Tag Archives: usda

Soybeans Near Short Hedge and Rally Target

The soybean rally has been driven by two primary factors – South American production concerns and Chinese demand. Today’s piece will be heavy on the data and light on the dialogue. However, I do want to tie into last week’s article on new Chinese commodity traders and the effects of Chinese governmental policies on free markets as well as the impact of our own crop insurance programs. The sum total of the analysis justifies the tremendous amount of producer selling we’ve seen and makes a strong case for selling soybean production ahead of the coming US seasonal peak.

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Buying the Cotton Market’s Decline

We used a slightly longer chart this week, going back just over a year to highlight the sideways action that has been the dominant feature of the cotton futures market and also to demonstrate the effectiveness of the commercial traders’ actions within this set of circumstances.

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A Final Flush in Soybean Oil

The entire soybean complex had been holding its collective breath ahead of yesterday’s USDA reports. As is typically the case, it quickly became a case of, “Buy the rumor. Sell the fact.” That said, yesterday’s post report action created a strong enough reversal downwards and away from the building overhead resistance to generate a COT Sell Signal. Normally, our chart would include a fourth pane labeled, “Short-Term Market Momentum.” However, for clarity’s sake, we left that pane out of the chart to focus instead on the commercial trader action illustrating their sensitivity to price.

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Commercial Selling and WASDE Pressures Cap Soybean Rally

Commercial soybean growers who hadn’t hedged their crop early in the year have taken a pounding on prices all summer long. As is seasonally predictable, the market did get somewhat of a harvest rally moving from a low of $9.04 in the November soybean futures contract up to current levels around $10.25. Negative price action has accompanied this rally as growers have sought to unload whatever they could ahead of the USDA’s November World Agriculture Supply and Demand report. The primary takeaway in the soybean market is the nearly 8% increase in this year’s crop estimate, now at 3.958 billion bushels versus their previous estimate of 3.927 b/bu. The only kind note in the report was the trade’s general expectation of 3.967 b/bu.

More interesting than the fundamental action is the increasingly negative technical picture taking shape as you can see on the chart below.

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Corn Base Forming Well

The corn market is balancing several factors as we move towards the US planting season. On one hand, we have the bearish factors of a record global corn crop and the largest year ending stocks since 2001. On the other hand, we are witnessing a rapid and sustained growth in exports along with weather complications taking their toll on South American supplies. Given the technical and seasonal factors at play in this market, I think we have finally put in the post 2013 harvest lows and could continue higher into the planting season.

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Cheap Feed, Expensive Beef – What Gives?

The cattle market has reached new highs repeatedly this month. We’ve known for years that the U.S. cattle herd has been steadily declining. It currently stands around 89 million head, which is the lowest it’s been since 1952. This hasn’t mattered much as the decades long decline in US beef consumption has wilted domestic demand.  Furthermore, the impact of modern animal husbandry techniques have significantly increased the final weight of the cattle that hit the slaughterhouses, thus supplying the market with more total beef on fewer total animals killed. All of this bearish information begs the question, “Why are cattle prices so high and where do we go from here?”

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The Bean to Corn Ratio Spread

The recent weeks of hot weather have begun to take their toll on the crops in the field. Primarily, we are witnessing soybean’s greater sensitivity to late summer heat relative to corn. Not surprisingly, soybeans have rallied about 14% since August 8th as compared to less than 3% for corn. The result of this divergent behavior among crops grown side-by-side is that the bean to corn ratio has been elevated to levels that we don’t view as sustainable. Therefore, we’ll look at some reference points for the bean to corn ratio as well as the relationship between these two crops before ending with some fundamental data that forces us to re-think the usefulness of historical data in the face of a fundamentally changing marketplace.

The bean to corn ratio is simply the price of soybeans divided by the price of corn. Currently, November soybean futures are trading around $13.55 per bushel and December corn futures are trading at $4.68 per bushel. The November and December futures contracts represent this year’s crop in the fields, respectively. Therefore, the current bean to corn ratio is approximately 2.9. Beans are 2.9 times more expensive than corn on a per bushel basis. The last time this spread was this high was August of 2009. There have only been four years since 1975 when ending prices for the current year’s crop have closed at a spread greater than 3. According to Carl Zulauf of Ohio State’s Department of Agriculture, the maximum traded price for the ratio is 4.1 in May of 1977. He’s also published the low figure of 1.72 in July of 1996. The average for the spread over the last 45 years is 2.52 while the spread’s normal trading range is 2.19 – 2.85.

