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Archive for January, 2012

Weekly Market Re-cap

Week of January 27th, 2012

Courtesy of Country Hedging

             The initial reading of fourth quarter U.S. GDP growth came in at 2.8%, below market expectations at 3.0%. While 2.8% growth would be the highest since the second quarter of 2010, the components were widely viewed as disappointing. Inventory growth accounted for 1.9% of the growth, while the personal consumption contribution to growth at 1.45% was short of forecasts. Growth is viewed as more sustainable when it is coming from consumer demand. Additionally, nominal GDP was only 3.2%, which means that if inflation had been as high as expected, the real GDP number would have been much lower. In the event, inflation was low, allowing GDP to be as close to the 3.0% expectation as it was, but without the underlying nominal growth, real GDP growth looks anemic. The low Price Deflator also increases the possibility that the Fed will implement more quantitative easing on the threat of renewed disinflation. On Wednesday, the Fed lengthened its timeframe for its conditional commitment to keep rates and an exceptionally low level from “mid-2013” to “late 2014”. They did sound an upbeat note in saying that the economy was “expanding moderately”. The U.S. dollar was sharply weaker this week on the combination of promised low interest rates and weaker GDP growth. For the week, the U.S. dollar index was down 1.8%, and gold rose 4.2%.

 Notwithstanding the negative outlook implied by the official GDP numbers and the Fed, current economic indicators continued to look reasonably good this week. The overall earnings season improved this week, getting a boost from good numbers from Apple, Boeing, and Caterpillar. The S&P 500 was virtually unchanged for the week. Durable goods orders and consumer sentiment from the University of Michigan were better than expected.

 Similar to what we reported here last week, talks between Greece and its creditors continue to make slow progress. This week, an agreement is reportedly “one step away”. It appears that the breakthrough made this week was that the agreement will allow the Credit Default Swaps to be triggered, as opposed to a completely “voluntary” write-down of the debt. The euro rose against the dollar by 2.2%. Crude oil rose $1.10 for the week, but the real excitement was in RBOB gasoline which was up $.1424 on the week, a 5% gain. Refinery issues were the main driver for gasoline.

 Nearby corn futures finished the week on a string of 7 straight non-losing sessions (it closed unchanged on Thursday), led by strong cash markets. Farmer selling shut-off following the bearish January report, and cash markets have been generally on the climb since then. Reuters reported that prompt cash basis at the Gulf reached the highest this week in at least ten years. Some of the squeeze may be related to commercial logistics, but export demand has also been picking up. Weekly export sales were the biggest since mid-October at 958 tmt. The daily reporting system lit up on Friday with a 170 tmt sale to Mexico. Weekly ethanol production was lower for the third straight week at 934 thousand barrels/day, down 7 from last week. For the week, corn was up 30.25 cents.

 The Buenos Aires Grain Exchange came out this week with its first estimate of Argentine production of 46.2 mmt. The USDA January estimate was 50.5 mmt. Rains improved in some of the South American growing areas this week, but production estimates are still edging lower. Too much rain in Brazil is hampering early export programs. Weekly exports were off sharply from the previous week at 466 tmt. For the week, nearby soybeans were up 32 cents.

The thought that the torrent of cheap wheat that has surged into world export markets from the Black Sea region since the middle of 2011 may come to an end gained currency this week. There was no official word on export “curbs”, but speculation rose after projections of export totals through the spring show totals reaching levels that Russsia specifically would be expected to react to. Export prices have already risen. Estimates for Ukraine’s upcoming harvest are being lowered on weather issues. Weekly U.S. export sales for wheat were the highest since mid-November at 605 tmt. Daily sales of 133 tmt to unknown were reported on January 27. For the week, Minneapolis was up 27.5 cents, Chicago was up 36.75 cents, and Kansas City was up 33 cents.

Anna Kaverman – Mercer Landmark

Just look out your window today and I don’t have to tell you that Mother Nature is confused. We go from having 4-5 inches of snow and extreme cold to rain and 50 degrees. On any given day I don’t know if it is going to feel like spring or typical Ohio winter weather. Having spring like temperatures in January isn’t always bad; however, it will prevent winter tillage work from getting done and reach havoc on stored grain. North Dakota State University recently published this article about managing stored grain.

January 20, 2012

By: University News Release

Dry grain or keep it cool to prevent mold growth during winter storage.

Provided by North Dakota State University 

Warm weather the first half of this winter has increased the potential for problems in stored grain.

“Grain needs to be either dried or stored at a cool temperature to prevent mold growth,” says North Dakota State University Extension Service grain drying expert Ken Hellevang. “If the stored grain is dry, the warm winter temperatures will not cause storage problems. But if the grain is not dry, the warm temperatures may be a concern. The potential for insect problems also increases at warmer temperatures.”

