Weekly Market Recap and Tom's Take, August 14, 2020

26

Market Update:

September corn futures closed down ¾ c today at $3.24 ½, up 16 ¾ from last Friday’s close. December corn also closed down 3/4c at $3.38, but that was a 17 ¼ c gain from where we left off last week.

November soybeans closed down ¾ c at $8.98 ¾, up 31 ¼ for week-on-week. Finally, January beans lost ¾ c today and finished at $9.03 ¾ a 29 ¾ gain for the week

Wednesday’s WASDE report was overshadowed by the widespread storm that cut through central Iowa. Some of you may have heard the word “derecho” being used in reference to this storm. A derecho is a widespread, long-lived, straight-line wind storm associated with a fast-moving group of severe thunderstorms. 10 million acres of cropland were damaged, as well as millions of bushels of storage lost. Some areas saw winds over 112 MPH, and the stretches were as wide as 30-50 miles at times. Many communities were left without power for several days as crews worked to clear the damage and repair power lines. As clean-up efforts continue, it will take time to determine the exact totals of loss and the long-term impacts.

We still want to cover the WASDE report numbers with you, as variances in them and future reports could/should impact market movement. Let’s start out with some carryout numbers. 19/20 US corn carryout came in at 2.228 billion bushels, in line with trade estimates but on the lower end. U.S. soybean carryout for 19/20 came in almost as expected at 615 mil bu. For 20/21 ending stocks, corn feedings were pushed up to 5.925 billion bushels, putting new-crop ending stocks at 2.756 billion bushels. This was still within the range but below the average trade estimate of 2.8. For 20/21 soybean ended stocks, the USDA put them at 610 million bushels, within range but above the average estimate of 525 million. Looking at world carryout without getting too far in the weeds, the USDA lowered 19/20 world carryout on corn and soybeans, with soybeans coming in on the low end of estimates at 95.85 MMT vs. the average trade estimate of 99.08 MMT. 20/21 world carryout also came in within range but below the average estimates on corn and soybeans, but these were raised slightly from July’s report.

Yield estimate is probably one of our “favorite” numbers to look at in this report, and this month was no exception. The USDA put 2020 US corn yield at 181.8 bu/acre, with an average trade estimate of 180.4. The USDA’s number in the July report was 178.5, so a 3.3 bu/acre bump. Soybeans were more of a surprise because while everyone was expecting to see an increase in the yield estimate, the 53.3 bu/acre number blew by the upper end of the estimate range and was a 3.5 bu/acre increase from the July report. Again, it’s important to note this data was all pre-Monday’s storm, so we could expect some major adjustments in coming reports as the true extent of crop damage is assessed.

Pre-Harvest Meetings: This year, we are hosting 9, 30 minute virtual meetings/conference calls to cover pre-harvest topics, grain policy updates, and a meet and greet with our President and CEO, Matt Carstens. Register here and be entered to win a $50 gift certificate to a local restaurant in your area: https://marketing.landuscooperative.com/acton/rif/42104/e-018f-2008/-/l-tst:0/l-tst/showPreparedMessage?sid=TV2:in6yb00eT

Be sure to tune in to this week’s episode of the Bull Bear Banter for a special segment with FSA Brian Berns on the crop condition outlook after Monday’s severe weather.

Tom’s Take:

Over the course of the past few months, many of our Grain Marketing Advisors and I have heard from several people that regretted the decision they made last fall to use a marketing alternative instead of putting their bushels on storage. The comments come in many forms, but the basic message is along the lines of “I’ll never do that again”. During each of these types of conversations, we do our best to remind people of what they, and we, were thinking during Harvest 2019. Most of us expected a large increase in Chinese purchases due to what was eventually termed Phase 1. We also expected other demand sectors to remain steady or perhaps even increase. So, despite a large U.S. crop, we were optimistic that prices would rise. And at that time, we were also hearing that most farmers did not have enough grain (primarily corn) sold ahead of harvest - and they did not want to pay commercial storage. It was in that light that we suggested and encouraged the use of a marketing alternative.

In fact, we presented 3 different marketing alternatives before the 2019 Harvest that would avoid storage fees and cap shrink and drying on corn at 15% moisture:

  1. Extended Price – sell your cash and in effect, “buy the board” – this was shown to have the greatest risk/reward profile. For every cent the board went up, you capture the entire cent. We also said the same for every cent on the way down, you would lose penny for penny.
  2. Minimum Price – sell your cash and buy a call against either the March, May, or July board, depending on how much time you wanted to buy. This one had a more moderate risk/reward profile. For every cent up, you would only capture about half of the gain. But, your downside was known. Hence the term, Minimum Price. You would know EXACTLY how much downside you would be agreeing to if prices dropped straight down.
  3. Minimum/Maximum Price or Min/Max – similar to a Minimum Price Contract, you would sell the cash price, buy a call against the March, May or July futures, and at the same time, sell a call for the same month, perhaps 50 cents or more above the one you bought. This one had the lowest risk/reward profile, as your “floor” or minimum price would be higher, but your upside would also be capped.

As we moved through the rest of the marketing year, in almost every single case all of these 3 worked out better than if the bushels had been put on storage. But as we all know NOW, our assumptions weren’t correct. In hindsight, it’s very easy to see that just selling it in October or November would have been the best thing to do. But, things changed. And they changed in a very significant negative way. Corona Virus shut down large parts of the global economy for a major portion of the year. Oil demand and subsequently ethanol demand was drastically reduced. Feed demand declined. Prices dropped further and quicker than any of us imagined possible.

I have also used the analogy of a person that buys a new car, after doing a lot of homework. This person bought what they believed to be THE safest car on the market. That was their ONLY criteria: buy the safest car. And then, one day as they’re driving down the highway, paying attention to everything coming at them and operating safely, a drunk driver crosses the center line and plows right into them. In any other vehicle, they might be a goner, but they had THE car that prevented major injuries. However, the car is totaled. And they get angry at the car because it did not help them avoid this unavoidable crash. 

It’s kind of like that with any of these marketing alternatives. You had the vehicle to avoid storage prices and it did what it was designed to do, but it did not and could not prevent a major market crash as we have seen. So, I say don’t get mad at the vehicle, the marketing alternative. It was the drunk crossing the centerline, the MARKET, that caused the problem. Don’t throw the baby out with the bathwater.

Realize that by the time we get to harvest, anything unsold is subject to all market moves one way or another. We think you should minimize your risk as much as you’re comfortable with. If you truly no longer want to use marketing alternatives like these, then you need to get comfortable with forward contracting. Because putting it in a bin, whether yours or ours, is not going to prevent a major market meltdown any better than these three did. We still believe these marketing alternatives have a place in a well thought out marketing plan. But, they only work well if the market improves. If you don’t think prices will rise, you should just sell. However, if you are optimistic about prices and would like to know more about marketing alternatives prior to Harvest, contact your local Grain Marketing Advisor now. It’s a lot easier to learn about them before you need to use them.