Weekly Market Update – March 27, 2020

Acreage Decisions
As we are heading to the field ourselves, we find the world in which we made our acreage allocations turned on its head. I have had a lot of questions over the last few weeks about how we should change our own acres. With the crisis seemingly escalating instead of recovering and an unprecedented stopping of the world economy noone has any clue how things will look when we try to crank back up. My advice is to stick with your rotations first and foremost. There is nothing that looks good enough to put all your eggs in one basket, so let your agronomics continue to be your first decision tool. As your second decision point, the market seems to be trying to discourage cotton and corn acres. I would listen if you are able to. Do not eliminate cotton or corn completely but if you have acreage that can still be shifted around the margins, i would do it. If it would be costly to make changes then stick with what you had. With this many unknowns, there is potential in everything depending on the shape of the recovery.

USDA says reports will continue to be released as scheduled. Quarterly stocks and prospective plantings report is coming out next Tuesday March 31st at 12pm. This is typically a pretty important report as it is our first good estimate of new crop acreage. This year there will be some extra uncertainty as the whole world has changed between when the surveys were taken at the end of Feb and now. Quarterly grain stocks are also going to be an important factor as USDA has used several stocks reports to reduce yield. This report could show the tighter old crop stocks that we have been talking about all year. The reaction to tighter stocks is going to be muted by the threats to ethanol demand, but it could still be an important correction.

One positive development this week is a warming of relations between the US and China. It has been widely reported there has been no direct communication between the US and Chinese Presidents for several weeks.The only diplomatic talks were with very low level officials. Today, Trump and the Chinese President both reported a direct phone call between the two and an offer of aid. The markets had been getting concerned about what it would mean for a speedy recovery from this if more negative rhetoric started developing between the two major powers. Those fears have been put to rest, for now. On the ag side, we need China buying and trying to fulfill the commitments!

Soybeans and wheat have posted the most recovery with corn lagging and cotton getting cheaper. Exports were great again this week for everything as China gets their economy back going. Bean crush margins in China are very strong as they build back grain inventories and their hog herds. With the first stimulus all but passed in the US and estimated at $2 trillion and rumors of a second and the Fed balance sheet ballooning, the US dollar has finally started to weaken. This will be a great benefit to the ag commodities as it makes our exports cheaper to the countries that buy from us.

Corn has lagged wheat and beans in the recovery due to ethanol. This economic shutdown would have been hard enough on energy markets without adding the Saudi/Russian tiff. Ethanol plants are shutting down across the country and are out of room to store ethanol even if there were positive margins. The biggest problem is we do not know when we will be able to get the economy back going to start using all these oil and ethanol stocks. We could see old crop stocks trimmed on the USDA report Tuesday, but the effect will be limited until we have a clearer picture going forward. Big purchases by China and strong exports were not enough to overcome the ethanol uncertainty but are certainly encouraging.

Pricing Guidance
Be scaling in sales anywhere above $3.50 on old crop and getting aggressive above $3.60. For new crop be looking to protect futures on any move about $3.80.

South America is finishing their growing season dry taking the top end off their crops. They are still big, but not as big as they could have been. South America is starting to face some additional logistic issues due to the coronavirus with trucking routes shut down and threats to the ports. China is importing beans from the US to help build back their stocks as their demand ramps up from repopulating the pig herds and their economy gets back moving. Domestic demand is expected to strengthen as soybean meal replaces DDGs in our feed rations. Soybeans have lots of positive fundamentals once we see some daylight at the end of the virus pandemic. We could easily see soybeans make a run back above $9 to $9.20-9.30 range. We would need to see something else positive to see much potential above those levels at this time. Basis is getting stronger in the US.

Pricing Guidance
Be looking to price old crop beans above $9.00. Be patient on new crop.

Wheat seems determined to make an attempt to get close to $6 chicago. The weakness in the Russian currency at the beginning of the oil war was negative but as Russian domestic prices have gotten higher, there have been talks of export controls. China has bought US wheat and exports have been fantastic.

Pricing Guidance
Scaling in sales between here and $6 July futures. Carry has come out of wheat for now but once we get to harvest, expect that to build back. Basis at harvest has been weakening. We have a bigger crop than last year but still nowhere near a record. Flour mills are slow and get backed up during harvest. Basis will firm back up into the fall.

Cotton has some positive fundamentals but fear is still driving it lower. People have been rushing out to hoard food and toilet paper. Clothing has not had the same increased demand. Cotton is sensitive to macro-economic factors on a good day, this has been exponentially worse. The market has caused a massive shift away from acres in the US. With China ramping up their economy we have seen very large exports. There is also a large locust swarm in Pakistan. Cotton has good fundamentals once we get back going in the right direction. The other positive with cotton is that going lower will not hurt new crop budgets anymore because we will get an LDP payment. LDP rate for old crop was 7 cents this week!

Pricing Guidance
Wait until next Wednesday to decide on old crop LDP payment so we can see whether it looks like it will go up or down for the following week. Other than LDP, patience on cotton.