Blogging by the Bushel
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Archive for May, 2012

Anna Kaverman- Mercer Landmark

Whether you are new to America or a citizens since birth, and you go by what you see and hear on TV and radio, you might be convinced that Memorial Day is the one weekend a year to “ENJOY HUGE SAVINGS ON ELECTRONICS AND HOME FURNISHINGS!’ 

You almost never hear the words Memorial Day anymore unless they’re followed by the word “Sale”.

People always complain that we’ve lost the true meaning of Christmas or Easter but unlike those examples, remembering our fallen soldiers doesn’t require you to be Christian or Jew or Muslim. Just American.

Not Republican, Democrat, liberal, conservative, pro-war, anti-war. We should all come together on this day…not the whole weekend…just Monday, and remember what the holiday means and how we’re supposed to observe it.

When America was trying to recover from the Civil War, nearly every family in this country felt the direct loss. Imagine a country one fourth the size it is now and then imagine nearly 700 THOUSAND casualties. On those first few memorial days, I’m pretty sure they didn’t celebrate with hot dogs and three day weekends and a sale on video games.

In the last seven years, Memorial Day has meant something for the first time to hundreds of families. Families, who’ve been through the scope of emotions that started with pride of service, fear of loss, and finally the numbing grief that the person they love is gone forever. Ask the families and they usually won’t use the word hero. Instead they’ll use words like “friend”, “brother”, “son”, “confidant”, “full-of-life”, “passionate”, and “sincere”

Just my opinion, but Monday is not the day to debate the wars in Afghanistan and Iraq. It’s offensive. It’s offensive to say our soldiers died in a meaningless war. It’s equally offensive to defend the cause. On this day it is. We’ve got 364 other days for that 

Memorial Day to me isn’t about war or all the feelings that go along with it. It’s about individuals who chose to serve in the United States Military, they chose to follow orders and they made the ultimate sacrifice. Chances are there is a veterans’ cemetery within a few miles of you. You’ll find many soldiers buried there who returned from the war and lived full, productive lives. But you’ll no doubt find a bunch of headstones that tell the story of an abbreviated life. Each of those markers represents the crushed dream of a wife, a parent, a brother.

And I hope we will remember that on Monday, in between hanging out with family and firing up the grill and hanging out with friends…I truly hope that Monday, if even for a fleeting moment, you will hit the pause button and realize that this is not just a day off from work or school. Our fallen heroes chose to put their lives on the line for many reasons, but I’m pretty certain that giving us a day-off is not one of them. 

I personally have not had the privilege to serve my country and know that I am not cut out for it. As much as I whine and complain about how imperfect America is (an inalienable right to do so in America, by the way), I am grateful that there are people you have willingly given a couple years of their lives to demonstrate to others and especially myself that what we have here is more than worth defending. And for those who did–and paid the price–they will forever have my unwavering respect and admiration.

HAPPY MEMORIAL DAY!

CHICAGO, May 18, 2012 /PRNewswire/ — CME Group, the world’s leading and most diverse derivatives marketplace, today announced it received CFTC approval to offer expanded electronic trading hours in its CBOT grain and oilseed futures and options beginning Sunday, May 20 for Monday, May 21 trade date. Hours will expand from the current 17 hours per day to 21 hours per day on CME Globex from 5:00 p.m. to 2:00 p.m. CT Sunday to Friday.

Products included in the expanded hours are CBOT Corn, Mini-Sized Corn, Soybeans, Mini-Sized Soybeans, Wheat, Mini-Sized Wheat, Soybean Meal, Soybean Oil, Rough Rice, Oats, and Ethanol futures and options plus all related calendar spread options and inter-commodity spread options.

Daily settlements will continue to be based on market activity at or around 1:15 p.m. CT each day. Additionally, open-outcry trading hours will continue to operate from 9:30 a.m. to 1:15 p.m. CT Monday to Friday.

