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Sunday, March 18, 2012

Cornbelt Update For March 19, 2012


A weekly Cornbelt digest of marketing, economic, agronomic, and management information.

Corn prices.  Rumors of Chinese corn buying buoyed the market several days this week.  While China maintained an official attitude of self sufficiency, estimates were being made that it may have a 24 MMT shortfall, which could be one of the reasons for the $9-$10 cash price for corn in China.  When the Chinese corn price exceeded $10 late in the week, May corn moved above $6.70 with the next target being $6.82.  So far, China has purchased about 150 mil. bu. of US corn. Marketing year export sales are at 1.265 bil. bu. with shipments to date of 872 mil. bu.  Increased export demand for distillers’ dried grains has also lifted that market and helped ethanol refinery profits.  Monthly ethanol exports were also at record levels of 76 mil. gal. with Brazil buying one-third of that.  The corn market has two persona, old crop corn with its perception of tight stocks and increasing demand, and new crop corn with its expectations of abundance. With an early start to planting, new corn does not have the market octane of old corn and early planting may signal increased acres, if farmers switch some of their flex acres to corn.  When May corn pushed above the $6.66 level, technical support strengthened underneath to keep it above that level.  The market will also be looking for subsequent follow-up fundamental support which would include increased exports and decreased stocks.  When May corn reached that 6 month high both farmers sold cash corn and traders took profits on futures positions.  Typically, that would have softened the demand, but there still is strong underlying support for old corn.  Old crop corn has shown resilience by being able to stay above that benchmark support level despite sometimes bearish news.  This week included news from the Federal Reserve that drove investors out of the commodity market initially.  While the basis has been strong for some time due to tight US stocks, the futures market now is sharing part of that bullish load resulting from recent export news.  The higher price this week is an early version of the spring tractor seat bounce, but unlike many years, farmers are responding and rewarding the market with sales as it moves higher. 
1) May 12 corn closed at $6.73, up 4¢ for the day and up 28¢ for the week.
2) Dec 12 corn closed at $5.7425, up 2¢ for the day and up 11.75¢ for the week.

Soybean prices.  Prices are over-bought and due for a major correction or at least due for a sideways movement while time and value catch up with each other. When May beans pushed through $13.50 the support strengthened for continued upward moves. Old beans reached new 6 month highs along with corn, helped by exports and positive crush numbers.  China continues to be a buyer, in an effort to feed a larger swine herd, and observers are looking for a 15% increase in its total exports over last year.  US export shipments are at 934 mil. bu, still 23% behind the 2011 record setting season. Export sales exceeded 50 mil. bu for the week, pushing marketing year sales to 1.120 bil. bu.  38 mil. bu of that amount was to China.  Oil World continues to reduce its estimates of the Brazilian and Argentine soybean crops. The Brazilian harvest reports yields anywhere from a 5 bu. loss compared to last year to 5 bu. per acre in total.  Soybean prices ended the week at the highs of $13.77, supported by continued export business and lower South American estimates.  The next target is $14.  Beans have been buying acres, but corn may want them back and may win if corn gets a record early planting start as expected.  New crop beans gained over 20 cents for the week in that effort.
1) May 12 beans closed at $13.74, up 5¢ for the day and up 36.25¢ for the week.
2) Nov 12 beans closed at $13.2825, up 2¢ for the day and up 23¢ for the week.

