Tucker Talk: November 23

Corn, wheat and cattle near Mirage Flats location.

Corn

Basis values continue to remain strong as producers are unwilling to sell at the current prices.  Exports were larger than expected last week with a large sale to Mexico on Wednesday, but are still only 30% of what they were last year at this time.  Brazil is actively offering corn to the world market 18-20 cents per bushel cheaper than the U.S..  Argentina’s new president takes office in December and he has some big ideas in reducing export taxes on commodities.  We could see up to a 50% increase in both corn and wheat acres depending on the magnitude of reductions.

Historically, trade falls into an annual holiday pattern the week of Thanksgiving in which there is very little market participation, thus increasing market volatility.  Traders often shore up their positions this week and then disappear until the first few weeks of the new year.  With increased volatility we could see some unusual rallies that could allow farmers to achieve higher prices in the next month.  However, this is the first year all trade is electronic and the impact on holiday season volatility is unknown.

Wheat

Wheat has a similar story to corn.  There has been very little wheat movement apart from the occasional landlord and lien holder.  Those that have committed to store until prices are more favorable have buckled down in hopes to at least see an improvement in basis levels.

There are some rumors that new mills are being built and old ones are being reclaimed due to attractive margins at current wheat prices.  Basic economics tells us that when supply increases, price decreases.  In response, lower prices may be attractive and we may see a corresponding shift in demand that will have a positive impact on prices.

Cattle

December live cattle are trading at $130, dropping $10 in the month of November but is currently at the same level it was at the end of September.  January feeder cattle are trading at $163 after dropping $20 in November.

Trade is talking about high slaughter weights and rapidly expanding herd numbers.  Whether or not the numbers support these perceptions doesn’t really matter when it comes to price movement.  The market will move on what it perceives even if the fundamental story does not support it. Such are the shackles of perfect information.

The following is my own speculation drawing on my background in agricultural economics.  The underlying problem with the cattle market in the last few months lies in basic supply and demand economics.  A perfect storm consisting of prolonged severe droughts in key cattle areas, herd numbers being at the bottom of the “normal” cycle, and various other economic factors caused a significant increase in cattle prices.  This in turn trickled through the supply chain and revealed itself to consumers as higher beef prices.  Consumers are fickle and easily substitute cheaper chicken and pork for beef when it is more favorable to them.  As supply has been increasing in the last few years, demand has been decreasing.  If herd numbers rise back to the level they were before the “perfect storm,” it could be disastrous for prices if demand has been reduced by half.  My point is that supply is only half the story and we shouldn’t forget about the other half.

Here I bring up a similar occurrence in the lamb industry, for which demand has all but disappeared.  Prices for those meats were high, consumers substituted away, decided they liked beef more, and never came back.  This scenario may be far-fetched and unlikely for the beef industry, but it is not impossible.  The industry may need to look to the sheep industry and glean any useful knowledge it can about stopping a declining demand.

Tucker Talk: November 13

Happy Friday the 13th.  May all your irrational superstitions haunt you today.

Corn

The USDA monthly Supply and Demand Report released on Tuesday was more bearish than expected.  Yield was increased from 168 to 169.3 bu/acre which was more than expected.  Export estimates were reduced by 50 million bushel and ethanol usage estimates were reduced by 75 million bushel.  In the big picture, corn supply expectations increased and demand decreased resulting in much larger corn stocks carryout.  The market responded with an $0.08 drop in futures prices.

The ethanol report came out Wednesday and was slightly bullish but long term ethanol production looks a little shaky.  Even though the consumer is driving more miles, the number of barrels of gasoline that they use is not increasing as fast as expected due to better gas mileage in vehicles.  China is considering ramping up ethanol production in order to use old out-of-condition corn that is in storage and could be a major competitor in the ethanol market.

Farmers across the US have put their corn in storage and are seeing if they can wait out the market.  Some think that the transition from El Nino into La Nina over the winter will result in drought conditions which could create bullish price conditions.  Basis is strong and has the potential to get stronger if farmers continue to hold on to their crop.  However, if there is a rally in the futures that spurs producer selling, basis could quickly fall apart.

Wheat

The strong value of the dollar and its impacts on exports is the US’s worst enemy.  When compared to the Russian Ruble and Brazilian Real, the value of the dollar is just too high for any country to be interested in buying any commodity from the US.  The USDA reduced export estimates in its Supply and Demand report released on Tuesday as a result.  Weather is fair so there is no new news to spur a rally.

Tucker Talk: November 6

Corn

Corn harvest finally built up steam at Farmer’s Coop Elevator with Tuesday seeing the highest grain intake before rain on Wednesday put a halt to it.  Late planting this year combined with a late killing frost has resulted in corn taking a few more weeks to dry down than normal and harvest is only about 20% complete in Box Butte and Sheridan counties.  Average moisture of delivered corn company-wide is 16% and test weight is 57.5 lbs/bushel.  Reports are still coming in that moisture is still around 18% in some fields.  Luckily we have had a mild fall to help dry the corn before harvest.

In the United States, corn harvest was 85% complete on Sunday.  Trade is surprised at how much corn is being tucked away and stored saying that the amount of on-farm storage across the country has been underestimated.  They are concerned that the quality of stored corn will be an issue because some facilities being used are not meant for grain storage.

Global supply and demand is being heavily debated as corn harvest comes to an end in the United States.  The US is seeing better than expected yields in many areas raising the production estimates of many analysts.  Brazil is also exporting more corn than was predicted.  US exports are in danger from the cheaper Brazilian corn and the fact that there is news looming overhead that China may reduce grain imports in order to boost the use of domestic stocks.  Exports will be the big talk in the USDA Supply and Demand report released next Monday.

Bar graph of major competitors for corn exports.

Blue line is USDA estimate. Light blue columns are last year’s exports. Dark blue columns are this years exports.

There is talk that the US could see an increase in soybean production next year due to more favorable economics than corn.  The concern, of course, is that supply will outweigh demand if this happens which will have a negative impact on prices.  Soybean exports from the US have  increased over the last several years but there is a slow start this year.

Wheat

Weather concerns were eased over the last week halting the slight rally that we were seeing.  The wheat market this time of year is mostly a speculative stew being fueled by weather and its impacts on dormancy status.  This can be beneficial in that producers can take advantage of any slight rallies to sell their crops out of storage.  I will be developing and promoting wheat marketing ideas as we get closer to the end of corn harvest.  Strategies include setting a floor, stopping storage, and tying 2016 crop to the sale of 2015 crop in order to get a premium on 2015 cash price.