Soybeans and corn obviously share many of the same concerns throughout the year and therefore their prices tend to move in the same general directions. Their seasonal characteristics are very highly correlated with the lone notable difference being soybeans’ tendency to remain at higher prices later into the spring due to their later planting dates and associated concerns. Once beans get past July 4th, they sell off just like corn until harvest time nears at which point they both get another boost. The correlation between beans and corn has been positive on a weekly basis all the way back to November of 2012. The daily chart, on the other hand is currently displaying the first negative correlation between these two markets since early May of this year which coincides with typical planting issues.

The United States is still the dominant market maker in both corn and soybeans. However, the rapid expansion of Argentina and Brazil’s commercial farming industry is changing the dynamic of the global corn and soybean markets. This year, the combined output of Argentina and Brazil is likely to be nearly 30% of global corn production and as much as 60% of global soybean production. The combined soybean output of Argentina and Brazil is expected to outpace the US by a third. This must change the way we view the data at hand. This is especially true when studies are produced using 45 years worth of data as the Ohio State piece referenced. The global supply of beans and corn hasn’t been split among our countries. The process has been and will continue to be, additive. Total global production will continue to increase overall with foreign production continuing to grow faster than domestic production.

The marketplace always reflects the participants’ best guess of fair value at the last traded price. Therefore, both domestic and global production rates are considered when trades are placed at the US commodity exchanges. However, more weight is always given to prices in the larger context. Daily highs and lows matter more than those of the last minute just as weekly highs and lows are accorded greater importance than their daily counterparts. Therefore, when markets make multi week, monthly or yearly highs or lows, we pay attention. The soybean rally brings us to levels not seen since last December and has pushed the relationship between corn and soybeans to multi-year highs.

We believe that the latest push in this spread has come from speculative buying in the soybean market. There are three primary drivers of mass speculative action in the commodity markets, all of which lead to whipsaw action at extreme price levels. Tension in the Middle East spurs speculative energy buying. Stock market collapses spur knee jerk selling. Finally, droughts spur speculative corn and bean buying. All three of these situations end up with small speculators left holding the hot potato. The current Commitment of Traders report clearly shows large amounts of small speculative buying heading into the USDA Supply/Demand and Crop Production reports. Considering commercial traders have pared their net position by 25% over the last three weeks, we believe it’s likely that this report could mark the high for the bean corn spread as it returns to its normal trading range.

Finding a Bottom in the Corn Market

The 2013 United States’ corn crop started off with predictions of being the largest ever. This was primarily due to the USDA acreage report issued on June 28th that showed 97.4 million acres planted for corn. This was the highest acreage allotted to corn since 1936 and also marked the fifth consecutive year of acreage gains for corn. This caused December corn futures (this year’s crop) to fall 9% in the next few trading sessions. Even though the market is now trading even lower than it was then, I think there are signs pointing to a bottom in this market. End line users should take advantage of the lowest prices we’ve seen in over a year.

Record planted acreage along with trend line yields would produce the largest corn crop in history. However, the University of Illinois pointed out as recently as last week that the USDA’s planting intentions report of June 28th won’t materialize the way the market initially reacted. The Fighting Illini pointed towards the prevented plantings number to support their argument that corn acreage may be more than 8 million acres less than originally forecasted. This is primarily due to the lateness of this year’s plantings. Furthermore, they comment on the currently declining characteristics of the corn crop condition, which may impact yields if pollination doesn’t get the weather it needs.

We often talk about a market’s, “fear premium.” Fear premium is the market participants’ disproportional concern of the market moving one direction instead of the other. Fear premium in the grain markets is always on the high side. Call options, which make money when the market goes up are always more expensive than put options in the grain markets. The difference between the current market price and the price of a put and a call option equally distant from the current price is 0 in an unbiased market. However, call options currently have a built in fear premium of approximately 30%. Therefore, the markets’ participants are 30% more concerned about prices moving higher by $.50 per bushel than the market falling by another $.50 per bushel.

End line users of corn have been stocking up on futures contracts with abandon. This is another good way of determining the underlying value of a market. The Commodity Futures Trading Commission issues it Commitment of Traders Report every week. The report tracks the market’s largest traders and categorizes them according their type of trading. Primarily, we look at three groups of traders – speculators, index funds and finally, commercial traders. We focus on the commercial trader category. It is our belief that those who produce the good and those who sell the good have the best understanding of a market’s value. Farmers, as a collective, ought to know what a fair price is for the corn they’re growing just as cereal producers or, cattle feeders should know what a fair price to pay is. End line commercial traders have built up a record position on the market’s decline. Clearly, they are willing to lock in as much of their future input needs as they’re bank accounts and storage facilities will afford them.