For example, cereal grain at 18% moisture content can be stored for up to about 200 days at 40 degrees and 90 days at 50 degrees, but only about 15 days at 80 degrees. For each 10-degree increase in grain temperature, the allowable storage time is reduced by about one-half.

The allowable storage time increases at lower grain moisture contents. At 70 degrees, the allowable storage time increases from about 30 days for cereal grain at 18% moisture to 45 days at 17% moisture, 70 days at 16% moisture and 200 days at 14% moisture.

Insects are dormant below about 50 degrees, so keeping the grain temperature below 50 degrees if possible is important, Hellevang says. If the grain temperature is kept below freezing during winter storage, insects can be killed.

The grain temperature near the bin wall and on the top surface depends both on the outdoor temperature and solar radiation. The amount of solar energy on the south wall of the bin will be two to three times as much on Feb. 21 as on June 21 due to the low solar angle. The amount of solar radiation on the bin roof is about three-fourth as much as during the summer.

“Monitor the grain temperature, particularly near the south wall and near the grain surface, and periodically run the aeration system to keep the grain cool,” Hellevang advises. “The goal in northern states should be to keep the grain temperature at 20 to 30 degrees during the winter and in southern states to keep the grain temperature below 40 degrees or as cool as possible.”

Check dry grain at least every two to three weeks as long as the grain is at winter storage temperature and at least every couple of weeks if it is warmer. Measure and record the grain temperature, watching for trends that indicate problems. Check the grain moisture content and examine the grain in several locations. Search for small changes that are indicators of potential problems. Collect a sample, warm it to room temperature and place the grain on a light-colored or white surface to look for insects.

Remember to verify that the moisture content measured by the meter has been adjusted for grain temperature. In addition, remember that moisture measurements of grain at temperatures below about 40 degrees are not accurate. Verify the accuracy of the measurement by warming the grain sample to room temperature in a sealed plastic bag before measuring the moisture content. 

Bin vent screens have the potential to become iced over when fans are operating in temperatures near or below freezing. Hellevang recommends leaving a bin fill-hole or manhole unlatched as a pressure relief valve if the air is being pushed up through the grain. If humid air is being pulled in through bin vents at temperatures near freezing, provide an unscreened opening, such as the manhole, for the airflow.

“Always remember safety when working around grain bins,” Hellevang says. “Grain suffocation is likely if entering a bin while unloading. It only takes seconds to be engulfed in the grain. Never enter a grain bin without stopping the auger and using the ‘lock-out/tag-out’ procedures to secure it.

“Also, a person can be instantly buried if bridging has occurred or a column of grain attached to the bin wall collapses,” he warns.

Sources familiar with Informa Economics say the firm has updated its 2012 U.S. acreage estimates. Following are details:

       Corn: Informa reportedly pegs corn acreage at 94.748 million, up 2.827 million from 2011. In December, Informa estimated acreage at 94.389 million.

       Soybeans: Informa reportedly pegs soybean acreage at 74.568 million, down 408,000 from 2011. In December, Informa estimated acreage at 74.608 million.

       Winter Wheat: Informa reportedly pegs winter wheat acreage at 41.947 million, up 1.301 million from 2011.

       Cotton: Informa reportedly pegs cotton acreage at 13.590 million, down 836,000 from 2011.

Anna Kaverman-Mercer Landmark

Once again Thank You Allen Douglass for this information. I am going to use the same chart from my previous post because it illustrates Allen’s point very well.

Weekly Continuous Corn Chart:  Front month corn locked in 570 to 665 range since end of September.  We have seen the bottom of this range – as well as the top twice each in that 17 week period.  Think about that… 95 cent range, and we have traversed it 4 times, working on #5!

Anna Kaverman – Mercer Landmark

The USDA once again managed to shock the market when it released the final 2011 production estimates and the December 1, 2011 corn stock estimate on January 12th. As a result it isn’t surprising that the nearby March 2012 corn futures declined by 52 cents in the two sessions following the release. Blelow is the March corn daily chart as of today. You can see the significant sell off that occured after the report was released.

Perhaps the biggest surprise though, was the ending stocks number which has left some still scratching their heads. The article below was posted on Ag Web on January 18th and it goes into a little more detail behind the rhyme and reason about how the USDA possibly achieved their numbers.

Understanding USDA’s Corn Stocks Estimate

January 18, 2012

By: University News Release

By Phyllis Picklesimer, University of Illinois

At 9.642 billion bushels, Dec. 1 corn stocks were 425 million bushels smaller than those of a year ago and the smallest in five years, but they were about 240 million bushels larger than the average of the reported trade guesses, he said.

