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This Week’s Market Forecast from Minnesota Jon…

Jon Scheve
Jon Scheve

 

 

 

Market Commentary for 8/21/16 

Pro Farmer estimates are showing a 164.3 corn national average, while the USDA was 168.8.  This wasn’t a big surprise to the trade.   Many feel that the final number will be somewhere in-between. We will know in almost 30 days as harvest should be nearly to I-80.  This week harvest was as far north as Wichita, KS.  Reports of dryland corn yields of 130-150 in fields that normally produce 100 are certainly going to get the attention of the markets. 

However, there was a significant 15 bushel yield difference between the USDA and Pro Farmer in IN and OH.  With 8.75 million acres estimated to be harvested in these two states, this could mean a 130 million bushel (or 1% of total crop) decrease.  If this happens, carryout could be under 1.6 billion overall, which could be good for prices. 

However, this assumes: 

  • No additional yield increases in the western states  

  • No changes to export demand (which has been called into question recently) 

  • No changes to feed demand despite significant amounts of feed wheat from the rainy weather this summer, a reduction in feed demand for corn is a strong possibility. 

look for a narrow trading range for corn until the October 12th USDA report. Farmers continuing to not sell at these reduced priced levels has been very supportive to prices 

Another concern recently is the possibility of the Fed increasing interest rates.  Everyone expects that it will eventually happen, but no one knows when.  If interest rates increase it would be a “double whammy” for farmers.  Increased interest rates increase production costs and the value of the dollar globally, making exports more difficult and hurting prices levels. 

2016 Corn vs Bean rotation 

Looking forward to 2016, the corn to bean price ratio is 2.25 : 1, which means corn is more advantageous than beans.  Last year at this time the ratio was 2.56 : 1, which favored beans.  Conventional wisdom says 2.4 : 1 is the “ideal” spread that neither encourages or discourages either crop.  What does this mean? This could hurt the chances of a spring rally to buy corn acres many producers usually hope for.  On the flip side, if corn is below $4, South America will plant fewer acres.  However, with the current large world carryout the market might be telling world producers it doesn’t need that much corn. 

We plan to adjust our 2016 planting rotation on my farm to plant more corn than beans.  This adjustment changes my 2016 sales percentages from 40% corn sold to 28% and 20% beans sold to 55%.   

Grain Marketing Recap for the 2014 Soybean Crop 

The 2014/2015 marketing year is essentially over with harvest a month away.  I continue to tell farmers that looking at cash prices isn’t enough.  Savvy farmers examine every aspect of the marketing process to optimize their grain marketing strategy. 

Futures  – have the biggest movement potential for farmers.  In the last year beans have had a $3.77/bu range ($12.71-$8.94).  My farm average futures sales was $11.48, which puts me in the top 33% of the market move.  Hindsight tells me I’m happy with this.  This price was established using a combination of futures, options and spreads, all of which helped reduce my risk and give me a good price. 

 

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Carry – Many farmers over-look the potential in market carry.  Carry represents how farmers get paid to store grain until early summer guaranteed.  This year the high was hit in early Oct, paying farmers 33 cents to hold their grain until the following July 1st.  (Usually it hits the top of the market before Nov 1st.) I set my carry price at 32 cents or 1 cent off the top.   

Soybean carry works a little differently than corn carry. South America can produce as many beans as the US by July 1, which causes an inverse (where the nearby futures market is higher than futures further in the future). This inverse in the carry market indicates that the market doesn’t need producers storing the crop once another new harvest takes place.  This inverse will then cost elevators and producers to hold the grain instead of paying a premium (like corn usually has). 

To avoid this, I had to set my soybean basis by July 1st or risk taking a loss in the carry market.  As noted by this chart below the cost to hold grain increased substantially after July 1st. 

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Basis – (The CBOT price minus the local price available), usually runs independent of the CBOT.  The range for basis was nearly 70 cents from top to bottom (-.80 to -.10) for the season picked up on my farm.  I set the basis for my farm in early May at the very top of the basis market for summer delivery.  Obviously, I’m extremely happy with that.   

Interestingly, basis did rally in August, but with the negative carry (explained above) it would have been a loss waiting for those basis levels.  Basis and Carry must always work together to guarantee profits. 

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Evaluating Performance 

I can only truly evaluate the performance of my marketing plan after I’ve broken down each component individually.  When farmers tell me their cash sales, it usually isn’t the whole story.  Maybe they picked their futures price well, but missed substantial opportunity in the carry market and who knows where the basis was when they made their trade. 

How to Make an Additional 5% on Your Soybeans 

If a farmer works basis and carry into their marketing strategy they can increase their profits by 5% or more.  While it is a little more difficult with soybeans than corn, the premium available is still worth the time.  Savvy farmers are learning how this kind of marketing is beneficial to their bottom line. This is not a reinvention of the wheel, but merely adopting a plan that already exists and is used by all the major grain companies. 

My Current Positions in Soybeans 

POSITION – BEANS 

2014 

2015 

2016 

Beans Sold 

100% 

87% 

54% 

CBOT Price 

$11.47  

$10.97 est 

$10.00 est 

Market Carry 

$0.32  

$.30 est 

$.30 est 

Basis on Farm 

($0.10) 

($.30) est 

($.30) est 

Cash Price 

$11.69  

$10.97 est 

$10.00 est 

 
 

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Today’s Markets
Commodity Yesterday's Close Today's End
Wheat $3.25 Bu $2.97 Bu
Corn $3.41 Bu $3.43 Bu
Oats $3.75 Bu $3.75 Bu
Beans $9.24 Bu $8.74 Bu
Milo $3.12 Bu $3.12 Bu
Fescue .38/Wet - .40/Dry
*Please Call for Current Market Conditions.