My Thoughts Regarding Old Crop Corn and Beans

Published on: 17:17PM Feb 28, 2012


Greece is back in the headlines after the Standard & Poor's ratings agency downgrade the country to "selective default." This follows a similar move by the Fitch ratings agency late last week cutting Greece’s long-term rating to one notch above "default." The market seems as if it was anticipating such a move and has shrugged it off, electing rather to embrace the news that the German Parliament has accepted the latest 130 billion euro bailout and Greece will again avert disaster. The euro is stronger on the news and the US dollar is weaker.   
Crude Oil is lower on the morning, but continues to look extremely strong and seems that most breaks are meet with renewed buying interest. You have to figure as long as Bernanke and the  powers the be in Washington maintain their dual-mandate to inflate, then oil isn't going down anytime soon. The average cost per gallon across the US has now reached $3.75, and has risen for 21 straight days. In fact fuel prices are now up over 13% in 2012 and setting their sights on our all-time high average cost per gallon of $4.11 set back in the summer of 2008.  
Soybeans continue to be the "frontrunner" as the trade becomes more concerned about tight ending-stocks, reduced South American production and more logistical nightmares and backups occurring at the ports in Brazil. The trade seems most concerned about the fact the USDA has the soybean ending stocks number at 205 million using South American numbers that were calculated back on February 9th. Make sure you understand what I am saying here, the 205 million ending-stocks number recently given this past Friday by the USDA was formulated using the Feb 9th South American soybean estimates. If you recall, at that point in time the USDA had pegged Brazil's soybean production at 72 million metric tons and Argentina at 48 million metric tons. Just yesterday, Brazil Consultancy AgRural lowered Brazil's soybean crop outlook to 68 million metric tons, while some are estimating Argentina's soybean crop could now fall below 46 million metric tons. The point is another 5 million metric tons of South American production could easily be shaved form the USDA's Feb 9th estimates and cause an even tighter ending-stocks number to be forecast. Many sources thinking well below 150 million.  
Let’s also not forget major backups at the ports in Brazil, some in the trade now thinking over 5 million tons or close to a 25 day wait, could cause more "switchbacks" from the Chinese to US soybean purchases.
From a technical standpoint March soybeans closed above its 200-day moving average for the first time since September.
On the flip side, many of the "bears" are thinking this bullish news is already factored in, and with an early plant almost guaranteed in the Western corn belt (because of limited snow-pack) soybean prices could actually be the ones that start leading us lower. Not only leading prices lower, but as more producers make a late switch to more soybean acres we could also see the basis start to weaken as well. I am not trying to scare anyone, but with prices quickly approaching $13.00 in the new-crop getting yourself to 50% sold seems like a wise idea, considering these are extremely profitable margins. Those who like to play the board may want to take a look at buying $13 puts and selling call premium to help finance the floor rather than selling straight flat price bushels. I personally think we have more upside potential, but these are extremely dangerous waters and the tides could turn at any time, so reducing your risk in some form or fashion looks to be my most prudent advice.
I don't see a whole lot of changes in the South American weather pattern. From my perspective Argentina continues to get normal rainfall as of late. While some of the more dry areas in Southern Brazil may actually get some soaking rains this week.  I doubt it will do much to help any real significant portion of the soybean crop, but it might help improve second crop corn or late planted soybeans. 
Corn traders are trying hard to digest the fact the USDA is now estimating 14.27 billion in total corn production.  This beats the highest estimate we have ever seen by more than 1 billion bushels. As you can imagine this type of number may take a little time to swallow and actually digest. One thing that is certainly NOT helping is the fact that we are sitting on at least an extra 4 million barrels of ethanol surplus.  Traditionally it seems as if we like to sit on about 17 to 17.5 million barrels of ethanol as we head into the prime driving season.  This year we are sitting on about 21 million barrels of excess surplus.  The way I see it we need to chew through about 4 million barrels of ethanol, just to get back to normal.  I think several plants are starting to realize the issues and I am hearing more and more about run times being cut and plants actually being closed for extended periods.  This certainly has me worried about "old crop" bushels, and I continue to encourage producers who have been enjoying strength in the basis to pull the trigger and look for ways to re-won the board with limited risk type strategies..i.e. cheap "out-of-the-money" calls or "bull-call spreads" of some type. Be careful getting carried away with long-term thoughts of over-supply, as all it will take is a green-light from those in DC in regards to a 15% blend rate to chew through the excess in  real hurry.  
I have had several calls asking me my opinion about the USDA's recent unexpected and aggressive move higher with the "feed/usage" numbers.  As most of you know the USDA took their estimates from 4.6 billion to 5.2 billion an increase of 600 million. Many in the trade are thinking either the USDA had the numbers extremely screwed up in 2011 or the latest 2012 numbers are way too high. I personally wonder if there isn't some political jockeying taking place as the USDA lowered the estimated corn being used for ethanol and raised the feed usage numbers above most all ethanol grind possibilities.  My point is, the press started to run wild with the "food-for-fuel" rhetoric when the USDA released estimates last year that corn being used for ethanol had actually surpassed the amount of corn being used for feed. The 5.2 billion number seems to be just out of the reach of corn used for ethanol even if production starts to ramp back up.  From a purely "political" stand-point it might be best for all of us if corn used for feed outpaces corn being used for least on paper.  

Our Grain Marketing Seminar last Friday here in Kansas City, MO went really well. It's not too late to get signed-up for a DVD of the show, we have a few left! Just give us a call and let us know. (816) 322-5300

  If you like this blog and want to read more, sign-up for our free trial of the daily report. Click here