Weekly Market Update – May 24, 2019

USDA announced the Market Facilitation Program (Part 2) yesterday and it was about as clear as mud and led to much confusion in the market. In the confusion everything sold off at the close. It seems the price weakness was caused by thoughts that the structure of the payments was going to discourage anyone from taking prevent plant but it does not seem to incentivize everyone to try to switch corn acres to soybeans which was everyone’s fear when the rumors started swirling before the announcement. I will go into more detail on how we currently understand the payment to be calculated below the commentary.

The Midwest continues to get pounded by rain after rain and most areas have been unable to do any field work. Many people have been noting that even if they get a window to work, there is a significant amount of field work that needs to be done before many areas can be planted. Final plant date is tomorrow for a good bit of the western belt including North Dakota (42% planted as of last Monday), South Dakota (19% planted), Minnesota (56% planted) and not much work has been done in those areas since Monday. Iowa was 70% planted but with some areas receiving 5+inches of rain in the last 7 days and below average temps there are a lot of questions about populations and crop conditions. The current pattern is forecast to be as bad or worse over the next 10 days. After that, there may be some relief but not a wide open window. Most of the corn that comes to our feed mills comes from Ohio (9% planted as of last Monday), Indiana (14% planted) and Michigan (19%). For us, this means basis should get stronger as Southeast feeders are going to have to look for other sources of corn. If this wet pattern continues, this market will continue to rally as it tries to encourage farmers to continue to try to plant instead of taking prevent plant or switching to other crops. The market also may need to ration demand as a late crop means we are going to use much more of the old crop to make it to the new crop that itself is probably getting smaller every day.

The Midwest may not have any heat coming, but we in the Southeast do and all areas could use a shower of rain, some more desperately than others. We know the market may go higher if the weather continues, but we have all also been here long enough to know how quick it can turn. We need to be covering costs and managing risk. We need to stay disciplined and be scaling in sales. We are coming off several tough years in a row and need to play defense not swing for the fences.

Many people have already scaled in sales per our recommendations, however if you have not this is a good opportunity to catch up. As this board continues to rally, it is also making some puts look more attractive. The $4 December put traded as low as $0.20 cents. This means you can lock a floor in at $3.80 by buying this put. $3.80 Dec rolled to March and shipped in December or January should equate to around $4.80 delivered when using a historic basis. Any extra basis we may see this year would be on top of that. Also that is the floor, if this market does continue to rally you would get to sell your corn much higher without having to worry about the downside! One drawback is that you have to pay the premium upfront. As the board continues to rally, the put premiums will continue to get cheaper allowing you to lock in a higher floor for less premium.

Wheat is following corn but does not have a fundamental story of its own yet. All the rain will not help quality in the US and may end up making some acres be abandoned and some spring wheat acres not planted but the world balance sheet is still comfortable. Russia seems to be about out of old crop but they have a large new crop coming and weather continues to be non threatening. Our basis is going to be very strong. We are very close to $6 flat delivered to a flour mill on an offer. They have very little truck wheat bought and would entertain any offers. I would like to be aggressive sellers between now and the middle of June before we go into delivery of the July contract. 

USDA’s announcement of the payments was not nearly as bearish to soybeans as the rumors had been. The structure of the payments will not encourage everyone to switch all their unplanted acres to beans as feared. That would have had implications for years to come as we are already facing a burdensome balance sheet, a trade war, and demand destruction due to swine fever in China. The lost demand in China is bearish for now, but they will build back their herds using vertically integrated farms instead of subsidizing the backyard hog producers again. Vertically integrated producers use more balanced rations that includes more soybean meal which will help increase demand over the long run. Soybeans still have time to be planted in the Midwest IF the weather breaks. If this wet pattern continues to hold, the soybean market is going to have some work to do.

Cotton has finally found some positive news on good exports, even with the increased trade rhetoric and exports usually slow this time of year. There was enough excess soybean stocks in the world to keep China going through the winter without buying much from the US. It is not the same situation on cotton. They will have to buy some cotton from the US if their usage stays up. However cotton planting is moving along without major disruption so far. The market is caught between increasing domestic supply (bearish), stronger world demand (bullish), and continued trade war (bearish). If we get a bounce into the 70’s we need to be sellers.

Market Facilitation Program
USDA’s announcement yesterday left more questions than answers. Let us be thankful that we are not facing as many planting decisions as farmers in the Midwest in the face of so much uncertainty. The payment will be a flat per acre rate calculated for each county. You will receive the same rate for acres of all covered crops (for us it will be mostly corn, wheat and soybeans). This means you will be paid the same rate in each county for an acre of corn as an acre of soybeans up to a maximum of your 2018 acres of those crops. USDA said they will announce the rates at a later date. The payments will be made in three tranches with the first coming in summer. The first payment is the only one that is guaranteed, the next two will be made “if needed” in the fall and in Jan 2020. Prevent plant acres will not be counted. Since we do not know the rates yet, to get an idea of how much the payment may be, we take the amount of money announced as direct payments and divide by the number of acres of covered crops and come up with around $40/acre. This is only a rough estimate as there are still so many unknowns, but it does give us some idea. Many analysts are estimating the range to be between $20 and $60 per acre. If we assume the rates that leaked early in the week to be accurate ($2/bu for beans, $0.64/bu for wheat, $0.04/bu for corn), we can try an example calculation.

This was done for a county in Kansas but the idea would hold for any county that produces only corn, wheat and soybeans. If this was for your county, you would get paid $54.41/acre for all your acres of corn, wheat and soybeans. We do not have a guess on the cotton payment so we cannot even get a guess on a county that has cotton acreage. Using this guess as a baseline, we can assume that counties that have higher wheat and bean acreage will get more per acre than counties that have more corn acres since the rate for corn is so much lower. Again, please remember USDA left way more questions than answers so these are really just guesses at this point.