Too much wheat impacting markets

USDA reduced corn yield estimates one bushel and raised bean yield estimates two bushels. The market reacted with corn prices decreasing 4 cents and bean prices 14 for the week. This isn’t unusual though.  Prices typically trend lower from the report until right before harvest.  It’s happened 13 out of the last 15 years.

Wheat

I rarely mention wheat, but right now it’s important to understand how it’s impacting the market.  Simply put, there is too much wheat in the U.S. and globally.  This is keeping prices low enough to encourage its use as feed instead of corn.  This could have a large impact on corn demand going forward.

Also, these lower prices may impact acres next year.  There were already 4 million fewer wheat acres this year (7% less). These lower prices may motivate farmers to plant other crops.  While some may plant small grains, or cotton, many will likely plant corn or soybeans.  Corn especially makes a good substitute for wheat in crop rotations because both are grasses and need nitrogen for optimal growth.

Funds are short wheat and farmers are long. There aren’t many buyers needing coverage, so I doubt the market will move much until something big and unforeseen happens.

Corn

Wheat replacing corn for feed not only impacts the U.S. feed ration, it affects exports too. Until wheat prices hit bottom and rebound, it will be difficult for corn to rally much.

Some are debating how many corn acres will switch to beans next year.  It’s really too early to tell right now.  Switching 2 million corn acres to beans isn’t unrealistic.  However, keep in mind assuming trend line yields, the market would still have potentially more carryout (2 billion) and a higher stocks to use ratio than either 2014 or 2015.

Similar to wheat, funds are short corn and farmers are long corn. End users are not well covered.  Farmers aren’t selling corn right now, which is keeping the market from going into a free fall.  However, it’s unclear what price point will motivate farmers to start selling and when.  The chances of $4 corn seems out of range until summer weather issues next year at the earliest.

Many don’t believe the USDA yield estimates and think it is closer to 171 to 172 bushels. These estimates aren’t bullish, but may suggest $3.25 is a reasonable value long-term.

Beans

Bean demand domestically and internationally is relatively high.  Export demand is 15% higher than 3 years ago and 50% higher than 10 years ago.  Domestic bean demand has been steady the last 10 years, up 4% from last year and 8% from three years ago. Keep in mind though, while the growing world population is keeping demand strong, production has also increased and kept pace.

Weather predictions in South America are currently overall neutral, as they expect near normal precipitation.  It’s important to keep South America weather reports in perspective.  Weather will vary regionally, but South America’s growing area is much more spread out than the U.S. It is 50% longer than the U.S./Canadian border to the US/Mexican border.  So, while it may be dry in one area, considering the large growing area, it doesn’t have to impact total production much.

Everyone was surprised when prices increased from the mid-$9s in Feb to almost $12 in May.  Many traders are expecting something like this to happen again.  One contributing factor to this price increase was heavy rains in late April in South America during harvest, reducing yields.  It’s unlikely that a widespread weather condition like that will happen frequently.  While I hope prices increase like last year, I need to be prepared if they don’t.

Most farmers don’t have 100% on-farm storage and they don’t store beans at home if space is limited.  So, the choice is to either pay storage rates and hope for better numbers or sell off the combine for income.  Funds are long bean futures and so are farmers.  It’s unclear who will sell first and for what price – the funds or the farmers. If both start to sell we could see a fast sell off.  In the spring most traders felt that beans would not trade above $9.50. Now most traders feel that beans can’t trade below $9.50.

Market Action

I sold the first 20% of my 2017 bean production at 9.49 last week.  Considering the South America weather conditions are predicting average conditions and that so many funds/farmers are long beans, I decided to sell. This is the same price as most of my 2016 bean production, so I’m starting 2017 where I left off in 2016.  If this is my worst sale of the year, I will be happy.

Speculation or Marketing

Are you marketing your grain like a speculator (gambling on what future prices for grain will be) or a marketer (someone who strategically sells their grain at profitable levels)?

Almost all farmers think they are marketers, but many unintentionally become speculators.  I think it’s the trade that fuels the fire by talking endlessly about how the market is at its lowest and that a huge rally is “just around the corner.”  I hope they are right, but what if they aren’t?  I can’t afford the consequences of wrong predictions.

It’s important to see the market from the non-farming speculator’s point of view, which is very different from producers. However speculators don’t need to worry about farm operation break evens, timing, cash flow, basis or production issues like farmers do. For speculators buying options can be a great way to speculate on the market and limit losses.  However, farmers trying to play the same game have to add any losses to their final grain price.  The worst case scenarios of trades that don’t work out for speculators look far worse for a farmer.

I heed the advice of speculators but I have to remember that I have different goals than they do. My approach sometimes has to be different from what others market participants are doing.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

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