporary issue. "I think we'll work through that, in large part because at the end of the day China needs feed grains," he elaborates. This adds credence to the expectation the rejections are more process and/or political as opposed to safety related. Learn more.

 

Ethanol production slips in latest week... The Energy Information Administration reports ethanol production the week ended Feb. 28 of 894,000 barrels per day (bpd) was down 11,000 bpd from the previous week and the lowest in seven weeks -- likely due to transportation challenges. The four-week average now stands at 901,000 bpd for an annualized rate of 13.81 billion gallons. Ethanol stocks, however, declined by 413,000 barrels from the week prior to 16.61 million barrels.

In its weekly "Today in Energy" brief, the EIA notes how ethanol producers are benefiting from a large corn harvest and improved margins from dried distiller grains (DDGs). It states margins for ethanol production and DDGs have increased "because of the sharp drop in corn prices after the 2013 harvest, combined with increased exports for distillers grain." Click here for more.

 

Administration targets crop insurance for $14 billion in savings in FY 2015 budget... As noted in "Evening Report" yesterday, the Obama administration's FY 2015 budget proposal includes reductions in the federal crop insurance program totaling $14 billion over 10 years. The savings proposed by the administration are provisions that lawmakers opted to reject in the Agricultural Act of 2014, including a reduction in the premium subsidy level for farmers. The administration’s plan would extract $10.1 billion via those reductions with another $4.1 billion sought from changes to reimbursements to crop insurance companies. Get more details.

Besides the fact the proposed savings are not part of the new farm bill and therefore won't have the support of Congress, it's important to note that via the budget process, the savings of $14 billion in crop insurance are used for expanded spending in other areas. But while the savings are unrealistic for now, a monstrous and growing U.S. debt and a likely disaster plan for drought in the West and Southwest means lawmakers may look again at "reforming" crop insurance by whittling down the roughly 62% subsidies farmers get from taxpayers to purchase coverage. It's likely just a matter of time before lawmakers tap the crop insurance subsidy bank.

 

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. Use the price strength to get current. We still believe price strength should be sold and frankly, the market has rallied farther than we anticipated, but we're willing to wait on a signal the upside has been exhausted before increasing old- and new-crop sales. If you are getting nervous about the bottom falling out of the market, we'd recommend making cash sales now.

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 10% of expected 2014-crop production sold via cash forward contract for harvest delivery. Get current with advised sales. We aren't willing to chase the market higher with buybacks for hedgers, but we are interested in reowning a portion of sales on a pullback as long as it's corrective in nature. Like corn, we are willing to wait on a signal the upside has been exhausted before increasing new-crop sales, but if you are getting nervous, we'd recommend making sales now to reward the strong rally.

Wheat: Hedgers are 100% sold in the cash market on 2013-crop production, while cash-only marketers are 75% sold. The rally in wheat futures has been stronger than we anticipated, but it's showing no signs of stalling. We're willing to wait on that signal before increasing new-crop sales and trimming old-crop inventories for cash-only marketers.

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. Cotton futures have been very resilient. Therefore, we'll wait on clear signs of a top before advancing old- and new-crop 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 remaining 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).

Hogs: Hog futures are at very attractive prices while the surge in volatility and severely overbought condition of the market signals a top may come at any point. 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. The $420 area appears to be a value level for July soymeal futures. Be prepared to extend coverage on a pullback to this area. While the runup in corn is impressive, we still believe price strength will be relatively short-term in nature, meaning we don't want to lock in these prices for an extended period.

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