“Those guesses were in an extremely wide range of 500 million bushels. Three of the 15 analyst guesses reported by Dow Jones were 9.55 billion bushels or larger, so not everyone was surprised by the USDA estimate,” Good said.

Part of the surprise in the magnitude of Dec. 1 stocks came as a result of the average expectation of a smaller 2011 crop estimate. With the absence of any supporting evidence, it is not clear why, on average, analysts expected a 30-million-bushel reduction in the estimated size of the crop, he added.

“The USDA estimate was a very modest 48 million bushels (0.4 percent) larger than the November 2011 forecast. The 78-million-bushel difference between expected and actual production accounts for about one-third of the surprise in the stocks estimate. The remainder of the surprise is the result of incorrect expectations about the level of feed and residual use of corn during the first quarter of the 2011-12 marketing year,” Good said.

The market anticipated a high level of use to be revealed, perhaps partly to correct what was perceived as an underestimate of feed and residual use in the previous quarter. The surprisingly large estimate of Sept. 1, 2011, stocks implied a very low level of feed and residual use during the final quarter of the 2010-11 marketing year and for the entire marketing year, he said.

“Some believed that the low, and incorrect, estimate of feed and residual use last year had resulted in an unrealistically low forecast of use for the current year. It was thought that the Dec. 1 stocks estimate would ‘correct’ the past errors and show a high level of use during the September-December quarter, resulting in a larger projection of use for the year. That did not happen,” he said.

Instead, implied use during the quarter was consistent with the USDA forecast of 4.6 billion bushels so the forecast was not changed. Calculated feed and residual use of 1.838 billion bushels during the quarter represents 40 percent of the projected total for the year, he said.

“The percentage of total use during the first quarter last year was an unusually large 43.2 percent. In the previous 4 years, use during the first quarter averaged 39.3 percent of the marketing year total, in a range of 38.2 to 40.7 percent,” Good said.

According to Good, the seasonal pattern and the total implied feed and residual use of corn during the 2010-11 marketing year is still troublesome. Explanations for the low level of use center on the potential for overestimating the amount of corn used to produce ethanol, increased feeding of distiller’s grains, and/or an underestimation of the size of the 2010 crop.

“None of those explanations, however, addresses the inconsistent seasonal pattern of implied use. In addition, the implied sharp decline in feed and residual use of corn, all grains, and all feeds (including an estimate of distiller’s grain) per animal unit during the last half of the marketing year is without explanation,” he added.

With year-ending stocks of U.S. corn still expected to be a relatively low 6.7 percent of projected use, a lot of price uncertainty remains, he said.

“The immediate focus may be on the size of the South American corn crop and the implications for U.S. corn exports. The USDA lowered the projected size of the Argentine crop from 1.14 to 1.02 billion bushels in last week’s report. Recent and upcoming precipitation will help stabilize that crop, but the extent of damage may exceed that reflected in the current forecast,” he noted.

 The forecast of the Brazilian crop was unchanged at 2.4 billion bushels. The USDA now expects U.S. corn exports to reach 1.65 billion bushels during the current marketing year, he said.  ”Nineteen weeks into the year, export inspections have averaged 32.7 million bushels per week (adjusted for Census export estimates through November). Inspections need to average 30.9 million per week from now through August in order for the total to reach the projection,” he said.

 A further reduction in the size of the South American crop, as occurred in the drought of 2008-09, could boost U.S. exports above the current projection, particularly if China continues the current pattern of small weekly purchases, he noted.  ”Beyond the South American crop, corn prices will be influenced by 2012 U.S production prospects. In general, analysts are anticipating more acres, higher yields, and a much larger crop than in 2011,” Good said.

According to Good, such a large crop has not yet been priced into the market. Potential crop size will be gradually reflected from spring through harvest, beginning with the USDA’s February baseline projections and including the March 30 Prospective Plantings report.

 ”Oh, and don’t forget the March Grain Stocks report to be released on the same day,” he said.

Anna Kaverman – Mercer Landmark

Happy Friday!

As we wrap up this first week of January and a short week for many I may add, the market has provided us with some fireworks to start the year off. These swings have once again shown that to be successful you need to manage risk instead of predicting it. Below is blog post from Ag Web that I feel highlights this point.

Current Marketing Thoughts

By: Kevin Van Trump,

Why You Need to “Manage Risk” Instead of “Predict”

Not trying to re-play the same old song and dance, but right now the market is stuck in somewhat of a holding pattern awaiting the release of data pertaining to the end-of-year crop production numbers and any type of change in the South American weather forecast. 

