Market Matters Blog
Katie Micik DTN Markets Editor

Friday 04/18/14

Railroad Delays Interrupt Field Work

OMAHA (DTN) -- Farmers are getting frustrated. Not only are they unable to empty their grain bins due to delayed railcar placements, but they are also concerned that rail delays will limit their ability to get fertilizer for spring field work.

Pictured is the first barge on Lake Pepin of the 2014 UMR shipping season. (Photo by Captain Larry Nielson, Lake City, Minn.)

"The rail problem is having a huge effect on us," said Dave Kjelstrup, who farms in the Underwood, N.D., area. "Urea cost is high because of transportation; in fact, some suppliers are telling their pre-paid customers they can't deliver the fertilizer. Thankfully, we have ours in bins on the farm."

Moving grain is still a problem, according to Kjelstrup. "The elevators are full and with no trains they can't get the farm grain in, and the bins in the country are full. Not serious now, but four months from now it will be. I personally can't move my sunflowers because Cargill can't move the oil and they are full waiting for rail cars."

Help may be on the way. On Tuesday, April 15, the Surface Transportation Board announced it will direct the Canadian Pacific Railway Company and BNSF Railway Company to present their plans to ensure delivery of fertilizer shipments for spring planting by Friday, April 18. The STB has also requested both railroads provide weekly status reports beginning one week later regarding the delivery of fertilizer on their respective railways.

The BNSF was one step ahead of the STB request, and on Monday, April 14, provided this plan on their website: "As we enter the next few weeks of peak demand for fertilizer, we understand the shortness of the season and the necessity of timely delivery in order to safeguard that producers can get this year's crops planted with the proper plant nutrients. BNSF is undertaking several specific actions to expedite fertilizer delivery to ensure our customers have the fertilizer where and when they need it." See the full announcement here: http://bit.ly/…

While elevators and farmers are hopeful the railroads get the fertilizer moved, it's a "catch 22" situation as the delay in grain car placement continues to keep elevators at a standstill.

Paul Lautenschlager, manager at Beach Co-op Grain in Beach, N.D., said his elevator is currently seven weeks behind in receiving cars, which prohibits him from accepting anything other than pre-contracted grain.

According to the last podcast update by the BNSF on April 11, ag rail car placements in North Dakota are still behind by over 7,000 cars and actually got worse from one week ago. The total of cars owed in the U.S. was barely improved from the prior week at 15,099 versus 15,127 one week ago. Days late increased again with the entire U.S. average at 26.7 days late versus 25.7 one week ago. North Dakota is behind 7,216 cars and later than last week at 26.1; Montana improved slightly at 3,300 cars behind but also later than last week at 31.6; Minnesota is behind from one week ago with 1,313 cars but days late improved to 23.5 and South Dakota is slightly better with 1,020 cars behind but got further behind at 28.7 days late. The entire April 11 podcast can be heard here: http://bit.ly/…

In his written testimony to the STB April 10 hearing, Robert Zelenka, executive director of the Minnesota Grain & Feed Association, gave an example of how rail delays affected one unnamed grain elevator on the Canadian Pacific railway. "This elevator ordered its rail cars two months early, but the cars ended up 12 days late," he said. "This cost the elevator nearly a quarter-million dollars in late charges on a 100-car corn train. In contrast, the CP has no penalty for late car placements. One of our biggest concerns looking forward is the likelihood of going into this fall's harvest with elevators close to full of grain and no freight to ship it." He said in a separate interview that, "This is as bad as I have seen it in my 33 years in this job, and there are several elevators that stand to lose a lot of money as a result of the poor service be provided to grain shippers."

CANADIAN FARMERS HAVING TROUBLE MAKING ENDS MEET

Cash flow issues are mounting across the Canadian Prairies. "Lack of cash flow due to poor grain movement is impacting producers' ability to cover last year's debt, while making it difficult to meet this season's input needs," said DTN Canadian Grains Analyst Cliff Jamieson. A piece by the Globe and Mail suggests the demand for last season's federal cash advance program, which loans $400,000 with the first $100,000 interest-free, saw a 50% increase in demand, while next year's program has also already generated interest in the past two weeks.

Meanwhile, debate surrounding Bill C-30, the Fair Rail for Grain Farmers Act, has been delayed until after the holiday weekend.

"While railways may be hitting the government-set target of 500,000 metric tons or approximately 5,500 cars for each of the two railroads, some farm groups continue to suggest it's not enough and that further changes in the legislation are needed to not only clear the current backlog of cars but the meet the needs of the future," Jamieson added. "The Western Canadian Wheat Growers Association would like to see a higher weekly target set for grain shipping, stating that the current weekly movement will continue to leave in excess of a 20-million-metric-ton carryout on farm by the end of the crop year and will lead to depressed prices for some time to come. As well, the Keystone Agricultural Producers passed a motion calling for increased running rights, which would force both railways to open their track to competing railroads as a means of increasing competition."

SMOOTH SAILING FOR BARGES ON LAKE PEPIN

On Monday, April 14, the USACE St. Paul, Minn., District said, "Our ice measurement team went out to Lake Pepin today to survey the current conditions only to discover that there wasn't anything to measure!" Then on Wednesday, April 14, the Angela K moved through Lake Pepin, pushing 12 barges and officially opened the 2014 Upper Mississippi River shipping season. Elevator operators on that portion of the river anxiously awaited the barges that would allow them to load grain bound for the Gulf, making space for farmers who have been waiting longer than usual to haul in grain they sold for opening.

DULUTH GRAIN SHIPPING SEASON STILL ON ICE

With open water along the North Shore of Lake Superior, the first upbound convoy of lakers arrived in port on April 14.

According to Adele Yorde, public relations manager at Duluth Seaway Port Authority, the first full convoy of downbound lakers was loaded and lining up to leave for the Soo Locks midday on April 15. "The convoy will be headed by the heavy icebreaker Mackinaw as they still expect to run into solid ice fields as they head south below Isle Royale toward Whitefish Bay," Yorde said.

According to the Daily Great Lakes and Seaway Shipping News, "It has been almost a month since the Soo Locks opened for business, but traffic is still moving at a historically slow pace. There are currently more than 40 ships waiting to get through the locks, and at this point the flow of traffic is at Mother Nature's mercy. Ships are lined up throughout the St. Marys River system, waiting for their turn to go west across Lake Superior."

Jim Peach, Soo Locks assistant area engineer, told the Seaway Shipping News, "This is one for the record books as far as anybody's living memory; as for anybody on our staff this is the first time we've experienced this much delay." Next week's ship schedule still does not show any salties scheduled, which keeps grain from leaving the port later than normal. Updates on the convoys can be found here: http://www.boatnerd.com

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow Mary Kennedy on Twitter at @MaryCKenn

(AG/CZ)

Posted at 12:53PM CDT 04/18/14 by Mary Kennedy
 

Monday 04/14/14

Regulators Are People, Too

The Commodity Futures Trading Commission's relationship with the grain industry is rocky, at best. The House Agriculture Committee reprimanded the Commission's rulemaking process last week by including language in a bill that undid a controversial rulemaking on residual interest, a concept that commercial hedgers argue would cause the cost of hedging to skyrocket.

For the moment, it appears the grain industry dodged an expensive bullet, but the House bill reauthorizing the CFTC has a long journey before it becomes law. The full House must pass the bill; and Senate Agriculture Chairman Debbie Stabenow, D.-Mich., told a group of ag journalists last week that she hopes to bring her bill to a committee vote by the end of the year, if the election doesn't interfere.

House Ag Chairman Frank Lucas, R.-OKla., made it clear he wasn't pleased the bill had to undo what the CFTC did.

"If they (issues) can be addressed as the bill is moving along, they could have been addressed when concerns were raised over the course -- in some instances -- of two or three years before," Lucas said. "So, while some of my friends in bureaucracy in the commission would assure you that rulemaking is the best way to go, I still have this funny idea that Congress needs to draft the laws and that our friends in the bureaucracy are there to implement the laws. But then, the era of the previous chairman is over with, and now we need to enter into a new era."