Wheat prices. Prices are being pulled up by the strong demand for corn, due to the potential exchange for livestock feed.  Chicago traders are still short wheat and as prices climb, they have had to cover their positions and that consequently pushes up prices further.  New crop production prospects have been improved by the warmer weather, but producers are keeping a watchful eye on the potential for any return to wintry weather.  With US wheat prospects looking up, traders reduced their bullishness, but also kept their eye on the winterkill problems in Ukrainian wheat regions.  The new crop is vulnerable to cold conditions in the US, as well as to dryness in Europe and North Africa.  Warm temperatures in parts of the Great Plains are creating stress where moisture supplies are short.  While those temperatures could be beneficial to yield if there is sufficient moisture, they will jeopardize the crop if a cold front brings freezing temperatures as is frequently seen in late March and April.  The temperatures are boosting the aphid population and its ability to spread barley yellow dwarf virus.  Watch for wheat to break out of its winter trading range if corn continues on its upward trek.  Export shipments were 32 mil. bu, pushing the total to 775 mil. bu., and only 15% behind 2011.  Export sales for the week were 13 mil. bu., pushing the total to 906 mil, or 24% behind the 2011 pace.  Based on purchase reports, US wheat prices are competitive with the Black Sea wheat market where most of the international buyers have spent the winter. 
1) May 12 wheat closed at $6.72, up 7.25¢ for the day and up 29¢ for the week
2) Jul 12 wheat closed at $6.7725, up 4.75¢ for the day and up 23.75¢ for the week.

MF Global customers may soon receive another 10¢ on their missing dollar, reducing the unreimbursed amount to 18¢ on the dollar.  That is the request of the bankruptcy trustee to the court overseeing the liquidation of the commodity brokerage firm.  The trustee has been recovering missing funds and plans to spread $685 million among 25,000 former customers.

When crop prices are not volatile, where would they level out?  Possibly lower than you might think.  USDA’s Economic Research Service has forecast prices through 2020, and says, “Long-run prices for corn, wheat, and soybeans are projected to decline in the near term as global production responds to recent high prices. Nonetheless, after these near-term price declines, long-term growth in global demand for agricultural products, the continued presence of U.S. ethanol demand for corn, and EU biodiesel demand for vegetable oils are expected to keep long-term prices for corn, oilseeds, and many other crops at historically high levels.”

What has ethanol done for you lately?  Renewable Fuels Assn. CEO Bob Dineen says:
1) The use of 13.1 bil. gal. in 2011 reduced the need for 485 mil. barrels of imported oil. 
2) In 2011, US-produced ethanol was substituted for 13% of crude oil imports.
3) Since the RFS was enacted in 2005, dependence on imported oil has fallen 15%.
4) With gas prices climbing, he says maintaining the Renewable Fuel Standard is important.

Read between the lines in a letter to the Renewable Fuels Association and the EPA may be indicating that the 15% blend of ethanol may become permanent for all vehicles.  It was approved for a few newer vehicles when announced 14 months ago. The agency approved a Misfueling Mitigation plan that moves the US closer to E-15 or 15% ethanol.

Do you have a handle on your cost of production for new crop corn? Variable ($386) and other non-land cost ($201) averages for over 600 farming operations in Central IL put the per acre cost at $832 when $210 cash rent is added.  Higher cash rent pushes the total closer to $1,000 per acre. That is a $44 increase over 2011 corn production costs.  The data from Farm Business Farm Management says fertilizer ($4) and seed ($7) were the biggest per acre hikes.

To cover that $832 per acre, what market price and yield do you have to achieve?  200 bu. at $4.25 will give you $850 per acre revenue.  If your selling price averages $4.50, you will need 190 bu. yields.  If your selling price averages $5, it only takes 170 bu. yields to reach $850.  If your yield is only 160, your average market price needs to exceed $5.25 per bu.

Weather #1. Above normal temperatures are promoting rapid wheat growth across the southern and central plains, where growth is 2 weeks ahead of the 2007 cropping season and jointing, says NE climatologist Al Dutcher. With temperatures forecast 10-20º above normal for the next 2 weeks, Dutcher says the crop would be vulnerable to a hard freeze, equal to 2007.

Weather #2.  Dutcher says the transition of La Nina to El Nino will bring a combination of impacts of both on the summer growing season.  Subsequently, the split flow pattern of the jet stream will continue and periodically pull a polar jet trough into the northern Plains, and if one goes far enough south, freezing conditions would jeopardize wheat and alfalfa crops.