From everything I am hearing and looking at, the weather in Argentina and southern Brazil looks to remain hot and dry through the weekend. We may have gotten a little wetter than we were at the beginning of the week, but nothing substantial. There is a chance for some rain and some cooler temps on Tuesday or Wednesday of next week in Argentine, with most thinking it will then move into southern Brazil. Several forecasters are simply calling this a little break in the action, before these areas heat back up and turn dry once again. Production estimates continue to be cut right and left, and in my opinion, the market seems both concerned and somewhat confused.  Have we added in enough premium to compensate for the production losses? Are we overreacting like we did during the US growing season and pricing in the worst possible scenario? Will the good areas in northern Brazil help offset the losses to south? These are all great questions, but ones we simply have no answers for at this juncture. 

Looking ahead to the 2011 US ending crop totals, I have listed a few of the bigger questions that still remain unanswered to make it a little easier to assess the numbers:

       Will the USDA reduce the corn yield numbers?

       The USDA is currently estimating the corn yield at 146.7bpa, several in the industry think we should be sub 145bpa. From what I am hearing, Ohio and a few of the others

       who where late to harvest actually came in a little better than anticipated. 

        Will the USDA reduce total harvested corn acres?

       The USDA is currently estimating 83.9 million harvested acres. Several analysts still believe we should be below 83 million.

               Will the USDA add to the feed usage numbers?

       The USDA is currently estimating corn feed usage at 4.6 billion.  As you know, this number has been highly scrutinized and many feel it is way too low.  Many analyst are looking for jump of 100 million in feed usage numbers. 

               Will the USDA increase their export estimates now that South America is having significant problems?

       The USDA is currently estimating exports at 1.6 billion. There are now more rumblings that this number is too low and the USDA should push it higher by at least another 100 million. 

               Will the USDA bump ethanol usage higher?

       This number could actually go either way. Currently the USDA is estimating 5 billion bushels of corn being used of ethanol.  Most are estimating this number will remain unchanged, while others are looking for a slight bump higher, and a fraction of analyst are even thinking it could be lowered.

                Will the USDA lower their soybean export numbers?

       Currently the USDA is estimating soybean exports will total 1.3 billion. Many in the trade think the USDA is way too high and this number needs to be reduced by 100 million.

               Will the USDA raise the soybean carryout?

       The USDA is currently estimating the soybean carryout at 230 million. Many are thinking on weaker exports, this number could now jump beyond 300 million, maybe eventually north of 350.

Keep in mind there is a big difference between a “researcher” and a “risk manager.” As producers, we are NOT trying to be researchers, we are not trying to predict crop size or weather patterns.  As “risk managers” you should be accessing the data that is being presented and making the proper adjustments to your marketing plan based on numerous factors and assesments. 

If you remember, our plan going into this marketing year was to get 30-40% locked in at profitable level prior to planting our crop. We were going to use the South American weather scares as our opportunity to lock in bushels. The opportunity is upon us and I urge you to react accordingly. Remember, you are NOT a “speculator” or a “research analyst,” but rather a “risk manager.” Reducing your risk and locking in profitable margins is your goal. 

Many advisors or, should I say, “researchers” told many of you to lock in your bushels in 2010 at around $4.00 for the next three years, obviously that didn’t work out so well and you are now left fighting an uphill battle.  That is NOT “risk management,” that is trying to predict the markets. That is being a researcher and calculating out your thoughts and numbers, then trying to predict the future. The problem is if you are right you are the “hero,” but if you are wrong you have “zero.”  If your a producer you have to take yourself out of this mindset.  Look at the entire picture, look at all of the pieces and all of the moving parts, then try and best assess your overall “risk,” and ways you can effectively REDUCE it while still remaining profitable.  

I believe we have more room to work higher on the production setbacks occurring in South America and the potential changes being made by the USDA, but as “risk managers” we have to take our shots when we get them.  We also have to consider all of the pieces to the puzzle and make certain we are not wearing our “agricultural- only” blinders.  

There is actually a very strong chance that in 2012 the US Dollar could rally and the problems in Europe could spill over and rain on everyone’s parade. I am of the belief either of these two scenarios would be enough to alter money-flow and seriously dampen any type of weather related gains.   

This keeps me cheering for the weather rally and hoping it will continue, but forces me to make more sales and reduce risk on fears that the “outside” markets could ultimately weigh on the entire commodity sector. 

Be a “risk manager” and I promise you will succeed. Leave the speculation, research and data collecting to those who have something to prove. Remain patient, follow your game plan and look for all of the necessary clues.  

As far as the “outside” markets are concerned, all eyes will be on US employment data the next couple of days. Next week I suspect most attention will shift back over to the European debt issues and 4th Quarter earnings here at home.