Former CFTC Chairman Gary Gensler earned quite a reputation with the ag crowd in Washington. A Financial Times article on Gensler's retirement at the end of 2013 summed him up pretty well: "Gary Gensler is regarded by some as one of the toughest regulatory cops policing Wall Street. Over the past five years, the former Goldman Sachs banker helped transform a sleepy Commodity Futures Trading Commission into a more powerful regulatory force.

"His critics, however, say he has been a bull in a china shop, so unyielding in his push for derivatives reforms that he has left confusion and anger among U.S. lawmakers, overseas regulators and market participants." (For the full article, http://on.ft.com/…)

My impression is Gensler fell into the "bull in a china" characterization for most in ag that worked with him. Very few people want to criticize him publicly, but one of the more mild terms I've Gensler described as is "doctrinaire."

I've also learned that much of the frustration with Gensler was actually directed toward his staff, which I've frequently heard was the most troublesome for ag groups to work with.

So while there's a big, public turnover in CFTC leadership, the turnover in staff is worth noting, too. Some of Gensler's staff will stay at the CFTC, but a fair number are retiring or leaving for greener pastures.

Regulators are people, too. Sometimes it's easy to forget that while a government agency issues rules, real people author it, negotiate concerns and ultimately shape the outcome. It's why the turnover in commissioners and staff matters. It's a chance for CFTC and the grain industry to build new relationships and work towards a better (or worse) relationship.

There's hope the grain industry's relationship with the CFTC will improve when the new nominees are confirmed. The three nominees may lack agriculture experience, but several folks in D.C. have mentioned they seem genuinely interested in making sure the futures markets function properly for commercial participants. So far, Timothy Massad, Chris Giancarlo and Sharon Bowen have left agriculture leaders with the impression they're good listeners that'll be easier to work with than the prior commission. They've acknowledged their lack of background and have been urged to hire knowledgeable staff to support them.

We'll just have to wait and see whether the change of guard at CFTC rekindles warm feels or sparks a nasty break-up.

Posted at 4:46PM CDT 04/14/14 by Katie Micik
 

Thursday 04/10/14

Observations of a Weary Traveler

Suitcases, frequent flyer miles and hotel rooms -- I've become very well acquainted with all of them in my time with DTN. My most recent journey started on Hilton Head Island in South Carolina for the National Grain and Feed Association last week. Then I traveled through sprawling pine forests to a small town northwest of Augusta, Ga., to visit some family.

I spent a split second back in Omaha, with just enough time to unpack, repack and sleep for a few hours before heading to the airport for my next flight. This trip to Washington, D.C. included the North American Agricultural Journalists conference and the usual WASDE report lock up.

I landed in Omaha around 4 p.m. last night, and the first thing I did was sort through my seed packets, till my garden and plant onions, broccoli and lettuces.

It's hard for me to believe we're ten days into April already, and the first thing I'm working on today is sorting through the mountain of notes and observations from travels. Here's a brief look:

NGFA

Every conference and every commodity organization has its defining characteristics. Like every NGFA Annual Convention, the bronze statue of Ceres, the goddess of grain, passed from one office to the other. Two lifetime achievement awards were handed out, and one recipient also received a garden gnome to acknowledge his favorite past time.

CME Group's chief operating officer sat in a leather armchair for a question and answer session. Bunge and Co Bank sponsored receptions. The general session presentations were broad and forward thinking, but the conversations in committee meetings and hallways addressed the hot-button issues: Viptera and Duracade's impact on country elevators and the supply chain and this winter's transportation logjam.

Unlike years past, MF Global and enhanced customer protections faded into the background as conversations shifted to the changing complexion of CFTC commissioners and how the agency's zeal could change the way end users do business.

I picked up a few interesting tidbits at the conference that don't quite have enough meat to become stories just yet. (I wrote about the Duracade issue last week, and a CFTC story is in the works.)

-- More than 311 million bushels of emergency storage and 543 mb of temporary storage were constructed this year to hold our bumper crops. The top states (in order): Iowa, Nebraska, South Dakota, Minnesota, Kansas. Usually, the temporary and emergency permits only last until the end of March, but Candace Thompson from the Farm Services Agency said elevators can apply for an extension. The agency's been flexible in the past, and "I think with the transportation issues this winter, we'll more than likely extend, but we must see that warehouse operators are trying to move grain out."

-- The corn and hogs futures contracts are under review by CME. The exchange regularly reviews its contracts to assess how well they work for the marketplace. If you’ve got a concern about how these contracts work for you, please get in touch with the CME. They’re open to ideas. One idea brought up in a committee meeting was whether or not a variable storage rate would be pertinent for corn and soybeans.

TIMBER! AND PINE POLLEN GALORE!

The shortest route to McCormick, S.C., from Hilton Head took us down bumpy, worn-out logging roads. We passed through areas where they were burning off undergrowth, areas where crews felled trees and areas re-growing from logging.

I couldn't count the number of trucks hauling trees or 2x4s. We passed at least three lumber mills you could see from the road. The timber industry is much larger than I had ever imagined, and driving down those narrow logging roads made we want to learn more about how the industry works, and if that rural livelihood is flourishing or struggling. I simply don't know.

That brings me to something I learned a lot about: pine pollen. Everything was coated in a yellow-green dust. We were out fishing one afternoon and a front came through. The wind blew giant clouds of green smoke out of the woods, and the haze hung around all day. It was a sight to see, if you'd already taken allergy medicine.

AG REPORTERS

A group of 15 or so ag journalists took a tour of the NASS lockup room earlier this week. I tagged along, even though most of the information wasn't new to me. It was interesting to walk through the steps of how a report is assembled and understand what happened in various rooms down the hallway from the press lock-up facility.

Perhaps more interesting -- and I didn't realize what happened until after we left -- was that Hubert Hammer was pulled away momentarily, and when he reentered the room, he made a comment that he had work to do too. A little while later, I noticed the Twitter comments on a picture of the analysts' room where they decide NASS estimates made a lot of references to delays. My hunch is that Hammer was pulled aside to be notified of the delay to crop progress reports. I don't know anything about why they were delayed, and didn't put two and two together until I'd left the building and lost my chance to ask.

(CZ)

Posted at 2:35PM CDT 04/10/14 by Katie Micik
Comments (1)
I'd sure do what you do for about 10 days. You see and feel hands on things we hear about and don't realize the temperatures, winds, "pollen", smells etc. Do people say hello, are they friendly or they just living their own little world. Let me know and I'll use some of those frequent flyer miles for you.
Posted by STEVEN SWANHORST at 2:34PM CDT 04/12/14
 

Friday 04/04/14

Baseball Season Opens, But River, Head of Lakes Grain Season Still on Break

OMAHA (DTN) -- Shuttle rail cars seem to be finding their way to elevators in the Northern Plains and some rail is beginning to move in Canada to ports full of waiting ships. However, one railroad official said rail car shortages will continue through winter wheat harvest.

Rail car movement is improving slowly, but problems probably will still exist when winter wheat harvest rolls around. (DTN photo by Elaine Shein)

"Gradual improvement" has occurred across the BNSF system due to grain loadings increasing over the past few weeks, BNSF Vice President John Miller said in a March 28 podcast. However, North Dakota users are probably not convinced as they wait for 7,541 cars versus 7,472 cars the prior week. That number is 46.8% of the total number of cars the BNSF owes in the United States.

Regarding the upcoming winter wheat crop, Miller said, "As we know, winter wheat harvest is fast approaching. In past years when there was plenty of available freight, the BNSF has been able to strategically preposition covered hopper cars to meet harvest demand. Due to the car order backlog we are currently experiencing this year, we will have limited availability to preposition cars."

Miller said the total number of cars the railroad was behind as of March 28 was at 16,112 versus the prior week at 15,343. North Dakota and three other states account for 87% of those late cars; South Dakota is behind 1,372; Minnesota is behind 1,599; and Montana is behind 3,468 cars. Since the middle of February, the total number of cars late has increased by 4,277 and cars behind in North Dakota have increased by 2,480.

