Clear Focus Hedging News and Views
April 1, 2022

 

"USDA Comes Through: Another Big Surprise"

We often joke about major USDA Reports, with quotes like "what curveball will they throw today?" The January numbers were very close to expectations so I guess we were due, and we got one. A nearly 2.5 million lower corn acre number, and 2.2 million higher bean acre number, Usually we fine big changes in the Quarterly Stocks Report, but that one came in pretty close to what the average trade guesses were. Initial reaction was to push December corn up limit, and beans sharply lower. Wheat was on its daily roller coaster ride with July Chicago trading in a 68 cent range. With the excitement over report day, the military conflict in the Ukraine was on the back burner, but will certainly regain importance from here on as we watch and see how much and how soon they can plant crops there, as well as what our planting season has in store in terms of weather. As this article is written on the afternoon of March 31, we will try to look at what we see now as important price drivers from here on, knowing that everything can change very quickly, as it did this past week when it looked like peace talks were going well and corn went down limit in minutes. Here is the list of what we feel are potential positives:

1) Early optimism on a quick end of the war was ended, and there is currently no real end in sight.

2) Western corn belt dryness and Eastern belt and Delta wetness are not ideal for a quick start to corn planting. With lower acres projected, we will need a favorable weather picture as alternative crops are high priced as well.

3) End users are still profitable, and the energy prices are at high levels with little sign of retreating quickly

4) Exporting grain out of Ukraine may be difficult at best for quite some time.

5) Prevented plant acres will be a big item, if weather is adverse, as high spring price guarantees and high input costs will incentivise going that route if it stays cold and wet.

6) It will be more difficult to attain a 51.5 bpa average yield for beans with that many more acres

 

From the negative side, we will be watching these::

 

1) The Safrinha corn crop looks very good now, and with good weather the next few weeks may be substantially higher than earlier thought

2) H1N1 bird flu is an issue in many states, millions of birds destroyed. Will it spread further?

3) Funds are still big longs in the corn and beans, will they stay there?

4) Early planting intentions can change if weather is favorable, will $7 corn verses $14 beans inspire some changes?

5) Ukraine farmers are planting in unaffected regions, we have to believe they will do all they can and other nations will help all they can as they need the grain and lower food costs

6) As we saw earlier, if a peace agreement is reached, there is substantil "war premium" in the market.

It is important to highlight in basic terms how the report looks to us, in terms of the "big picture". A reduction of 2.5 million corn acres may mean 450-500 million less bushels of production in the US, and a boost in bean acres may mean an extra 100-150 million bushels of beans. If you look at what South America "lost" in terms of bean production expectations, 150 million bushels more here is a relatively small number. If you look at what is possible from the Safrinha crop and "IF" the Ukraine is capable of getting most crops planted, 500 million bushels less may not mean much, especially if bird flu, lower hog numbers, a slow down in ethanol production, and a host of other things come down on the negative side.We are not taking either side, we just want to keep it all in perspective, and remind ourselves that every development calls for a certain level of risk management. Will you change your crop mix now? Do you feel these numbers are close to the final? We already had a call today to lift a bean hedge and add a corn one as the producer who was going to put beans on beans reconsidered. Some of this is bound to happen, but in reality, spring weather will be the key factor in those decisions. Bottom line, we would not bet the farm on these numbers, but would rather look for the spread in corn and bean acres to narrow some.

Some other items of interest are huge differences in local basis, as the cash market is very disconnected with futures in some areas. The inverted market has caused many commercial grain entities to bids off the July rather than May. With cash bids here in Northern Indiana bid at -30 basis July, and other areas of the state holding a positive basis, it is hard to recommend any reasonable strategy for all, we would rather encourage you to look at all available bids, and be aware of what month they are bidding off and what the bid is farther out. We suspect that nearby basis will widen out, and the spreads should narrow with old crop losing to new at least for a while, following today's pattern of December gaining 17 cents on May. The September/December inverse narrowed 5 cents today closing at 12 1/2 cents while a short time ago we were over 30 cents. Watch these spreads and cash bids/basis levels, and don't wait to long to price old crop corn bushels. On the beans, lets see if the drop in futures today can inspire a stronger basis in the next few days, or even some end user buying as July futures closed below $16 for the first time in many weeks.

We will also be monitoring other potential items that have been discussed but have not seen any further action, like a decision in the European Union to allow crop production on previously mandated "fallow land" which could be a few million acres or more. There has also been a lobby effort to release CRP acres here in the US on a temporary basis to offset lost production elsewhere in the world. While no action is immenent, there will be intense pressure from consumers to get inflation under control, and even if a bushel of wheat only amounts to a fraction of the cost of a loaf of bread, you can bet that's where the arguement will start. Never mind the cost of energy, the wheat price has doubled so that;s got to be a big reason! (You and I know better, but most of the world does not) When people get hungry or don't have enough money to fill the car with gas or buy the groceries they want, there will be protests. How the government here and elsewhere deals with this will be impact us as producers. There is conflicting pressure on the government to reduce food AND energy costs, so on one hand some want to cut renewable fuels standards (negative for ethanol and bean oil) while others want more renewable fuels to cut those costs. Good luck on that policy tightrope, but you get the idea, government policy changes can have a quick and devastating price impact on our commodities. Don't go to sleep on sound risk managment. We would rather be more protected than less when prices are this high and profit margins are where they are. Look at your own bottom line, what you have sold and what is still unprotected, and ask the question we ask ourselves every morning: "From this price level, do I want to be long, short. or neutral?" Don't forget the grain still in the bin as well as what you expect to produce this year and next for that matter. We have prices that are profitable for this year and next, and staying "long" too long always brings out the worst as we look back and wonder what "could have been"

In conclusion, we now have the "cards on the table" in terms of intentions, and the trade will watch spring weather to see if those numbers will hold or change. As we said earlier, we expect some changes if corn price continues to rally and beans fall. The quarterly stocks numbers held little if any surprises, and now we will look to the April 8th Supply/Demand Report where numbers today will be incorporated into updated carryout projections, and updated world numbers (special emphasis on Safrinha corn crop, Argentina update, and what the USDA expects from the Black Sea region) All this along with projected changes in demand, exports and usage to give us new carry out numbers that will drive prices into the planting season when weather gets in front of the line. There are lots of moving parts in the marketing game this year than normal, and keeping up is a challenge, but knowing your costs and profit goals can take a lot of the edge off. Until we have peace in Europe (which may take years) and normal grain export flow, there will be more than enough volatility for all. Keep it in perspective and be aware of profit opportunities this year and next. Nothing is guaranteed, so we are on our own to make these decisions. Call or stop by if you want to talk over some ideas, there are many every day to fit what you may want or need, and remember those who are dealing with unbelievable adversity as they try to grow crops in Ukraine.

 

Dates to Remember:
Every Monday: Export Inspections at 10:00 am
Every Thursday: Export Sales at 7:30 am
Every Friday: Commitment of Traders Report at 3:00 pm
April 8th: Monthly Supply/Demand and Crop Production Reports
April 22nd: May Options Expire
April 22nd: Cattle on Feed

Mike Daube: 574-586-3784
Allen Gard: 573-221-9234