Weather #3. The Climate Prediction Center has assembled a risk analysis of precipitation and temperature for the Cornbelt, stemming from the transition from La Nina to El Nino:
1) From March to May drier than normal in western and northern Cornbelt.
2) If El Nino dominates by June, drier than normal in central and eastern Cornbelt.
3) If El Nino arrives by June, moisture normal to above in western Cornbelt.

Weather #4. “Coupled with an El Nino that favors drier than normal summer conditions from Iowa to Ohio, it will be difficult to hit the national trend line for corn yields.  The additional corn acres projected for planting could easily replace some lost production, but only if drought conditions do not intensify and expand into the central and eastern Cornbelt.” says Dutcher.

If crop prices go up, does acreage really increase that much?  Not as much as you might think says the USDA’s Economics Research Service.  ERS says in the past 30 years acreage variations in total cropland has been small.  While the real prices of commodities have declined over 60% during that time, total cropland planted has only declined 60%.  When commodity prices spiked in 2006-2008, total cropland did not increase, but the acreage mix did change. Farmers increased land in corn and wheat and reduced acreage planted to hay and other crops.
CBOT corn futures prices in the corn market are showing a strong inverse (i.e. nearby prices higher than deferred prices) from old to new crop. “Since January, the Jul’12 corn contract has traded at a 50-80 cent premium to the Dec’12 (new crop) contract. Inverses from old to new crop futures are not common in corn, and generally occur in years like this year, when ending stocks of corn are projected to be very tight,” says MN marketing specialist Ed Usset. 

Be careful if you are buying land.  That is the warning of Purdue economist Craig Dobbins, who says, “Expectations about the future of the market could be wrong, and if land values or commodity prices decrease, that can really change profit margins and it doesn’t have to be a drastic increase.”  He says more severe problems could occur if substantial money is borrowed to finance the purchase.  He surveyed 32 farm managers and rural appraisers in Indiana and 48% thought prices would rise, 31% thought they would hold, and 21% expect a decline.

Commodity and farm groups have quickly re-organized to battle the continuing efforts of LightSquared to implement a rural broadband Internet service.  The groups contend the technology being used would interfere with GPS signals used throughout the country because they are on adjacent frequencies with the broadband signal.  A federal agency has sided with the farm groups earlier, but the developer has indicated it will be continuing the project. 

A light at the end of the tunnel for fighting soybean aphids may be a new gene being bred into 16 varieties for 2012.  Rag genes suppress aphid growth and reproduction if the aphids feed on beans with the naturally occurring gene.  IA St. entomologists suggest anyone interested in growing the Rag beans, first look at the yield potential on your farming operation.

Pork exports during January exceeded 500 mil. lbs. for only the second month ever, says MO livestock economist Ron Plain. January exports were up 133 mil. lbs. (36.1%) compared to a year ago. China, Japan, Mexico, and Canada each purchased at least 15 mil. lbs. more US pork than in January 2011. In total, 25.3% of January pork production was exported. That is the third largest monthly export share ever. Pork imports equaled 3.3% of January production.

But Beef exports were a mirror image and imports exceeded exports during January for the first month since August 2010, says Plain. Beef exports during January were the lowest of any month since April 2010, largely because Hong Kong purchased 7 mil. lbs. less US beef than in January 2011. January beef imports were up 43 million pounds (28.8%) compared to a year ago and the most since June 2011. Only 8.6% of January beef production was exported.

A political candidate never wants to be defined by his opponent, but that is exactly what happened to lean, finely textured beef.  It has been a prime ingredient of hamburger for many years, composed of finely ground lean trimmings with the fat removed.  It is then treated with ammonia hydroxide to eradicate any bacterial issue, but that process will tend to “puff it up.”  While it is approved by USDA and the FDA, anti-meat folks approved the label “pink slime.”

Cornbelt Update is a weekly publication by S2LS Ag Communications and Consulting.  Republication or distribution is prohibited without prior permission.  Subscription fee is $65 per year.  Address subscription requests to: © 2012

Posted by Stu Ellis on 03/18 at 08:29 PM | Permalink

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