Velocity has increased from 155.6 miles per day to 159, Miller said, but shuttle turns per month (TPM) to the PNW was slightly lower at 1.9 TPM. The only improvement reported for shuttle TPM was at the Texas Gulf which went from 2.5 TPM to 2.8 TPM in one week. The trip from the Northern Plains to the PNW has experienced severe conditions most of this year in part due to the extreme cold weather. On top of that, there were derailments of oil and grain cars, there was an avalanche affecting traffic through Montana and recently, there was a mudslide in Washington affecting service there. According to the BNSF, service was restored to one main track in Washington late on April 1 with the second main track expected to open April 2. However, the BNSF stated on their website that, "Customers may experience delays of 24 to 36 hours on shipments moving through this corridor."

The entire BNSF podcast can be heard here: http://goo.gl/…

CANADA'S RAIL BACKUP CONTINUES

The CN Railway will soon start to place the weekly minimum car requirement set by the government, CEO Claude Mongeau told news organizations this week. But CN is concerned added car volume may overwhelm grain facilities and create further problems.

"A war of words has broken out between the grain industry and the railways," said DTN Canadian Grains Analyst Cliff Jamieson. "The railways point towards the potential for the grain industry to fail in meeting the targeted volume of one million tonnes per week, while the grain industry claims they can handle even more if the railways were to only maximize movement into each of the five freight corridors -- the west coast, Thunder Bay, eastern Canada, the U.S. and the domestic industry.

"CN hit approximately 5,100 cars in week 34, with the goal to soon reach 5,500 weekly in the coming weeks, while CP will be doing the same. Small shippers have expressed frustrations over warnings from the railways over the potential detrimental impacts of the pending legislation," Jamieson said.

"Farm groups presented to the House of Commons Agriculture Committee this week on the concerns surrounding the proposed government legislation to address the grain shipping backlog. Many point to the need for clarity around the definition of acceptable service, while are concerned about the need for equitable treatment as railways are placed in a position to determine which regions see shipping, which grains move along with what direction the movement will take place as they ramp up movement to meet the government mandate."

ICE STILL TOO THICK ON LAKE PEPIN

Ice thickness on Lake Pepin has improved a little, but most of the lake is showing ice depth of 19 to 26 inches, according to the latest ice measurements by the USACE, St. Paul District. Barges are unable to break through ice that is deeper than 12 to 15 feet without risking damage to their vessels. The other part of the equation is the amount of blue ice versus white ice and currently there is more blue than white. The USACE describes the difference as: "Blue ice, sometimes called black ice, is clear and solid. White ice or snow ice has air bubbles. Together they equal the total ice thickness." Basically, blue ice is harder to get through.

See the entire report and graphs here: http://goo.gl/…

LAKE SUPERIOR STILL FIGHTING ICE; CUTTERS LIMP HOME FROM THUNDER BAY

While progress has been made in Duluth in handling the extreme ice cover this winter in the Great Lakes, some areas are still battling thick ice. Ice cutters have been traversing the Great Lakes from Duluth to Thunder Bay to the Straits of Mackinac in order to clear the way for ships.

Adding to the time consuming task was damage to two ice cutters last weekend while trying to cut ice in Thunder Bay and along the Canadian shoreline, downbound to Whitefish Bay and eventually through the Soo Locks. Both ships had to be helped back to port in Duluth for repairs.

Mark Dobson, Coast Guard vessel traffic controller in Sault Ste. Marie told news organizations early this week, "The ice thickness the cutters are encountering was at least three feet in some places, four feet in others. In the middle of Lake Superior, ice rubble fields six feet thick were being encountered."

See an update here: http://duluthshippingnews.com

SPRING THAW MAY BE NEAR

Help may soon arrive from Mother Nature, according to DTN Senior Ag Meteorologist Bryce Anderson. "Temperature trends next week should offer some thawing in northern crop areas," he said. "The core of the latest cold-air pattern will migrate from the Canadian Prairies into Ontario and Quebec, and this will allow for a more westerly air flow and a more moderate pattern. Overnight lows will be around the 28-33 degree F mark with most daytime highs ranging in the low 50s F."

Mary Kennedy can be reached at mary.kennedy@dtn.com

Mary Kennedy can be followed on Twitter @MaryCKenn

(ES/CZ)

Posted at 1:47PM CDT 04/04/14 by Mary Kennedy
 

Thursday 03/27/14

Overbooked China Diverts Shipments to the U.S.

It appears that overbooked Chinese soybean importers have diverted shipments to the United States, split between deliveries to the East Coast and the Gulf of Mexico.

DTN analysts report that three industry sources in the U.S. and Brazil say that 20 cargos, or roughly 18.4 million bushels, that were originally booked for delivery to China have been sold to the United States in the past week.

One source noted that China rolled another 20 shipments to a later delivery date. Another source added that an additional six or seven cargo loads could be on their way to the U.S. soon.

"The global soybean situation is interesting because the U.S. doesn't have the supplies to meet its current commitments and China has overbooked," DTN Senior Analyst Darin Newsom said. "The result is an equally interesting coming and going of ships leaving port in the U.S. headed to China while at the same time, China may be redirecting some of its purchases from Brazil to the U.S."

An article in the Wall Street Journal on Thursday morning highlighted that private Chinese importers were backing out of deals on soybeans and rubber, "adding to a wide range of evidence showing rising financial stress in the world's second-biggest economy."

The article went on to say: "But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals." (You can read more here: http://on.wsj.com/…)

Those risky Chinese financing deals -- China's made them on soybeans, too. DTN China Correspondent Lin Tan explained in an article in late January that some Chinese importers used soybean import contracts to access credit in China's tight lending environment. Here's an explanation from that article:

"Companies have found they can get credit from the bank much easier by using soybean import contracts as collateral because it's normal import business. For example, a soybean importer signs a contract to buy beans, takes it to the bank and gets a loan. Often, they sell the beans to another crusher, or if the price is right, they'll cancel the contract and use the funds for other purposes."

China's soybean crushing margins are negative right now, another reason why they don't want more cargos to show up at their docks. After several years of rapid expansion, Tan told DTN there are two kinds of companies that could go bankrupt in this kind of market: the ones with no experience, and the companies that bought soybeans for financial reasons.

His sources in China indicate that at least three soybean crush companies could default on Brazilian bean purchases at a rate of about 10 cargos a piece.

The diverted shipments to the U.S. point squarely to tightness of U.S. domestic supplies. Newsom said USDA’s projected 35 mb of imports would fall well short of allowing the U.S. to meet its commitments. To do so would require at least two to three times that amount.

"The idea that it is better for shipments to be coming to the U.S. now rather than waiting for early summer is spot on," Newsom said. "Again, it is another indication of just how tight U.S. supplies are and how tight merchandisers are expecting them to get. By June we would be scraping the bottom of the bins, leading to a skyrocketing inverse in the futures spreads and extremely strong basis. This way it may be a more orderly short supply rally into summer."

Posted at 4:20PM CDT 03/27/14 by Katie Micik
 

Tuesday 03/25/14

Parts of Ag Confidence Index Show Correlation to Corn Prices

One of my favorite parts about the DTN/The Progressive Farmer Agriculture Confidence Index is that I do a lot of interviews with farm broadcasters. It's fun to be the "expert" in interviews every once in a while.

The blue line shows DTN's index for crop producers' present situation. With the exception of September 2012, it closely tracks the national average cash price of corn. (Chart by Darin Newsom)

One of the broadcasters asked me about the role the weather plays in the index's findings. I had, after all, discussed at great length how the index reflected the past year's corn price decline, and that's not exactly what the conversation had been in the past.

It's an interesting question, and one that doesn't have a hard and fast answer, but we're getting closer. We now have four years of data to look at, and that's a big step. When we first wrote stories about the Ag Confidence Index, it was difficult to pick out trends and explain the drivers. There just wasn't enough data for comparison.

