Evening Report (VIP) August 15, 2012

August 15, 2012 10:25 AM

CARD: RFS WAIVER COULD HAVE LIMITED PRICE IMPACT ON CORN... Bruce Babcock, director of the Center for Agricultural and Rural Development (CARD) at Iowa State University, has reevaluated his estimate of the impact on corn prices if a waiver of the corn-based ethanol mandate via the Renewable Fuels Standard (RFS) was enacted. He now says higher gasoline prices imply greater market demand for ethanol, which reduces a mandate waiver's impact on corn prices.

Babcock says based on his current variables, the flexibility built into the RFS allowing a carryover of blending credits (RINs) from previous years "significantly lowers the economic impacts of a short crop, because it introduces flexibility into the mandate." He continues to say, "The 2.4 billion gallon amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $2.49 per bushel to $0.58 per bushel. This means that waiving would lower corn prices by about 7.4%."

Babcock also explains that if the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the "price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall." This implies that ethanol plants will be a strong competitor for corn even without a mandate, he says. Click here to read more, including a list of variables the study uses.


ETHANOL PRODUCTION RISES FOR THIRD STRAIGHT WEEK... The Energy Information Administration (EIA) reports ethanol production climbed for the third straight week despite squeezed margins created by high corn prices. For the week ended Aug. 10, EIA reports ethanol production rose to 819,000 barrels per day (bpd) , up from 817,000 bpd the previous week. Meanwhile, ethanol stocks declined by 1.1% to 18.4 million barrels.


USDA TO PROVIDE MORE DROUGHT RELATED AID... USDA Secretary Tom Vilsack today designated 172 additional counties in 15 states as primary natural disaster areas due to drought and heat, making all qualified farm operators in the areas eligible for low-interest emergency loans. Vilsack also announced today the availability of up to $5 million in grants to evaluate and demonstrate agricultural practices that help farmers and ranchers adapt to drought. Additionally, in response to a request from five National Organic Program (NOP) certifying agents, USDA's Agricultural Marketing Service today announced that USDA will grant a temporary variance from NOP's pasture practice standards for organic ruminant livestock producers in 16 states in 2012. Click here for more details.


RATE OF INCREASE IN PLAINS FARMLAND VALUES SLOWS... The rate of increase in the value of Central and Southern Plains farmland slowed during the second quarter of 2012, but values still remain well above year-ago levels, according to the Federal Reserve Bank of Kansas City. The bank survey says farmland values rose less than 3% during the second quarter compared to the first quarter of 2012. However, the value of irrigated and non-irrigated cropland is more than 25% above year-earlier levels. Ranchland values climbed higher, as well, with annual gains of 16%. Click here to read more.



CORN: Get current with advised marketings and be prepared to increase downside price protection when the market shows signs of a major top. While futures have backed off their highs, technicals are still overall bullish. Hedgers are 35% sold on expected 2012-crop production via cash forward contracts -- 25% for harvest delivery; 10% for March 2013 delivery -- with another 40% of expected production hedged with Dec. $6.50 put options purchased for 31 1/2 cents. Cash-only marketers are also 35% priced on expected new-crop production via forward contract -- 10% for harvest delivery; 10% for March 2013 delivery; and 15% for May 2013 delivery. Hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market.

BEANS: Get current with advised old- and new-crop marketings. We'll hold off on advising additional sales for now as supplies will be very tight through the 2012-13 marketing year, but be prepared to increase downside price protection when the market shows signs of a major top. Hedgers are 50% sold on expected 2012-crop production via cash forward contract for harvest delivery with another 25% of expected production hedged with Nov. $14.00 put options purchased for 42 3/8 cents. Cash-only marketers have 50% of expected 2012-crop forward sold for harvest delivery. Hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market.

WHEAT: Hedgers and cash-only marketers have 75% of 2012-crop sold in the cash market. With futures hinting at a downside breakout from the recent, choppy trading range, hedgers should be prepared to purchase put options to cover remaining downside risk.

COTTON: Hedgers and cash-only marketers have 50% of expected 2012-crop production sold for harvest delivery. The attempted upside breakout failed, suggesting futures will remain in the extended, choppy range. Be prepared to advance new-crop sales on a sharp price bounce as long-term fundamentals are negative. Hedgers and cash-only marketers are 100% sold on 2011-crop in the cash market.

CATTLE: Fed cattle producers should carry all risk in the cash market for now. But be prepared to add hedge coverage as the cash and product markets are likely nearing a short-term top. Feeder cattle buyers should be prepared to hedge a portion of needs if futures confirm a short-term low as calf supplies are tight.

HOGS: Traders have an expected increase in pork production built into the market. That limits our willingness to hedge, although an extended price recovery would provide an opportunity to cover a portion of fall and winter downside price risk.

FEED: We are not interested in locking in current, historically high prices for an extended period. But be prepared to extend coverage on a sharp price pullback as supplies will be tight through the 2012-13 marketing year.

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