Monthly Report: October 1, 2015
CORN: September was a relatively quiet month for corn. The December contract range was carved out with a low of $3.60 ½ and a high of $3.95, which was much narrower than that of June, July, and August. The funds weren’t very active and posted modest changes throughout the month, quietly lowering their net long position by less than 10k contracts. On the WASDE report, the USDA scaled back their yield estimate from 168.8 in August, down to 167.5 in September, and the market is anxiously awaiting their October estimate which will be released on Friday, October 9th.
The yield reports have been overall favorable, with a few exceptions of course. Even some of the areas that were hit with too much rain early in the year have staged a tremendous recovery. At this point there really isn’t enough evidence to dispute the current USDA yield estimate of 167.5 and so we are remaining with that for our supply and demand estimates.
The table below includes those estimates next to the latest USDA numbers. Our main difference is that we have not been nearly as optimistic on export demand as the USDA has been. The USDA believes that final corn exports will be 1.850 billion bushels, down only 25 million from 2014. We believe exports will be down to 1.700 billion. Even to achieve our estimate the current sales pace needs to improve. With a strong U.S. dollar and strong competition this will be very difficult. High prices over the past 5-7 years have created strong investments in land and infrastructure, most notably in the Black Sea region and in Brazil. This has helped production increase rapidly in those areas. The has also helped foreign competition continue to gain market share from the U.S. during our traditional “gut slot” of October through January. This is a trend that is likely to continue for the years to come.
The following chart helps show why we believe the USDA is overly optimistic on demand. Year-to-date the USDA has only sold 22% of the total government projection compared to the five year average sales of 41%. If the US maintains this pace we will actually be short about 500 million bushels from the current government estimate! So for us to lower the export demand estimate by 150 million we are assuming a major increase in the pace.
Many analysts have been quick to single out weekly sales numbers being higher than the “average” sales-per-week needed to reach the USDA demand. However, they tend to use the entire marketing year to reach that final estimate. This is simply a lazy way of looking at the data. The sales pace does not remain even throughout the year. A large portion of U.S. sales are booked by January (especially in soybeans). The chart above helps illustrate this required pace to meet the USDA estimate. Between now and January 5th for example, we would need to see corn sales average 1.493 million MTs every week to get back on pace, as opposed to looking at the entire marketing year which would require only 765,000 MTs per week. Every week that we sell less than this amount will make the likelihood of us “catching up” less likely.
To summarize, we still believe a position of heavy sales (100% of expected) with basis locked is a good strategy. Our December $4.00 call options are still going to provide that upside potential however we will likely exit these prior to expiration (the current recommendation is to have orders working to sell half of the calls for 30 cents). December 2015 corn is roughly 70 cents higher today than December 2014 corn was a year ago. This is a big difference, especially considering the fact that supply is projected to be similar to 2014 levels while forward demand is severely lagging. The US Dollar has been a main culprit for this lag and since it is still 11.5% stronger than last year the outlook remains bleak. Perhaps the price stays within that $3.60 – $4.00 range from a lack of producer selling. Carryout is likely to grow if these prices stay firm to our competition and no new demand is enticed. If carryout continues to grow through either strong yields or lackluster demand, we could easily see prices in the lower $3’s by the end of the year.
December 2015 Corn compared to December 2014 Corn:
CROP INSURANCE: Federal crop insurance is starting to establish the fall price and will continue to over the month of October for both corn and soybeans. This means the crop insurance “put” will begin to expire and therefore producers will have to reexamine their risks since that price floor will no longer exist.
SOYBEANS: Soybean prices have fallen to corn prices over the course of September (see chart below). This may be in realization of a larger crop size than originally thought, or perhaps the soy demand picture is even worse than it is for corn.
Corn exports account for only 13.5% of total US corn demand. Soybean exports however, account for 46.3% of total demand. Therefore, export demand fluctuations can have a much larger impact on the price of soybeans which may be why the soy/corn ratio trend has turned lower.
Soybean Export Demand: Even with the larger sales reported in today’s weekly report, it is unlikely in our opinion for bean sales to reach the USDA’s final demand estimate. In order to reach the current USDA estimate of 1.725 billion in exports, we would need to outpace last year’s record sales pace by over 200 million bushels from now until the end of August! This is not impossible but is very unlikely in our opinion without a major fundamental change in South America. Our “window” to sell soybeans aggressively to the world is much smaller in soybeans. The following chart is the 2015 export sales pace compared to the five year average.
Over the last five years, 88% of the final exports had been booked by January 1st. To accomplish this we need to see 1.467 million bushels sold every single week until then.
The following supply and demand table compares our estimates to the USDA’s. We lowered harvested acres by 500,000, but raised yield to 49.0 bushels per acre. The production increase comes after seeing a large number of very favorable yield reports.
With heavy consideration of the strong US Dollar and the availability of South American supply, we believe soybean exports are overstated by at least 125 million bushels and so have used a conservative cut to 1.6 billion. We have left the crush demand unchanged at a record of 1.870 billion bushels however we think the market is going to have to entice that demand with lower prices. December crush margins are already fading, trading over 30 cents off the high. Without a strong crush estimate, the carryout could grow even larger. The market’s job is to make sure that doesn’t happen and finding that demand with lower bean prices may be the final answer.
Board Crush Margins:
The Brazilian Real has continued to collapse. In the chart below you can see the dramatic decline over the past several years. Since brazilian farmers are paid in their local currency but their soybeans are priced in U.S. dollars to the world buyer, they have received near record prices. This continues to encourage additional expansion of full-season corn and soybeans as well as aggressive expansion in their second season “safrina” corn crop. This has also encouraged aggressive selling by both the farmer and the commercials on the world market. This has quickly shifted the market share away from the U.S. and is a major headwind going forward.
Brazlian Real Weekly Chart:
To summarize, we see a lot of the same problems from last month still unaddressed. The demand remains poor and yield reports are confirming that this year isn’t going to be a disaster like many bulls had hoped. Emerging market currencies are still collapsing against the Dollar and making our prices less competitive in the process. A large portion of grain analysts appear to be looking for a harvest low to form since this is the day it bottomed last year. We believe there are too many negative factors that are pulling on grains for that to be a clear call right now and would remain well hedged (see hedge recommendations below). Growers continue to store corn and soybeans and wait for higher prices. Although this strategy has worked in the past, this could prove to be a very dangerous bet. The economics and global fundamentals have changed dramatically in the past 2 years…be careful.