As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk.  CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate.  CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago.  CME Group also operates CME Clearing, one of the world’s leading central counterparty clearing providers, which offers clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc.  CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc.  NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc.  COMEX is a trademark of Commodity Exchange, Inc.  All other trademarks are the property of their respective owners. Further information about CME Group (NASDAQ: CME) and its products can be found at www.cmegroup.com.

Corn traders are being forced to decide if they believe the recent talk about a cooler, wetter weather pattern developing this summer. If the “El Nino” like patterns do develop I have to believe it ultimately delays the crop to some extent, and the “old crop” bushels become much more valuable. On the flip side if conditions remain dry and are mixed with some extreme heat the trade will start to become extremely nervous about yields and quality. Which leaves one big question hanging, “Where should we start estimating U.S. corn yield”? Below is an article that was on Ag Web that provides some valuable arguments.

Estimating U.S. Corn Yield: Where Should We Start? MAY 17, 2012 By: University News Release Are USDA’s estimates for 2012 accurate? Take a look behind the numbers. The magnitude of the U.S. average corn yield in 2012 will be one of the most important factors in determining the average price during the 2012-13 marketing year due to the relatively low level of carry-out from the current marketing year. Early in the season, yield expectations generally start with an analysis of the trend in historic yields and an extension of the trend into the current year. As the planting and growing season progress, yield expectations are modified by the timeliness of planting, weather developments, and USDA crop condition ratings. The USDA provides survey based yield estimates beginning in August.

At this still early point in the growing season, corn yield forecasts focus on trend yield, which can be thought of as average improvement in yield over time due to improvements in plant genetics and production technology. Analysis of the trend in the U.S average corn yield would seem to be a straight-forward exercise, but there is in fact considerable variation in how that analysis is conducted. The calculation of the value of the 2012 average U.S. trend yield, for example, can vary depending on:

1) The form of the fitted trend (linear or non-linear),

2) The starting date for calculating the trend,

3) The ending date for calculating the trend, and

4) Whether any historic yields are excluded from the trend calculation.

 Most analysts fit a linear trend to historic yields, but the starting date for calculating the trend varies depending on whether there has been a perceived change in the trend over time. Most common is the perception that average yields have been increasing more rapidly since sometime in the 1990s as compared to the two or three decades earlier. The perceived higher trend has been mostly attributed to the development and adoption of new plant genetics and/or traits. One of the difficulties of identifying trend shifts in the short term is the potential for other factors, such as extended periods of favorable or unfavorable weather, to impact yields for multiple years. Sometimes a few historic yields are excluded from the trend analysis with the explanation that such yields were “outliers” that are not likely to re-occur in the future. For corn, candidates for exclusion are typically low yields associated with unique weather events (drought, flood, or freeze) or widespread disease. It is rarer for high yielding years to be eliminated from the analysis.

With this background, we can proceed to a discussion of alternative estimates of the 2012 U.S. corn trend yield. All calculations are based on actual yields without any adjustment for variation in weather conditions from year-to-year (unconditional yields). The first estimate was presented last week by the USDA in the May 10 World Agricultural Supply and Demand Estimates report. It is important to emphasize that this estimate was not generated by a survey process. Instead, the report indicated that the forecast of the 2012 U.S. corn yield of 166 bu. was “based on the simple linear trend of the national average yield for 1990-2010 adjusted for planting progress.”

 Notice that the calculation excludes 2011 from the analysis and simply extends the 1990 through 2010 trend two years to 2012. This results in a USDA trend yield calculation for 2012 of 164 bushels. The trend line is reproduced in Figure 1 (red line). It has a slope of 2.32, indicating that the trend increase in corn yields was 2.32 bu. per year from 1990 through 2010. The same report indicated that the 164 bu. trend yield forecast was increased 2 bu. to 166 bu. to reflect the rapid pace of planting and emergence this spring.

In its report, the USDA did not indicate why the trend calculation was started in 1990 or why 2011 was excluded from the trend analysis. While there is a legitimate argument about the initial year to use for trend estimation, dropping 2011, a low yield year, from the estimation is more than a little curious. This seemingly small deletion turns out to have a large impact on the trend yield estimate for 2012. Adding back in 2011 to the USDA sample lowers the 2012 trend yield estimate 2.6 bu. to 161.4 bu. per acre (black line in Figure 1). The estimate for 1990-2011 reflects a trend yield increase of 2.15 bu. per year.

