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Sunday, May 06, 2012

Special Edition:  Cornbelt Update



 

Corn prices. Tight stocks of corn are beginning to have a substantial impact on the market.  Toward the end of the week, May corn going into delivery was trading 36¢ over July futures before spread traders began to take profits.  At the end of the week a major processor at Decatur, IL was offering 60¢ over July futures ($6.80) for deliveries.  One major ethanol producer indicated some plants would run out of corn during the month.  Monday’s USDA shipment report pushed export deliveries to 1.08 bil. bu., including 110,000 bu. to China, and a 5 mil. bu. sale of new corn likely to China.  Thursday’s export sales report indicated more than 136 mil. bu. sold, pushing marketing year sales to nearly 1.47 bil. bu.  That includes 178 mil. bu. to China, with many more reports on the books for sales to unknown destinations.  However, the bears have had a strong influence with the rapid rate of planting the new crop and its good condition reports.  The new crop prices have a narrow trading range between $5.25 and $5.50.  Old crop corn prices have been challenged to move higher, but large bearish trading days do serve to attract foreign buyers.  At week’s end a substantial amount of selling in crude oil and other markets overwhelmed corn and July corn headed toward a test of support just above $6.  Simultaneously, end users pushed the expiring May contract higher with a 50¢ spread of the May-July contracts.  Gulf basis bids continue to surge, reaching just $1 over July futures, emphasizing tightness in the supply of available corn stocks.  Late week export sales were also announced, but buyers were all buying new crop corn in the low $5 range and saving $ per bushel.  The export business was not enough for the new crop corn market and it faded closer to the $5 mark and a retest of support in that neighborhood.  But the lower prices for both the old and new crop were more of a reflection of outside markets than demand for the commodity.  It is just money flowing away from risky investments.   
1) Jul 12 corn closed at $6.2025, up 5.75¢ for the day and down 5.25¢ for the week.
2) Dec 12 corn closed at $5.2425, down 5.25¢ for the day and down 14.5¢ for the week.

Soybean prices.  Practically every day brings a new and lower estimate of South American production, with the latest dropping the Argentine soybean crop below 40 mmt, 5 mmt under USDA’s estimate, which could be adjusted in the May 10 USDA Supply and Demand Report.  US exporters are being asked to make up the shortfall and shipments have reached 1.089 bil. bu., still 270 mil. bu. behind the 2011 pace.  Chinese purchases were limited to new crop beans, an order in response to short South American supplies. Export sales totaled 64 mil. bu. for the prior week, including 22 mil. in old crop beans.  Marketing year sales have reached 1.25 bil. bu.  801 mil. of that has been Chinese purchases, including 262 mil. from new crop supplies.  May contracts pushed over the $15 mark before July took over front-month responsibilities.  There is still some attractiveness of new crop bean contracts with the thought that farmers will get so wrapped up in corn planting they will forget to put seed beans in the planter boxes.  That has given new beans some spark, and served as a challenge to marketing the crop. Strong fundamentals have buoyed the bean market even in the wake of strong technical signals.  At the end of the week weakness in outside markets pulled commodities down, even while tightness is acknowledged in both new and old crop beans.  There was a rumor in the market that Brazil would not have enough soybeans to meet its domestic demand and may need to import some from the US before the next harvest.     
1) Jul 12 beans closed at $14.7825, up 4.75¢ for the day and down 15.25¢ for the week.
2) Nov 12 beans closed at $13.6675, down 10¢ for the day and up 4.75¢ for the week.

Wheat prices.  Wheat began the week boosted by stronger corn prices. Marketing year shipments are up to 916 mil. bu., 214 mil. under the 2011 pace.  Marketing year sales slipped over the 1 bil. bu. mark, down 282 million from last year.  Crop tours began their seasonal assessment earlier in the week. Reports of good quality and a larger crop, combined with lower corn prices spelled bearishness in the wheat market.  Tour participants also wheat that needed rain badly and with yields that reflected heat and lack of moisture.  Early heading has helped the quality but two-thirds of the excellent Kansas crop is being treated for stripe rust.  The market is looking to put in a bottom along with the USDA crop report on Thursday.  Reports of dryness in US wheat areas and the Former Soviet Union helped provide support to the market.  The market was also pressured by the impending harvest of winter wheat and some of the first fields were cut late in the week.  Friday’s bearish action in outside markets also pulled wheat lower, even with a dip below the $6 mark in July contracts, which quickly recovered.  The wheat market is expecting a large production estimate with the May 10 USDA WASDE report.  But at this point wheat needs the corn market to pull prices higher.
1) Jul 12 wheat closed at $6.095, down 6¢ for the day and down 40.5¢ for the week
2) Jul 12 wheat closed at $6.905, down 5.5¢ for the day and down 19.5¢ for the week.