Last week, I asked DTN senior analyst Darin Newsom to dig into the numbers a little bit for me, particularly whether the index tracked along with the price of corn. Newsom found that when you look at crop producers' response separate from livestock producers responses, there was a correlation when you look at how farmers rate their present input and income situation.

"The strong correlation between the monthly close of the DTN National Corn Index (national average cash price, or NCI.X) prior to the collection of data for the Ag Confidence Index highlights just how heavily the corn market can influence opinion," Newsom said. "The chart compares the NCI.X with the current grain producer index, with the two showing a very strong correlation of 72.5%. As for the general index, the previous monthly close of the NCI.X has a correlation of approximately 64%, still a strong tie.

"Yes, I understand the statistical rule that correlation does not prove cause, but the link between the two seems mostly unbreakable. I say mostly because of the outlier Ag Index from September 2012. That month saw the index drop 20 points from the March numbers despite cash corn closing at an all-time high. It is just as interesting to note that the Ag Index bounced back for the next release in December 2012."

September 2012 was an interesting point in time to take a survey of the sentiment of farmers -- that summers' "flash drought" robbed them of good yields, and many were just figuring the damage. Our methodology asks farmers to rate their current input prices as good, bad or normal. Then we ask whether they think prices will be better, stay the same or get worse 12 months down the road. We ask the same questions about farm income. That fall, we saw a strong shift in how farmers viewed their income. More than 25% of farmers called their income "bad," up from 10% in the spring. My guess is that this reflects farmers who forward contracted grain early in the season and got caught upside down. Also, our survey was taken before the harvest price for crop insurance was set. So there were a few variables that could explain why that fall's reading broke away from the correlation to corn prices.

Now, let's return to my friend's question on weather's impact on the index. The weather during the growing season of 2012 took a distinct toll on the psyches of farmers before harvest. Production concerns reigned, and higher prices appeared to be a small consolation. As farmers tallied the elevator tickets and reconciled their checkbooks, higher prices alleviated some of the angst.

What we don't know yet is if this pattern in our index would repeat if we encountered another 2012-esque growing year. Will September 2012 become an outlier in our data set? It'll be on the "things to watch for" list.

One other note on the weather: I think weather plays an important role is in how farmers define their expectations for the year ahead. No one can plan for the weather. We talked to Peru, Ind., farmer Allie Wilson last week, who said he expects income will be lower in 2013, but he could see 2014 income going either way.

"It all depends on what Mother Nature gives us this growing season for 2014 farm income," Wilson said.

So, I've laid out the case for market prices and for the weather. There's still plenty to study. For instance, how closely to farmers' expectations of conditions 12 months from now track with the next year's December futures prices? And, with the corn supply expected to grow this year, will the correlations shift to soybeans as that crop makes up a larger portion of income?

Like Newsom said, correlation is not cause, but it provides an interesting window into the data.

(CZ)

Posted at 11:54AM CDT 03/25/14 by Katie Micik
Comments (1)
Katie & Darin, Even as far out as North Dakota, Corn prices & the Confidence Index of Agriculture are strongly correlated. We never used to consider Corn a consistent agronomic Upper Great Plains top income performer. With all of the positives in todays Varieties, Renewable Fuels Standards Corn production & confident are directly linked. Were far from the I'-State's but even out here w/ 90-day maturity corn hybrids & premium corn values ;;; big expectations with corn drove great enterprise investment and expansion. Now it both price and confidence are greatly moderated.
Posted by Dale Reimers at 9:59PM CDT 03/25/14
 

Monday 03/24/14

Ag Confidence Index Foreshadows Things to Come

The latest results of the DTN/The Progressive Farmer Agriculture Confidence Index highlight a very predictable trend: as commodity prices decline, crop producers feel the pinch and livestock producers become more profitable.

Some trends are bold and hard to ignore. Others are more subtle, more like foreshadow than forecast. Five simple questions make up the Ag Confidence Index survey, but the breakdown of responses from different categories of farmers (region, crop/livestock, annual sales) provides lots of food for thought. It's an intriguing exercise, but often needs the statistical disclaimer that whenever your narrow your sample size, the data's not always representative.

That said, Robert Hill, an economist at Caledonia Solutions who helped design the DTN survey, found a few pieces of data that reflect some interesting trends that go beyond the "livestock, up; crops, down" trend.

Every ag economist these days points to projected profit margins for crops that are thinner than the past few years, and remarks that profitability will, by and large, depend on a farmer's land costs.

One piece of the data DTN collects in its survey categorizes farms by annual sales (remember my smaller sample size disclaimer). This time, it showed that farms with more than $1 million in annual sales were very pessimistic. Farms in the $500,000 to $1 million range sat at neutral. Both groups' expectations for income and input costs in the year ahead appear grim.

"We may be seeing an interesting phenomenon playing out in how land prices work their way through the market by size of farm," Hill said. "Larger operators feel the pressures of land price movements long before the smaller operators. So there is a lag effect of land prices through the market, where first it seems to be felt by the larger operators and then after some time, the effect ripples through to the smaller operators."

The second trend Hill pointed out is one that's been a long time in the making.

"The big surge in capital expenditures on farm equipment and land is behind us. We have entered a period of more rational behavior on such expenditures," Hill said. "Three main factors may explain this draw down on capital expenditures. First is the fact that the farm fleet has been substantially upgraded during the surge of the past 3 to 4 years. Second is that the tax advantages of year-end purchases are disappearing. Third is that prospects for net farm income are down from historical highs. Farmers now are entering a cycle driven more by 'replace as needed' for their equipment."

What do you think, readers? Are cash rents on your mind, and how are they going to affect your income prospects this year? Are you going to hold off on equipment purchases next year?

Posted at 1:07PM CDT 03/24/14 by Katie Micik
Comments (1)
Katie, Your story is correct on all accounts. Larger landholders are apt to feel more immediate pain from the slimming of margins. And Equipment is wonderfully upgraded by all farms at this time. No need to spend further on Equipment for several years. Land will be very selectively purchased from now on under these low-margin propositions. Balance Sheets are strong and if a small parcel with quality fits a grower it will still sell very strong. But selectivity will dominate our grower land purchases more than it did in the $7.25 corn years. Controlling costs is a dominant concern this year.
Posted by Dale Reimers at 9:46PM CDT 03/25/14
 

Friday 03/21/14

Rail Service Slow to Recover

OMAHA (DTN) -- Despite weather easing as we move into spring and some small reductions in the number of late rail cars in a few states, the number of days that cars were late increased in the past week and shuttle turns are taking longer than usual. In addition, those needing rail cars to fill are paying more.

Empty railroad tracks are a sign of the times in Canada where available railroad cars are in high demand. (DTN file photo by Elaine Shein)

The spike in average March non-shuttle secondary railcar bids/offers per car "added $0.45 per bushel to the cost of shipping grain in jumbo hoppers" for the week ended March 13, according to USDA's weekly Grain Transportation Report. Record high shuttle freight costs "added $1.47 to the cost of shipping grain in jumbo hoppers, USDA reported. "These costs are in addition to what shippers must pay directly through tariffs and fuel surcharges (that change monthly), which currently total between $4,000 and $6,000 per car on key BNSF grain routes." Mileage based fuel surcharges for all railroads can be found at: http://rsi.rsilogistics.com/…

Two key states in the western Northern Plains -- North Dakota and Montana -- are still seeing the number of late rail cars increase, according to a BNSF podcast on March 14.

"Late cars in North Dakota were at 7,305, up 9% from the March 6 report. The average days late were 22.4, up from 18.6 days two weeks ago," said John Miller, BNSF vice president. "Montana showed 3,176 late cars, up 9% from March 6. Average days late were 23.2, up from 18.8 days two weeks ago."

Other states named by Miller showed decreases in the number of late cars, but the cars that were late were later than they were last week. Minnesota had 1,309 late cars, down 5% from a week ago and those cars averaged 23 days late, compared to 20.5 days the prior week. South Dakota reported 1,284 late cars, down 8% from March 6, and those cars averaged 21.8 days late compared to 19 days the prior week.