To illustrate the impact of the starting date on the trend calculation, we also calculate the trend yield for 2012 based on the linear trend of actual average yields from 1960 through 2011. The longer time period reflects the view that a notable change in the U.S trend yield has not occurred since 1960. Based on that time period, the trend calculation for 2012 is 158.4 bushels, reflecting a long term trend yield increase of 1.86 bu. per year (magenta line in Figure 1).

So, what do we think is a reasonable starting point for estimating the U.S. average corn yield in 2012? As we discussed in a previous post, there is indeed evidence of a slight increase in corn trend yield in some areas of the country in recent years, but we cannot yet confirm an increase in the overall U.S. average trend yield. So, we begin with the long term trend estimated over 1960-2011. We then “de-trend” historic yields over 1960-2011 in terms of 2012 technology. Next, we drop 1988 (early extreme drought conditions) and 1993 (historic flooding in western Corn Belt) from the analysis based on the argument that these are extreme outliers unlikely to be repeated in 2012. Finally, we add 2 bu. per acre to reflect the potential impact of the timely planting of the 2012 crop.

The 50 de-trended yields are presented in Figure 2 after re-arranging the yields from lowest to highest. The average de-trended and planting date adjusted corn yield for those years is 161.4 bu. per acre (coincidentally, the same as the trend yield over 1990-2011). Of particular interest is the chance that yields will equal or exceed the recent USDA estimate of 166 bu. per acre. Our analysis indicates that the average yield would equal or exceed 166 bu. in only 16 of the 50 years, or about one-third of the time.

The seemingly arcane topic of corn trend yield estimation can have large market impacts in certain situations. 2012 is one of those situations. The USDA recently estimated the corn trend yield for 2012 (after adjusting for planting progress) at 166 bu. per acre. Our analysis, based on the long-term trend increase in U.S. average corn yields, is that a more reasonable estimate is 161.4 bu. per acre. Using the USDA estimate of 89.1 million harvested acres of corn in 2012, the difference in the two yield estimates represents over 400 million bushels. Furthermore, our analysis indicates there is only about a one in three chance that the U.S. average yield in 2012 will equal or exceed 166 bu. per acre. The USDA estimated yield is likely to require favorable summer weather consisting of below average temperatures and above average rainfall in the main producing areas.

Old crop corn is definitely a riddle right now, and could be extremely dangerous…unfortunately in both directions. Let me explain: there is doubt that the bushels exist, and also doubt the US farmer will sell what he has left on the recent break. However, we still need to consider a couple of important thoughts. Many of the guys who are still holding cash bushels have historically done well doing the same the past couple of years, and are now banking that the same thing will happen again this year. All I can say is be extremely careful driving the car at high speeds looking in the rear-view mirror.

Producers left with “old crop” supplies are now playing an extremely dangerous game of high stakes poker. Unlike last year (and I hate to say it), but YOU (the producer with old crop bushels) may end up being the ones ultimately holding the “bluff” hand. I realize the USDA has thrown out their bluff by reporting the 851 ending stocks number, while you are actually the ones that own the old crop corn bushels and feel as if you are in control.

Look back to last year, I would have to say the hedge funds ultimately held the “bluff” hand. Meaning they simply bid up the futures, the trade bought their bluff and they banked big profits as they blew out north of $7.50. From where I sit, the funds look as if they have tried the exact same strategy this time around, buying most every break and getting killed in the process. Simply stated, no one bought their “bluff,” production in South America never really fell apart, in fact the USDA is now estimating Brazil will have an extra 200 million bushels compared to their last estimate, and their prices are well below the US for July corn. We also have to realize the US has had next to ideal planting conditions and the thoughts of one billion bushels coming into the pipeline “early” are running rapidly through the trade.