A major change of operations was announced across all major agricultural commodity exchanges with a expansion to a 22-hour trading day.  Beginning with the May 21st session the trading session will begin at 6 p.m. and end at 4 p.m. the following day.  The two hour hiatus will provide the opportunity to settle up. The action by the CME, KCBT and MGEX was spurred by the 24-hour InterContinental Exchange adding corn, wheat, and bean contracts.

Reaction to the longer trading day was not favorable by the National Grain and Feed Association, which represents grain elevators that are looking at the requirement for having merchandisers available for longer than typical hours.  Concern is also being expressed about the release of USDA’s price sensitive reports during the trading session, since large investment houses would have the resources for instant receipt of the data, but farmers would not have immediate access.  USDA said it would be studying the issue of disadvantaged data users.

“I am not overly concerned about added volatility so long as everyone has access to the data at the same time,” said ag economist Scott Irwin at the University of Illinois.  “There are many other examples where markets are open when government announcements are made, especially in the stock market.  In commodity markets, export sales are announced during trading hours and the cotton market has been open during WASDE and crop report announcements.  ICE has electronic hours on a different cycle than CME.  My main concern is equal access to the information for everyone at the moment of release.  USDA servers have been slow and tied up for many high profile announcements in the past.”

If $13 soybean prices hold, that will set a record for season average prices, says IA St. market specialist Chad Hart. In his monthly newsletter, Hart says, “Current futures prices are offering strong prices for both crops. And what had been a sizable return advantage for corn has shrunk to nearly an even tradeoff between corn and soybeans.”  He says based on IA St. production cost estimates, 2012 will be another profitable year, “Given trend-line yields with these prices, corn and soybeans could return $100-150 per acre above production costs.”

What is your marketing plan for new crop beans?  That’s the question posed by IA St. economist Steven Johnson as a result of the $2.75 gain in new beans since December and solid resistance at $14.  He says good weather means a 3 bil. bu. crop and big acreage in South America, with the potential of those 2 crops overwhelming global demand for beans:
1) Bullish fundamental factors are already reflected in new crop bean prices.
2) New beans will steal corn acres, more double-cropping, and get prevented plant, and CRP.
3) New crop November futures are more than $1 above the $12.55 insurance guarantee.
4) Seasonal price trends indicate that November bean futures peak in the spring months.
5) Many farms have not generated adequate cash flow for next fall and winter.

Hasta la vista La Nina. The National Weather Service officially proclaimed La Nina to be history for the time being, and many Cornbelt farmers may have been doing their happy dance on Thursday.  Equatorial Pacific waters have been warming in recent months, wiping out the ability of the weather system to bring dryness to major agricultural growing areas.  Neutral conditions are expected through the summer.  Next up could be El Nino, which has its own characteristics, among them cooler, wetter conditions in the upper Midwest, dry in the South.

How is your diesel fuel budget?  May prices should be a few cents under last May, with prices through harvest a few cents higher than the same month in 2011.  December 2012 and January 2013 will be 6-7% higher than the same month a year earlier, say KS St economists. 

Iowa cash rents continued upward in 2012 say IA St. ag economists, whose annual survey indicated the largest one year increase for cash rent between 2011 and 2012.  Their average was $252 per acre, which was a $38 gain, but that represented an 18% increase in cash rent.  Their survey was based on crop reporting districts and increases ranged from 9% to 26%.

If you are wondering about under- or over-compensating your employees, watch for USDA’s annual report on Farm Labor.  It will be released May 17 and include regional data on hours worked, wage rates, and will be featured on http://www.farmgateblog.com .

Brazil #1-ethanol competition. Currently, 243 mmt of sugar cane goes for ethanol, but Brazil leaders say 1.2 bil. tonnes are needed by 2020.  Cropspotters newsletter says that is a 9% increase per year, and 70 new refineries are needed, with only 3 in the planning stage for 2014 start-up.  While cane growth has exceeded 10% annually, the industry is in debt.

Brazil #2-big bean plant.  Brazil has a contest for a soybean plant with the most pods and Pedro Beppler took top honors this year with 14,769, only 3,025 pods behind last year. Sorry.

Brazil #3-potash demand cut. Expanded production in South America has pushed up demand for fertilizer, but Brazil has announced development of a new potash mine that will help reduce its dependence on import fertilizer.  Currently it imports 90% of its potash.