The entire podcast can be heard at http://goo.gl/…

FOCUS ON NORTH DAKOTA

In eastern North Dakota, Finley Farmers Grain & Elevator Co. manager Dave Fiebiger said, "Getting cars isn't the problem for me, it's the cost of getting them. ... If you want March cars, the conversation starts at $7,000" per car for shuttles. As for getting shuttles placed, he said he had shuttles placed on March 9 and March 15. "The cars billed March 10 were pulled March 14 and the cars billed March 16 were pulled on March 17." These turn-around times, from cars arriving at the elevator, getting filled and the railroad actually pulling the full cars away from the elevator, are longer than usual.

Shuttle turn times for the whole BNSF system averaged 2.1 turns per month versus the normal average of three turns per month.

Farther west in Beach, N.D., Beach Cooperative Grain Company manager Paul Lautenschlager is not very optimistic. Earlier this week he said his 27-car COT train ordered for Feb. 1 was finally spotted at his siding, but was missing 23 cars. As for service and freight costs in his neck of the woods he said, "Beach Co-op Grain is seven weeks behind in railroad service. I bought a 24-car COT for mid-April shipment last week. It cost me $2,800 per car. I called the railroad to place it and they told me without a smile I would not see that train until June."

Lautenschlager added, "Today I am seriously looking at buying a May train for $3,000.00. This situation is not good nor is it going away any time soon. Maybe years if you ask me. Obviously the railroad will eventually get caught up. They have not offered any cars for sale in the COT auction for over two months now. Secondary freight is running out and that is why it is so expensive. I am out of cars."

This must frustrate Lautenschlager's patrons as well. A notice on the company website pretty much sums up his current inability to get rail cars and ship grain: "We are only taking contract wheat. No cash or price later."

CANADA RAIL STRUGGLES CONTINUE

Canada's two major railways unloaded 569,800 metric tons of western grain in the week ending March 16, DTN Canada Grains Analyst Cliff Jamieson reported. This volume was almost entirely made up of West Coast unloads at the Port of Vancouver and Prince Rupert. This is 25.6% higher than the combined volume unloaded in the previous week at the Pacific ports as well as Thunder Bay and Churchill, although remains well below the one million metric ton weekly target as mandated by the federal government, which is to start in April.

"Frustrations remain high," Jamieson said. "Prairie oats are not moving south as a result of the focus on western movement. Some terminals have expressed their doubts that the government target can be reached, while the Provinces of Alberta and Saskatchewan have suggested that the weekly target as well as the daily fine for not hitting the target are not set high enough, setting their sights on a 13,000-car-per-week target for the two railroads combined rather than the 11,000-car target in the order, while preferring to see a daily fine of $250,000 rather than the $100,000 per day as announced by the government."

On moving Canada's 2013/24 crop, CN CEO Claude Mongeau said, "It will take more than the summer, continue into the fall, into next year." This is not welcome news for producers who have contracts that are months overdue, or are waiting for supplies to tighten on the Prairies, which will in turn improve basis levels on new sales.

RIVERS FLOWING SMOOTHLY

As water levels increased on the Mississippi River near St. Louis and ice began to break up and melt on the Illinois and Ohio rivers, more barges were able to get downriver to the Gulf for export.

Barge freight has moved lower, most noticeably on the Illinois River, where freight costs dropped 60% to 65% this past week for March barges. "During the week ending March 15, barge grain movements totaled 757,024 tons -- 45% higher than the previous week and 71% higher than the same period last year," reported USDA. "During the week ending March 15, 479 grain barges moved down river, up 41.3% from last week; 726 grain barges were unloaded in New Orleans, up 5% from the previous week."

With better water conditions, more empties were able to make the trek upriver for loading, which added to a lower cost in barge freight as well. "For the week ending March 15, 665 total barges, were able to transit Mississippi River Locks 27, Arkansas River Lock and Dam 1, and Ohio River Locks and Dam 52, up 371 barges from the previous week," USDA reported.

The only area of the river still not 100% open for business is the UMR, St. Paul Distinct. The USACE has been measuring the ice depth in Lake Pepin and it is thicker than in years past. The next measurement should be taken March 26 and shippers in that area are hoping to be able to start loading barges by mid-April.

NOAA released its spring flood outlook on March 20, showing minor to moderate risk in the Midwest. "Recent snowmelt has increased the near-surface soil moisture and elevated the potential for rapid runoff from rain events," NOAA reported. "In addition, significant river ice increases the risk of flooding related to ice jams and ice jam breakups." The concern over ice jams is that they could affect the operation of the locks and dams along the river, many of which are currently under repair due to damage sustained over the winter.

DTN Senior Ag meteorologist Bryce Anderson said the NOAA outlook is reasonable and there may be some planting delays in some areas of the Corn Belt.

"The NOAA spring flood outlook has a category of "moderate" for much of the Mississippi and Red river valleys, along with the upper Missouri basin as well as the Great Lakes, with a rating of "minor" in the Ohio Valley. This is a reasonable outlook considering the moderate snow cover in the Upper Midwest and the northern Rockies. Combine this with a below-normal temperature outlook for the rest of March through April, and I think we will see some issues with flooding-related field-work delays in portions of the Corn Belt this spring. The flood outlook also may complicate river transport at times during the next couple months."

The complete outlook can be found on the NOAA website: http://www.nws.noaa.gov/…

Mary Kennedy can be reached at mary.kennedy@dtn.com

(CZ/SK)

Posted at 3:44PM CDT 03/21/14 by Mary Kennedy
 

Wednesday 03/19/14

CME Shifts to Variable Daily Limits

OMAHA (DTN) -- The daily limits on how far grain futures contract prices can move each day will be reset twice a year according to a new formula, CME Group announced on Wednesday.

CME Group's proposed new variable price limit mechanism will allow higher limits when futures prices are high and lower limits when prices are low. (DTN file photo by Jim Patrico)

The new variable price limit mechanism will allow higher limits when prices are high and lower limits when prices are low. It replaces the current fixed limits of 40 cents per day in corn contracts and 70 cents per day in soybean contracts.

The variable limits, which must be approved by the Commodity Futures Trading Commission, are scheduled to go into effect on May 1 for all standard and mini corn, soybean, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, oats and rough rice contracts.

CME will also eliminate daily price limits on all of the grains and oilseeds options products.

Dave Lehman, CME's managing director for commodities research and development, said the variable limits proposal is on track for CFTC's 45-day approval process.

CME last changed limits on futures contracts in August 2011, when it boosted corn's daily limit from 30 cents to 40 cents. CME previously raised corn daily price limits to 12 cents in 1993; 20 cents in 2000; and 30 cents in 2008.

CME began working in a new price limit mechanism after 2011's change. In conversations with customers at that time, Lehman said they heard a lot of concern that the price limits were constraining the market after a recent run-up in prices.

"At the same time, there was interest in a mechanism that would allow limits to contract when prices went down," Lehman said.

DTN Analyst Rick Kment said that when corn was trading in the $2-per-bushel range in 1993, a 12-cent limit would allow a 6% price swing. When corn prices moved to $4 per bushel, the 12-cent limit only let the market go up or down 3% each day.

"In the past, I think CME felt that it had always been playing catch-up because any push to increase limits and maintain the desired percentage market shift has always followed a price movement, and not kept up with the movements," Kment said.

Lehman said there was always a lot to consider when making an "ad-hoc" change to limits, chief among them changing the terms on existing contracts. The new method gives two weeks between when the new limits are set and when they go into effect.

He said customers liked that limits provided a "cooling-off period" on hot market days. "We think this mechanism strikes a balance between cooling off and letting the market function as the price discovery tool it's designed to be."

Under CME's new variable formulation, the daily limit would be set at 7% of the average settlement price of 45 consecutive trading days. It will automatically readjust on the first trading day of May and November each year. The May readjustment will be based on the July contract's settlement prices while the November adjustment will use the December contract for most grains, and the November contract for soybeans and rice.

Lehman said CME arrived at 7% from a statistical perspective: Historically, 99% of price changes in the grain market have been 7% or less.