End line users of corn understand that even if we do end up with record acreage and good yields, we’ll still barely budge the global ending stocks number. The world currently stands at about 70 day’s worth of grain supplies. This is not just corn but an index tracked by AgriMoney that includes rice and wheat. The point of the chart published by AgriMoney is that peak production relative consumption has shifted to a deficit trend over the last 20 years. It has dwindled from 130 day’s supply in the mid 1980’s to our current level of 70 days. All things considered, this year’s US harvest could add about four days to the world’s supplies. This is hardly a drop in the bucket.

There’s no question that corn prices have been declining since the June 28th USDA acreage report and the next major report isn’t due out until August 12th. This leaves the market with time to trade its way through pollination and the trend to continue lower. However, the record net short position in managed money cannot continue to profit from corn’s decline for much longer. The market can only trade so low relative to its fundamental value. Commercial traders clearly see this market entering their value area. We’ll side with them and be on the lookout for a reversal in prices. Most importantly, we’re approaching prices that leave no more room for bearish surprises, therefore, the path of least resistance will soon turn higher.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Buy Beans Below the Teens

The growing season for U.S. crops is right around the corner and several factors, fundamentally, technically and seasonally are lining up to suggest that the time to buy soybean futures and soybean meal futures may be right around the corner. Last year’s drought placed heavy demands on Brazilian and Argentine crops as well as the beans left over in the bins. The tight supplies have left us with a stock to usage ratio of less than 5%. In fact, the USDA recently stated that this year’s U.S. stock to usage ratio of 4.3% is the lowest since 1965. Typically any ratio below 10% is bullish for U.S. beans.  Meanwhile, the global stock to usage ratio is the lowest since 1996.

Demand for soybeans also continues to increase. Chinese hog farming represents a large portion of the soybean demand through their use of soybean meal as feed. The USDA expects that China’s hog production may reach more than 60% of the world’s total in 2013. In fact, Chinese soybean imports have increased six-fold since 2000 to meet the growing demands of their own domestic usage. U.S. exports are already 25% above last year’s levels and currently stand at 93% of the USDA’s export expectations of the U.S. crop in 2013 for the marketing year ending this August. China’s imports have led the way and are up 13% year over year.

Seasonally, soybeans tend to sell off and make an early spring low sometime in February. This is followed immediately by a rally into Memorial Day as planting related weather concerns force the market back and forth between, “too dry” or “too wet.” The late February low also coincides with the South American harvest, which is currently in full swing. The South American harvest sell off is similar to the September harvest sell off we get here in the U.S.

The final piece of seasonal analysis is the analysis of the seasons themselves. Last year’s drought has not been sufficiently squelched by winter snows. Soil moisture in the leading soybean producing states is running dangerously low. Nine of the most productive states are sitting at 20% of normal soil moisture. This is the mirror image of last spring when only 20% of the same area was below normal moisture levels. The world cannot afford a drought in the U.S. in 2013.

Moving to the more technical nature of the market the commercial traders have been net buyers of beans since November. Their net position has doubled and they’ve only been net sellers twice in the last 15 weeks. Commercial traders have been early buyers in each of the last three years. Each of the last three years has given us an early rally, as well. Deeper research reveals the importance of this. Commercial traders have come into the year on a positive note one third of the time over the last 30 years. Soybeans have had meaningful early rallies in seven out of the ten years that commercial traders have started the year on a bullish note.

The USDA has raised its 2013 forecast to a range of $13.55 – $15.05 per bushel. These estimates are based on the November soybean futures, which will be this year’s planted crop. November soybeans are currently trading at $12.70 per bushel. The November beans have formed a triple bottom on the daily chart near $12.55. This would imply the market wants to trade lower and see what happens under the $12.50 area. Technically a test or, penetration of $12 would provide an ideal bottom to start looking at the buy side for the November soybean futures contract. Breaking the $12.50 level would accomplish two things. First, it would flush early and weak buyers out of the market and allow the positions to reset themselves. Secondly, it would create an oversold condition that, combined with positive commercial trader momentum could be used as a springboard to get long on the bounce higher.