Cutworms.  If you don’t have them, prepare to share your secret, other than not having any cornfields.  Entomologists urge immediate scouting, looking for larvae and cut off corn.  If you have the signs of black cutworm damage, work through the yield loss fact sheet, which includes cost of control, preventable loss, price of corn, and potential yield before spraying.

If your herbicide and insecticide have a fight to the death, it is the death of your corn, not the weeds or bugs.  That is the warning of IL weed specialist Aaron Hager, who offers a very poignant chart which indicates which of the two pest control tools, when applied on the same crop, will either not harm your corn, or harm it in varying ways from minor to unacceptable.  FYI—many of them you have or will be applying to your corn this spring.

Has the window closed for corn planting?  Typically many Cornbelt cornfields are planted well into mid-May, but we are now almost 2 months after some of the first fields were planted.  IA St. agronomist Roger Elmore says soil conditions are most important for getting a crop off to a good start, and he notes soil temperatures are improving. While yields begin to drop in early May, those are based on average responses and it is not possible to tell what the rest of the year will bring.  If you are planting corn in mid-May and beyond, adjust plant populations.

An increasing temperature, which causes greater corn yield variability in some production areas, will have a greater impact on price volatility with federal ethanol mandates, says Purdue economist Thomas Hertel.  He calculated a 50% increase in corn price volatility between 2020 and 2040 compared to recent history, if the ethanol mandate conflicts with higher temperatures.  He said corn and energy market relationships could buffer the volatility, as long as the current ethanol mandate were not in play. A co-researcher from Stanford said a one or two degree increase in heat “is a big hammer” particularly in low yield years for corn.

Crops needing heat, such as corn, may do better in wind farms. Researchers studying temperature change around Texas wind farms report an increase of .72º C more than the increase over the rest of the state over the past 10 years.  The researchers say, “Wind turbines modify surface-atmosphere exchanges and transfer of energy, momentum, mass, and moisture within the atmosphere.  These changes, if spatially large enough, might have noticeable impacts on local to regional weather and climate.” 

What would happen, if the Governmental Accounting Office was successful in getting Congress to adopt a $40,000 payment limit on crop insurance indemnities?  The GAO is pushing that concept as a means of saving money, despite how much crop insurance a farmer might buy.  IL ag economist Gary Schnitkey says the limit would be reached with as few as 1,600 acres for Illinois farmers, because risk subsidies paid by USDA vary from year to year.

Schnitkey’s analysis says the limit would likely be first encountered by sole proprietors who have few individuals involved in the operation. He says restricting benefits would not only be a change for the Risk Management Agency, but the relationship between total payment and expected costs would have an impact on rate setting.  “Farms with high cash rented acres would reach the ceiling quicker than others, and since risk subsidies are a percent of total premium, farms in riskier situation will reach limits quicker than farms in less risky situations.”

Here is an update on several livestock issues pending from recent weeks:
1) A leader in the British pork industry says his colleagues had to abandon gestation stalls or become uncompetitive, and they are all scrap metal now.  He told the Animal Agriculture Alliance Conf. the rest of Europe is facing the same challenge faced by US pork producers.
2) The California dairy cow which tested positive for BSE had a still born calf and a live offspring, which was euthanized, and tested negative for BSE.  Another dairy associated with the dairy holding the BSE animal has been placed under quarantine by California officials.
3) Prior to the announcement of the discovery of the BSE cow live cattle futures dropped the 3¢ limit on the CME and the Commodity Futures Trading Commission wants to know how the information was released to the market.  An investigation on the news release is underway.

Iowa State University calculations estimate the average breakeven live price for barrows and gilts in the first quarter of 2012 at $64.46/cwt, down $1.66 from the fourth quarter of 2011, but up $3.76 compared to January-March 2011. MO livestock economist Ron Plain reports the average Iowa hog was sold at a profit of 55 cents in the first quarter.

Cattle prices have weathered the fourth US cow with BSE quite well. The June live cattle futures contract ended the week at $115.37/cwt, up $2.52 from last Friday. August settled at $118.50/cwt, up $2.95 for the week. October fed cattle ended the week at $123.80/cwt, up $3.08 compared to the week before. December fed cattle settled at $127.15/cwt.


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:  StuAgNews@aol.com © 2012

Posted by Stu Ellis on 05/06 at 11:51 PM | Permalink

Comments

The strength of the wind is not constant and it varies from zero to storm force. This means that wind turbines do not produce the same amount of electricity all the time. There will be times when they produce no electricity at all. This means the corn won't benefit from them sometimes.

Posted by: JohnPGISelfDirected at May 7, 2012 7:07AM

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