"So out of 100 days, maybe there's one day with more than a 7% change," Lehman said. So under the variable limit format, "maybe we can expect one or two days of limit moves in a year."

CME also established minimum daily price limits -- 20 cents on corn, 50 cents on soybeans and 30 cents on the wheats -- in case the 7% formula is overly restrictive. The higher of the two calculations will be used as the price limit.

The new variable price limit mechanism allows for expanded daily limits. If the contract settles up or down the limit, the next day's limit will be expanded 50% and rounded up to the next 5-cent mark. For example, if corn futures settle up 25 cents per bushel (in two contract expirations or in the last contract of the crop year), the limit will expand to 40 cents per bushel the next day "and remain at that level until no corn futures contract expirations settle at the expanded 40 cents limit."

If the criteria is met in one of the contracts of the soybean complex (beans, meal or oil), the limits will expand for the whole complex.

HOW VARIABLE PRICE LIMITS WILL BE FIGURED

CME's mechanism for figuring variable price limits aims to keep the market from swinging more than 7% in one day. When prices are higher, the limit will be higher. When they're lower, the limit will drop. This is what would have happened to daily limits if this rule had been in place before 2012's harvest.

From Aug. 13 to Oct. 16 in 2012, the average December settlement price was $7.74. Seven percent of that figure is little more than 54 cents, so the limit would be rounded up to 55 cents. It'd be in place from the first trading day of November to the last trading day in April.

CME would begin tallying the July 2013 contract's price around Feb. 11 and would calculate the average on April 16. Last year, the average settlement price would have been $6.73, resulting in a 45-cent daily price limit.

During the fall of 2013, the average December settlement price from Aug. 13 to Oct. 16 was $4.59. Seven percent is 32 cents, which would be rounded down to a 30-cent daily price limit.

"If you look at prices now, the corn limit would probably go down (from the 40-cent fixed limit), and the soybean limit would probably go up (from the 70-cent fixed limit)," Lehman said.

Katie Micik can be reached at katie.micik@dtn.com

(AG/BAS)

Posted at 7:59AM CDT 03/19/14 by Katie Micik
 

Monday 03/17/14

Intuitive, with the Potential for Confusion

CME Group outlined its new mechanism for setting daily price limits on the grain markets. One of our editors saw a tweet and asked: What does this mean, and do we need to tell people about it?

The answer from our Senior Analyst Darin Newsom was a resounding yes, followed by a technical description of how the new method would work. But while Newsom answered in wonderful detail, I think the editor's question was just as revealing.

Not every DTN reader (or every DTN staffer) understood what this headline said at first glance. They've probably heard of days where the market has locked limit-up or limit down, but it's probably not the first thing they thought when they saw CME's announcement. I'd bet "Huh?" was a more realistic reaction.

Even remembering the fixed price limits can be hard. Currently, it's 40 cents on corn, 70 cents on soybeans and 60 cents on wheat. I had to ask our analysts to remind me of the wheat limit.

I think CME's variable price limit mechanism is intuitive and will work well for the market, but there's also plenty of potential for confusion.

At its core, CME Group is moving from an "ad-hoc" system of adjusting fixed daily price limits to a fluid system that's responsive to the markets. When CME changed the limit for corn in 2011, they were criticized for being behind the curve. Prices had already risen, and traders felt the 30-cent limit restricted the market on its upswing. Others felt it'd be hard for CME to reduce the limit when prices swung lower, given its tortoise-like approach to increasing the limit. After all, the corn limit only changed four times since the 1990s.

CME's taken themselves out of the equation with their new mechanism, which will reset the daily limits twice a year on the first day of May trading and November trading. The exchange will average the price of the July or December futures contract over 45 days, multiply it by 7% and round the answer to the nearest nickel.

"For example, instead of a standard 40 cent daily price limit for corn, it would be a variable amount depending on price. If the six week average for July corn was $4.50, times 7%, equals 31.5 cents. Rounded to the nearest 5-cent increment would be 30 cents. In contrast, if July corn closing prices averaged $6.00, 7% would be 42 cents that would round to 45 cents," Newsom said.

Joe Hofmeyer, a market analyst at CHS Hedging, said that overall it's not a huge change, but it's one that could increase flat price volatility and could create confusion among commercial grain traders' customer base. Hofmeyer's thoughts:

"Overall I don’t think it’s a big deal, although it does have the potential to increase flat price volatility in the futures market if the markets can justify it. Allowing limits to move proportionately to the futures market (with 6 month increments) should create cleaner/more transparency if the market can justify limit expansion through higher prices. Right now on lock limit days the big players with a certain level of sophistication can simply move over to synthetic options and continue to trade. It is interesting to do the math and see the that in order to maintain our current 40 cent limit in corn we’ll need a 6 month average in July 14 corn futures of $5.72 (no way we get to that), so it seems that limits will actually shrink. Intuitively it makes sense the limits should be proportionate to the futures market in which they are limiting, this is how option values work.

"From the commercials perspective, specifically, I do think that it will create some confusion with their customer base. I get questions all the time from producers wondering what the limits on corn, soybean and wheat are. Imagine how much additional confusion there will be when these limits are moving every 6 months."

Here are a few resources to help you be minimally confused. The new limit scheme will go into place on May 1, using the 45-day average from mid-February to April 16. It will change again in November, just about in time for you to forget it all again. I've got your back on that one though; I've already put a reminder in my calendar to write a blog next fall when the limit changes again.

Here's a link to CME's executive report, which outlines the changes in detail. http://bit.ly/…

The information below is from the DTN article published last Friday. Essentially, it's just walking you through the math using the past year and a half of prices as an example.

HOW VARIABLE PRICE LIMITS WILL BE FIGURED

CME's mechanism for figuring variable price limits aims to keep the market from swinging more than 7% in one day. When prices are higher, the limit will be higher. When they're lower, the limit will drop. This is what would have happened to daily limits in corn if this rule had been in place before 2012's harvest.

From Aug. 13 to Oct. 16 in 2012, the average December settlement price was $7.74. Seven percent of that figure is little more than 54 cents, so the limit would be rounded up to 55 cents. It'd be in place from the first trading day of November to the last trading day in April.

CME would begin tallying the July 2013 contract's price around Feb. 11 and would calculate the average on April 16. Last year, the average settlement price would have been $6.73, resulting in a 45-cent daily price limit.

During the fall of 2013, the average December settlement price from Aug. 13 to Oct. 16 was $4.59. Seven percent is 32 cents, which would be rounded down to a 30-cent daily price limit.

Posted at 11:57AM CDT 03/17/14 by Katie Micik
Comments (3)
Sounds like a hood plan although I'm with Mr. Hofmeyer I don't think it will make a lot of difference. The one good thing as for me when My neighbors ask what is the limit for corn I can say if CME would stop changing it I could tell you. It will be easier for me not to sound so dumb. Ha Ha !! I enjoy your articles Katie.
Posted by WARREN HARDY at 7:17AM CDT 03/18/14
How does 42 cents round to 45 cents? (see Newsome quote). This system seems fair to me. Keeping the daily limit at a level percent of price makes lots of sense. The displays that show current futures prices need to have the daily limit incorporated into the display, maybe just behind the commodity title.
Posted by Jim Williams at 2:42PM CDT 03/18/14
Hi Jim -- You are correct, in Newsom's simplified analysis, it should probably be 40 cents instead of 45. However, when I computed the 45-day averages, they were far from round numbers. So it's possible the 7% figure could be something like $.42617, which could be rounded up to 45.
Posted by KATIE MICIK at 2:57PM CDT 03/18/14
 

Tuesday 03/11/14

Mom, the Mini-Wheats!

I know what you're thinking after reading that headline: Katie's hungry. It's not safe for Katie to write when she's hungry. She takes too much liberty with those movie references.

Perhaps I am hungry this afternoon, but no, I'm not going to write about sugar-coated shredded wheat cereal or the latest exploits of the Wedding Crashers (note: the original blog post said Anchorman, which several readers pointed out was incorrect. This is what happens when I write when I'm hungry, folks). This afternoon's topic is a new Kansas City hard red winter mini-sized wheat contract that will be available for trading on March 24.