All of a sudden the bet moves around the table to the “farmer” who is left with the actual corn, he “calls” the bet, and in some cases due to extreme stubbornness and anger over the USDA he actually raises (by re-owning more on the board). The problem I see for the “farmer” is who will now bid up the bushels he is left holding. Basically no one wants to be the guy without the “chair” when the music stops playing. Do you think producers who are looking at a basis of over $0.50 cents in the July contract will want to carry the corn forward and take the flat price hit and the massive basis hit as well? I doubt it, but if no one else “bluffs” or bids up the bushels then where do we end up? This is exactly why I didn’t want to hold “old crop” bushels this late into the game…

Today, the USDA released the May WASDE report and the May Crop Production report. The WASDE report, which included the first forecasts for the 2012-13 marketing year, contained some very bearish projections for corn, but the soybean and wheat forecasts have mixed implications. Following is a brief summary of the new forecasts.

Corn

For the current marketing year, the projection of U.S. feed and residual use of corn was reduced by 50 million bushels to a total of only 4.55 billion bushels. Analysts expect more wheat feeding this summer and an early harvest of the 2012 corn crop to reduce summer feed demand for corn. Year ending stocks are projected at 851 million bushels.

 The projected size of the current Argentine corn harvest was unchanged from the forecast of last month, while the projected size of the Brazilian crop was increased by almost 200 million bushels (8%). The projection of world marketing year ending stocks was increased by 190 million bushels.

For the 2012-13 marketing year, the USDA forecast a record high U.S. average yield of 166 bushels. That forecast is based on the linear trend of yields from 1990 through 2010 adjusted up by 2 bushels due to the expected positive impact of early planting. Production is forecast at 14.79 billion bushels, 2.432 billion larger than the 2011 crop. Feed and residual use of corn is projected to increase by 900 million bushels during the year ahead due to lower prices and a jump in residual use due to the size of the crop.

Exports are expected to increase by 200 million bushels, to 1.9 billion, while ethanol use is expected to be unchanged at 5 billion bushels. Year-ending stocks are projected at 1.881 billion bushels and the 2012-13 marketing-year average price is expected to be in a range of $4.20 to $5.00, compared to $6.10 for the current year. 

The USDA also sees an increase in corn production next year in Argentina, South Africa, Mexico, Canada, China, and the Ukraine. World stocks at the end of next year are expected to be 975 million bushels (19 percent) larger than stocks at the beginning of the year.

Soybeans

For the current marketing year, the projection of the domestic crush was increased by 15 million bushels and the projection of exports was increased by 25 million bushels, leaving the projection of ending stocks at 210 million bushels. The projected size of the current Argentine harvest was reduced by 92 million bushels and the Brazilian estimate dropped by 37 million bushels, further tightening the projection of year-ending world stocks.

For the 2012-13 marketing year, the U.S. crop is projected at 3.205 billion bushels, 149 million larger than the 2011 crop, reflecting a near record yield of 43.9 bushels. The domestic crush next year is expected to be 10 million bushels larger than that of the current year, while exports are expected to jump by 190 million bushels. Year–ending stocks are projected at 145 million bushels, reflecting a record low stocks-to-use ratio of 4.4 percent.

The 2012-13 marketing year average farm price is projected in a range of $12 to $14, compared to $12.35 for the current year. Under normal growing conditions, the USDA sees a sharp rebound in South American soybean production and world stocks in 2012-13.

Wheat

For the current marketing year that ends this month, the USDA raised the projection of U.S. exports by 25 million bushels and lowered the projection of ending stocks by the same amount. Very small adjustments were made in foreign wheat production estimates.

For the 2012-13 marketing year, the USDA projects the U.S. crop at 2.245 billion bushels, 246 million larger than the 2011 crop and the largest in 4 years. The projection reflects the NASS winter wheat production estimate of 1.694 billion bushels (up 200 million from the 2011 crop).