There are far too many bullish global factors to ignore the buy side of soybeans in 2013. The fundamental factors of growing global demand in the face of record low current inventories will magnify any weather related issues. The soybean market typically overshoots its targets and suggested price ranges. Therefore, buying soybeans $1.50 below the bottom of the USDA’s price targets may very well net a profit in excess of the USDA’s high side of their forecast at $15.05.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Higher Cattle Prices in 2013

The outlook for cattle prices in 2013 appears to be even higher than 2012 due to declining herd sizes and an increasingly favorable export climate. The US cattle herd has been in decline over the last few years. The drought of 2012 has led to the culling of more animals including non-productive dairy cows and heavier steers that have managed to avoid the feedlots. The addition of these animals into the production mix did three things. First, it increased the average weight of cattle coming to market. Secondly, the increasingly tight supplies already pushed the April live cattle futures contract above the 2012 highs. Finally, it has led to the smallest U.S. starting herd since 1952.

The USDA’s January cattle inventory report shows a total U.S. cattle herd of 89.3 million head. This is the smallest calf crop since 1949 and is the 18th consecutively smaller calf crop. Producers and finishers appear to be coming to the consensus that it’s better to have fewer animals at heavier weights than more animals at lighter weights. The University of Missouri points out that steer weights are up over 34lbs from last year and December marked the 49th consecutive week of heavier steers on a year over year basis. There is an argument within the industry as to the real reason behind the growing weights between those who say weights are increasing due to better animals being culled versus the addition of the beta-agonist, ractopamine.

Politically, 2013 will see a good boost in demand due to Japan’s relaxation of the ban on U.S. beef following the mad cow episode of late 2003. This year, Japan will allow U.S. imports of cattle up to 30 months old. This relaxes the 20-month age limit rule that effectively crushed U.S. exports to Japan. Prior to mad cow, Japan was the number one destination for U.S. beef exports. In fact, Japan imported more than 500,000 tons of American beef as recently as 2000 in contrast to 2012’s total imports estimate of just over 200,000 tons. Many agribusiness insiders see the relaxation of the age limit as Japan’s recognition of globally tight supplies for the foreseeable future.

We’ve addressed the certainty of a declining cattle supply in 2013 as well as sourcing added demand in this marketing year due to freer trade, that leads us to the primary variable of input costs. This brings us to the feed vs. ethanol battle over the 2013 corn crop. Some of the blend tax incentives for ethanol producers were allowed to expire in 2012. Ethanol producers are still bound to the Renewable Fuels Standards mandate that shows 2013 as the first time that the mandate’s target is set beyond the blend wall. This year, 13.8 billion gallons of our fuel supply is supposed to come from ethanol. However due to our primary blend of 10% ethanol, we are unlikely to produce the 13.8 billion gallons to meet the mandate target.

The Renewable Fuels Standards face an application dilemma that must be sorted out by the bureaucrats to put the fundamental factors of the ethanol market back into equilibrium. Currently, unblended ethanol is trading around $2.37 per gallon while wholesale gas prices are about $2.65. The disequilibrium comes into focus when we realize that ethanol is about 25% less efficient than gasoline and should therefore, trade at a corresponding discount. Using the example above, ethanol should be trading at $1.99 per gallon. Ethanol blenders will have to push for either reenacting the expired ethanol blending subsidies or, governmental clarification of E85 liability and warranty issues that will allow the expansion of the E85 delivery infrastructure.

Finally, the cattle market will keep its eyes focused clearly on the skies. The drought of 2012 was genuinely historic with many ranchers still feeling the pinch through the high price of hay this winter. The run-up in grain prices was brutal to cattle ranchers, as crop insurance provides no relief for livestock ranchers. Therefore, this may be the most important weather year that I’ve been witness to as a steady and useful supply of rain will be necessary for both grazing and growing feed crops. The National Oceanic and Atmospheric Administration (NOAA) expects 2013 to be a normal year however, several universities’ grain forecasting models are leaving room for exceptional volatility with average December corn (2013 crop) prices expected to finish around $5.75 per bushel but, quickly tailing out to more than $6.50 per bushel without factoring in the rising tide of any additional volatility.

Cattle farmers appear to be taking proactive steps to managing their businesses in 2013. The Commitment of Traders Report clearly shows commercial buying both in the grain markets and the cattle futures market itself. Commercial traders have bought more than 11,000 contracts of corn below the $6.50 per bushel level in the December contract. This is evidence of cattle producers attempting to lock in their feed costs for the coming year at anything near normal feed prices. We’ve also seen commercial traders nearly double their long position in the cattle futures as they guarantee their ability to make future delivery. U.S. Cattle ranchers locking forward production costs at these levels shows that they’re projecting their profit margins based on growing global demand rather than declining input costs. Given the miniscule herd numbers, we could see prices really skyrocket in 2013 if the weather is decent and ranchers can hold back animals to re-grow the herd size on forage, rather than feed.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.