CME Group has released a lot of new trading tools for hard red winter wheat since it acquired the Kansas City Board of Trade in late 2012. Short-dated new crop options and calendar spread options came first, but perhaps the mini-contract will become the most popular.

"All I can say is it's about time," DTN Senior Analyst Darin Newsom said. "The HRW market has been needing these contracts for the last 20 years."

HRW mini-contracts are one-fifth the size of regular future contracts, or 1,000 bushels per contract. They can be offset against the standard-sized KC contract on a 5 to 1 basis. It comes with a smaller tick size and lower margin requirements. There's a 15-minute extended trading window to help adjust positions at the end of the trading day.

The smaller contract will likely fit the needs of HRW producers better than standard contracts, Newsom said, explaining that wheat yields tend to be more variable than corn and soybean yields. That makes using 5,000 bushels contracts to hedge a little burdensome.

"What one thinks should be 25% of expected production could easily turn out to be 50% to 75%," he said.

It'll also be a helpful tool for grain elevators, said Newsom, a former wheat merchandiser in Kansas. Many merchandisers require 5,000 bushel allotments for forward contracts.

"Say a producer wanted to cover 7,000 bushels but was forced to do 10,000 bushels," Newsom said. "Then he saw yield drop due to weather to the point he only produced 7,500 bushels, and all of a sudden the producer is short on his forward contracted crop and has to buy back at the market. The 1,000 bushel increments will allow for better forward contracting."

One of the unknowns when creating a new contract product like the KC HRW mini-contract is whether or not it can attract enough interest to be a true vehicle of price discovery and a solid hedging tool.

"It will be interesting to see if noncommercial traders can get interested in these contracts. It shouldn’t take too much given HRW is the largest wheat crop the U.S. grows," Newsom said. "By introducing HRW minis, the CME is possibly creating new customers that for all the above reasons (and some I’ve likely forgotten) had stayed away from hedging/forward contracting."

What do you think: will this be an advantageous tool for you on your farm or at your elevator?

Here's a link to contract specifications for more information: http://bit.ly/…

(CZ/BAS)

Posted at 4:06PM CDT 03/11/14 by Katie Micik
Comments (2)
How about Dad, where's the Pork Chops.
Posted by Dick Overby at 8:30PM CDT 03/11/14
Smart move it will let people be more aggressive.
Posted by Derek Newsom at 3:30PM CDT 03/12/14
 

Friday 03/07/14

Crimea River: Rumblings of War in the Grain Markets

If the Washington Post articles by Zbigniew Brzezinski on March 3 and Henry Kissinger on March 5 are indications of the kind of advice that President Obama is currently receiving regarding Russia's advance on Ukraine, then we are likely to hear more strong rhetoric and see some form of economic pressure brought against Russia by the West, but not a direct reigniting of the Cold War.

Kissinger counsels: "A wise U.S. policy toward Ukraine would seek reconciliation, not the domination of a faction." Ukraine should be treated something like Finland, he suggests. Because of Ukraine's strong ties to both Europe and Russia, Ukraine should stay independent, Kissinger says, but not be hostile to Russia.

Zbigniew Brzezinski was the U.S. National Security Adviser from 1977 to 1981 under President Carter, and he is concerned that Putin's success in taking control of Crimea will encourage him to take other parts of Ukraine that also have heavy Russian populations. Brzezinski says that the West should privately convey to Putin that "the Ukrainian army can count on immediate and direct Western aid..." Of course, much of what the West eventually does depends on Russia's next move which is highly uncertain at this point.

On Sunday, March 16, Crimean residents are probably going to vote to secede from Ukraine under the watch of Russian troops and the move will ratchet up tensions even more between Ukraine and Russia. Where events go from there is anyone's guess, and the uncertainty is adding to nervousness to the grain markets, especially for corn and wheat prices.

As far as grain markets are concerned, the conflict has come at a good time, if there is such a thing. Winter wheat in the Black Sea region is about to emerge from dormancy, and the 2013 harvests of corn and wheat had plenty of time to be shipped before Russia's seized control of Crimea on February 28. Ukraine exports 16% of the world's corn and 6% of the world's wheat and, so far, the flow of grain has not been interrupted. Since Russia's advance, May corn has gained 36 cents and May Chicago wheat is up 56 cents. Not all of the gains are a direct result of the conflict, but the general nervousness over the situation has definitely made a strong contribution.

The bigger question, of course, is where events go from here. Different wars have had different effects on commodity prices throughout history. Sometimes the anticipation of war can scare investors out of the markets as it did in the aftermath of 9/11. At other times, war is bullish for commodity prices as it was in World Wars I and II. In this case, if serious fighting were to break out, it would likely be bullish for corn and wheat as it would become difficult to grow and transport crops in the Black Sea region. Will fighting erupt? I hope not, but it is a legitimate risk to grain prices. Or perhaps this whole scenario finds a diplomatic solution, and we look back a couple months from now and see what a good selling opportunity this was for wheat. Stay tuned.

Mr. Brzezinski's March 3rd Washington Post article at: http://wapo.st/…

Mr. Kissinger's March 5th Washington Post article at: http://wapo.st/…

Posted at 8:59AM CST 03/07/14 by Todd Hultman
 

Wednesday 03/05/14

One Cancellation Down, How Many More to Come?

China cancelled a soybean shipment this morning, and as DTN analyst Todd Hultman told me, it's the first time in a long time the sell-side of the soybean market has had much to talk about.

Everyone expects cancellations. The lingering question is, how much will China cancel? This morning, China canceled 245,000 metric tons, about 9 million bushels. It's not their first cancellation of late, but it's different because it wasn't offset by news of a new purchase.

Export sales are roughly 90 mb more than USDA's projected export demand number of 1.51 billion bushels. One of the newsletters I read pointed out that 3 million metric tons of soybeans that have been marked "sold" still need to be shipped. Of that, 2.6 mmt are marked for China and another 500,000 mt have been sold to "Unknown," which most people assume means China.

There's room for China to cancel more shipments from the U.S. And after last year's port delays in Brazil and this year's political fiasco in Argentina, who could blame them for being cautious.

"Outguessing China's actual need is tough, but their demand looks legitimate so far, so I do not expect a lot more --- 50 mb or less?" Hultman said. "Old-crop supplies are still tight, even if 80 mb more are cancelled."

While China's appetite appears to be strong, there are some reasons for concern. DTN China Correspondent Lin Tan has a story on the impact of the H7N9 flu virus on the country's poultry industry (look for it in the news segment Wednesday or Thursday). He says it's having a big impact on the feed industry.

"Feed demand down 25% in the first two month of 2014. Soybean crushing margin is negative now. Soybean crushing companies have a big storage of meals. The crushing industry is expecting to process less beans in the following months. We also see the stock at the import ports getting higher: It was 5.2 mmt in Feb., will get to 5.6 mmt this month and is expected to be 6.2 mmt next month, according to local market players."