Spring wheat production forecasts are based on the March report of planting intentions, historic ratios of harvested-to-planted acreage, and trend yields. Consumption is expected to increase by 184 million bushels, mostly in feed and residual (50 million) and exports (125 million). Year ending stocks are projected at 735 million bushels, 33 million less than stocks at the beginning of the year. The marketing year average price is projected in a range of $5.50 to $6.70, compared to $7.25 for the current year.

Production of wheat in the rest of the world is expected to decline by 875 million bushels, 3.7 percent, from the large production of the past year. The bulk of the expected decline is in Kazakhstan and the Ukraine.

Marketing Implications

The projections for corn consumption during the current and upcoming marketing year continue to appear inconsistent. Feed and residual use appears under-stated for the current year and over-stated for next year. Prospective exports also appear under-stated for next year. On the production side, the USDA has started with very aggressive yield and production forecasts. It is not clear why 2011 was not included in the trend analysis of yields. Still a build-up in stocks appears likely next year and suggests prices will continue to moderate back to the levels of 2007-08 through 2009-10. Soybean forecasts are pretty much in line with expectations and support prospects for continued historic high prices. Wheat forecasts point to a return to a more normal balance of U.S. and foreign wheat production. Forecasts for the 2012-13 marketing year are subject to substantial change over time. The next check points for judging current forecasts will be the June 12 Crop Production and June 30 Acreage and Grain Stocks reports. Expect more surprises!

Commodities were range bound in April as the markets digested the implications of last month’s planting report. Soybeans have continued their rally and now stand at a three-year high after the USDA announced that U.S. farmers will plant the largest corn crop since World War II at the expense of soybean acreage. China shocked the market at the end of the month by buying 1.5 million tons of U.S. corn, the largest one-day sale since 1991. Optimal weather has farmers planting at a record pace across the Corn Belt as 53% of the entire corn crop has already been planted compared to the five-year historical average of only 27% by the end of April. So what does all this mean? Watch out for the markets wild cards!

Call them black swans, outliers or wild cards, they give the market fits. We may see a few this year, because farmers are at the center of some historical production swings. While grain trading is determined within a large supply-and-demand market, it’s the wild cards thrown into current tight supplies this year that will add volatility and possibly change on-farm production dynamics as we know them.

Thanks to a bullish environment and agree-able spring weather, USDA is expecting more corn acres. Overall supply is an important marketing factor, but demand from China and other overseas markets has an even greater impact, says Farm Journal economist Bob Utterback. “We are in a time period when the supply and fundamentals for corn and soybeans are still important but will indicate only about 40% of the price direction,” he says.

The Chinese wild card could be played. The U.S. Grains Council reports: “USDA has confirmed more than 3.9 million metric tons (MMT) of U.S. corn has been sold to China during the 2011/12 season. As I mentioned above just yesterday they bought their largest one day sale since 1991. With this sale it is possible that the current season could surpass the 1994/95 record of 4.287 MMT of U.S. corn sold to China.” That makes for a shaky corn market.

Another wild card is the Environmental Protection Agency’s recent approval of applications for registering ethanol in 15% gasoline blends. This is a significant step forward for E15 fuel—will more U.S. corn go to ethanol production this year? The record sale of U.S. corn at the end of April will set the bullish tone for grain prices throughout the summer and into the new crop marketing year. In addition there is no doubt that we will encounter many more bumps in road before fall harvest so keep your eyes and ears open.

Rumors circled the floor of the Chicago Board of Trade yesterday after members of the board of CME Group Inc. voted 9-1 to go to a 22-hour trading day, said Tom Grisafi of Indiana Grain Company.

While it is uncertain what the new hours will be, it is speculated that the CME Group seeks to go to a 6 a.m. to 4 a.m. trading day. Grisafi said this is in part to compete with the longer hours the InterContinental Exchange plans to implement May 14.

What would the proposed hours mean for farmers? The biggest concern Pro Farmer editor Chip Flory has about the change is an open market during USDA report days.

“If the market is open during report times, we will never see push or protection again,” he said. The changes will likely be of greatest concern for farmers who have exposed basis on a report day. “They are holding the most risk,” Flory said.