(CZ)

Posted at 11:57AM CST 03/05/14 by Katie Micik
Comments (5)
How can china just cancel a shipment? If I buy grain for future delivery I have to take it or at leased pay the difference in price.
Posted by FRANK FULWIDER at 7:13AM CST 03/06/14
That's a really good question Frank, and unfortunately there's not a very good answer. Here's what I've gathered from conversations with traders who work with China, academics and few Chinese traders I've met. One of the first things I'm always told is that there's some kind of an "out" clause in the contract, and China most likely pays a penalty fee. Sometimes, there's a clause that allows them to shift into a contract with a different origin. It shows up here as a cancellation, but for the grain company, it's still a sale. Also, one of the reasons why Chinese companies seem to cancel more than other countries is that they're not allowed to hedge on CBOT. They have the Dalian Exchange, but it's not nearly as liquid or true to global prices and doesn't quite work for them. The lack of hedging ability means makes them more willing to cancel a contract and pay a penalty fee if the market price goes down -- they still end up ahead. I wish I had a better answer for you, but this is about all the information I've been able to gather, and no one will go on the record either.
Posted by KATIE MICIK at 9:10AM CST 03/06/14
As a answer to your questions of how much of the US soybean crop will the Chinese buy, from the the way the markets are acting it looks like to me; the answer is All the Rest of it !
Posted by JONATHAN HOOK at 5:36AM CST 03/07/14
Hi Katie - Frank . Puede suceder que el exportador 'ABC" reemplace una venta de poroto a China con embarque en el Golfo por otra con embarque en Brazil / Argentina con una 'prima de descuento"en el precio que compensa la multa por anular la compra a USA saludos
Posted by Unknown at 9:25AM CDT 03/10/14
Thank you unknown commenter. My Spanish is rusty, but with the help of Google translate, here's what I think you're saying: It may be that the 'ABC' exporters of beans replace a sale to China from the Gulf with a shipment from Brazil/Argentina with a "premium discount" on the price that compensates for the canceled the purchase from the USA.
Posted by KATIE MICIK at 4:17PM CDT 03/11/14
 

Monday 03/03/14

Can Crop Insurance Guarantees Sway Acreage?

Now that we're finally into March, we have one more piece of information about next year's crop: spring insurance guarantees. While these numbers will vary somewhat by state, and will be finalized by RMA this week, the average price in February gives us a little perspective on the year ahead.

"Probably the most interesting thing is the difference between 2013 and 2014," DTN Senior Analyst Darin Newsom said. "This year's corn average $4.62, or 82% of last year's $5.65. Is $4.62 still a profitable level? On the other hand, Dec corn is rallying and looks to approach $5.00+ in the near future. If the guaranteed floor is still profitable, and marketing can be done at higher levels, will we see the big switch in acres this year or will it wait until 2015?

"As for beans, Nov averaged $11.36, or 88% of last year's $12.87. The Nov bean/Dec corn ratio may favor beans slightly, coming in at 2.5:1 in 2014 vs. 2013's 2.3:1."

There was lots of discussion of the Nov bean/Dec corn ratio at Commodity Classic last week, but it didn't reveal any clear trend. Some farmers were going to stick to their rotation. Some were going to move some corn-on-corn acreage to beans this year. And some were going to increase soybean plantings. One analyst estimated the switch could be as much as 10% based on his conversations at Classic.

Is the crop insurance guarantee enough to keep corn acres near 2013 levels? Or will the profit potential in soybeans outweigh the potential marketing opportunities of $5 corn? I don't pretend to have an answer, and I have a feeling the only people with a strong inkling are farmers and seed salesmen.

2014 CZ14 SX14 MWU14
3-Feb 453 1108.5 620.5
4-Feb 459.25 1110.5 633
5-Feb 457 1112.5 635.5
6-Feb 458.25 1118.5 629
7-Feb 460 1121.75 629.5
10-Feb 458.25 1116.25 635.25
11-Feb 455.75 1123.5 644
12-Feb 457.75 1118.75 657.75
13-Feb 456.25 1133.75 652.75
14-Feb 459.75 1130.5 654.75
18-Feb 463.75 1138 664.5
19-Feb 468.25 1138.5 669
20-Feb 468.75 1145.25 669.5
21-Feb 464.25 1153.75 659.75
24-Feb 465 1160.25 668.75
25-Feb 467.75 1167.5 673.5
26-Feb 466.5 1169.25 665.5
27-Feb 461 1155.5 651.75
28-Feb 471.5 1169.25 662
Average 462 1136 651
2013 565 1287 844
82% 88% 77%

(ES/CZ)

Posted at 10:58AM CST 03/03/14 by Katie Micik
Comments (3)
Katie,my acres were set back in the fall when I planted wheat as I will double crop with soybeans.Double crop grain sorghum I have ruled out.Soybeans look to be the best money. I will have about 20% more bean acres. I try to spread my work load so I can't shift to many acres. I enjoy your articles.
Posted by WARREN HARDY at 6:34AM CST 03/04/14
I think weather is going to impact plantings more the insurance.Here we are first week of March and we have 3 ft. of snow in the fields in places.It is cold all the way to Texas, and won't they be thinking of planting soon? We are going to go from snow to mud because there is not any frost in the ground,Witch is not a bad thing I just don't know when we will be able to topdress wheat or get on the fields. So it could get late for corn in some places.
Posted by Raymond Simpkins at 7:03AM CST 03/04/14
4.70 corn is much better than 11.50 beans for me, will stay with more corn if weather cooperates
Posted by Tom Keller at 7:14PM CST 03/04/14
 

Wednesday 02/26/14

PED Virus Could Trim Corn Consumption

How much will PED virus trim from pork supplies? No doubt, it's one of the huge issues facing the pork industry. At the recent USDA Outlook forum, economists said they expect tighter supplies of hogs available for slaughter during the second quarter of 2014. They expect slightly larger expansion in the second half of the year at producers increase farrowings in response to higher profit margins. Thus, USDA expects a 1% increase in pork supplies in 2014.

Purdue economist Chris Hurt estimates that PED virus-reduced herd numbers in the second quarter could trim corn use by 45 million bushels. But as he points out in the slide above, poultry is the largest consumer of corn and faces fewer challenges to expansion. (Photo courtesy of Purdue University)

A few folks I spoke with at the Outlook Forum seem to think USDA missed the mark and underestimated the impact of PED virus, and think pork production will be pretty similar to 2013. Purdue Ag Economist Chris Hurt suggested during a webinar earlier this week that the futures' market disagreement with USDA's forecasted live prices shows the market's concern (with a little speculation thrown in, perhaps). He, however, thinks producers will continue to feed hogs to heavier weights this year to take advantage of profitable feed costs, and that will lead to some increase in pork supplies.

There's a question for grain producers in all this: how will the PED virus affect corn use? Hurt said hogs make up 29.5% of grain consuming animal units. As of February's supply and demand reports, USDA estimated total feed demand at 5.3 billion bushels. If hog supplies drop 3%, it could shave about 45 million bushels from corn use.

"That's about a nickel impact on corn prices. I don't think this is really large, but it's a bit negative," Hurt said.

Corn's feed use has been one of the more controversial columns in USDA's demand reports. It kept growing while the cattle herd kept shrinking. One of Hurt's slides (the illustration with this blog, or slide 19 in the presentation here: http://bit.ly/…) offers a little bit of an explanation. Poultry is by far the largest grain consuming animal sector at 33.6% of total corn use, followed by hogs. Beef cattle come in third at 25% and dairy trails at 10.4%.

Unlike hogs and cattle, poultry faces the fewest barriers to expansion, particularly in the broiler sector. High broiler prices in 2012 set farmers on a path to increasing flocks, but it was generally kept in check by higher feed prices until the second half of 2013, when bird numbers increased 4% over the prior year, USDA's outlook for poultry stated. Bird numbers are still increasing, but at a slower rate. USDA expects moderate expansion in 2014. Like hogs, USDA expects a certain amount of expanded broiler meat production to come from heavier bird weights, due to cheaper feed costs.

Could PED virus have a noticeable impact on corn use for feed? Yes, a 45 million bushel reduction is large enough to matter, but current projections for 2014's feed usage compared to 2013, 5.3 bb and 4.3 bb respectively, it's important to remember that at the end of the day, overall feed usage will be larger than last year.

Posted at 4:11PM CST 02/26/14 by Katie Micik
Comments (1)
Purdue in their presentation are projecting a 3.7% drop in the number of head going to market. They also show a 0.9% increase in pork production. The higher production comes from higher slaughter weights. They estimate the futures market is expecting a 3.1% decline in pork supplies. Hogs are less efficient users of feed as they become heavier. So from Purdueâ?™s own projections they should expect corn use to increase. The economics will drive any additional increase in slaughter weights. Should available floor space be used for heavier hogs, the lower feed efficiency of heavier hog will consume more feed than if production; in number of head, had not dropped. Freeport, IL
Posted by Freeport IL at 1:01AM CST 02/28/14
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