PD EAST MAIN
Table 1
Chances of corn reaching these prices in 2016
Price
March
July
$4.00
92%
100%
$4.50
48%
76%
$5.00
32%
52%
$5.50
16%
24%
$6.00
12%
16%
$6.50
8%
16%
$7.00
4%
16%
Patrick Patton for Progressive Dairyman
Source: Stewart-Peterson Inc.
Table 2
Chances of soybeans reaching these prices
in 2016
Price
March
July
$9.50
84%
100%
$10.00
72%
92%
$10.50
52%
76%
$11.00
40%
60%
$11.50
24%
56%
$12.00
16%
48%
$12.50
16%
32%
Source: Stewart-Peterson Inc.
U.S. corn ending stocks and stocks/use ratio
2,500
25%
2,000
20%
1,500
15%
1,000
10%
5%
500
0
0%
95-96 97-98 99-00 01-02 03-04 05-06 07-08 09-10 11-12 13-14 15-16
Ending stocks
Stocks/use ratio
Source: Stewart-Peterson Inc. and USDA
Stocks/use ratio
Ending stocks
Figure 1
A case for higher feed prices
There’s something farmers do
when watching a weather forecast
prior to chopping hay. It’s the same
thing that’s done before an alfalfa or
corn variety gets chosen – or a hand is
revealed in a game of poker.
In all of these moments,
probability is being applied. A
mathematical term, probability
measures the likelihood that
something will occur. When we aren’t
certain of an outcome, we rely on
probability to guide decision-making.
When making seed and
harvesting decisions, you likely rely on
a few pieces of good information and
past experiences. Generally, nothing
more is needed.
Marketing is different. Assessing
probability involves a lot of technical
and fundamental analysis, and a heavy
dose of number-crunching. The extra
work has its benefits; chiefly, the least
and most likely price levels come into
better focus. In turn, with wellresearched, reliable information in
hand, you can better focus marketing
strategies.
Probabilities for 2016 feed prices
What might feed prices look
like this year after assessment of
the mathematical probabilities? To
find out, we researched annual corn
futures contracts and following-year
prices over the past 25 years. Looking
at year-to-year price increases, we
determined likelihoods for reaching
certain price levels this year (Table 1),
expressed in percentages. We applied
the same research to soybeans (Table
2).
The analysis revealed that, despite
downward price pressure having been
the predominant scenario reported for
2016, there is a strong likelihood feed
prices will rise during the year. Before
that can happen, the markets will need
to see some proof, which we’ll get to in
a moment.
Commodity markets tend to
move on three variables: perception,
momentum and attitude. As we head
into 2016, the general perception is
that the U.S. has ample inventory and
supply of corn and soybeans. This fuels
belief that feed prices aren’t likely to
increase, putting a lid on momentum
and preventing a move toward higher
prices. Consequently, attitude toward
feed remains bullish. These three
variables feed off each other until one
of them changes.
Changes is in the air
Several factors and trends support
the case for higher feed prices this
year. Whether or not prices rise
remains to be seen. However, there is
more upward price risk for feed cost
increases than there is downward
potential to save money by assuming
prices will remain low. This alone is
reason to avoid becoming complacent
with the favorable feed prices we in the
dairy industry have been experiencing.
Let’s look at what’s behind
the case for higher feed prices and
what you can do to prepare for the
possibilities.
1
Stocks-to-usage ratio
Current ending corn stocks of 1.8
billion
bushelsto
suggest
Welcome
the there is ample
supply
on handGENERATION
(Figure 1). However,
NEXT
ending
stocks to
doOFnot
give
a complete
FEED
PROCESSORS
Welcome
the
supply
picture.
For
that,
we
look at the
NEXT GENERATION
stocks-to-usage OF
ratio,
which
measures
FEED PROCESSORS
the relationship between supply and
demand. Since 1995, the stocks-tousage ratio has spanned just under 5
percent to about 21 percent. At 13.6
percent, the 2015 stocks-to-usage
ratio tells us the supply cushion is
Welcome to the
NEXT GENERATION
OF FEED PROCESSORS
COME SEE OUR NEW PRODUCT LINEUP
AT THE WORLD AG EXPO, FEB 9-11 2016
COME SEE OUR NEW PRODUCT LINEUP
AT THE WORLD AG EXPO, FEB 9-11 2016
Supreme International Limited
9.5 x 4.3333
17.3
The World’s Best TMR Processor
THE WORLD’S BEST TMR PROCESSOR
www.supremeinternational.com
1.800.563.2038
The World’s Best TMR Processor
www.supremeinternational.com
• 1.800.563.2038
www.supremeinternational.com 1.800.563.2038
34
Progressive Dairyman
Issue 5 • March 12, 2016
PD EAST MAIN
U.S. corn yield vs trendline with years after a
strong El Niño highlighted
Figure 2b
180
50
160
45
140
40
Yield
Yield
Figure 2a
120
35
100
30
80
25
60
1965 1970 1975
1980
Actual yield
1985 1990 1995
2000 2005
Year after strong El Niño
Linear (actual yield)
Source: Stewart-Peterson Inc. and USDA
more tenuous than what is generally
perceived.
Through analysis, we can project
carryout and stocks to usage for 2016
based on assumptive yield numbers.
It wouldn’t take much disruption in
supply to push the current stocks-tousage ratio into the 10 percent range,
which likely would result in a bearish
price trend for feed buyers.
2
U.S. Dollar Index
The U.S. Dollar Index has been
in a sideways trading range since
March 2015. When it breaks out,
20
1965 1970 1975
2010 2015
U.S. soybean yield vs trendline with years
after a strong El Niño highlighted
Actual yield
1980
1985 1990 1995
2000 2005
Year after strong El Niño
2010 2015
Linear (actual yield)
Source: Stewart-Peterson Inc. and USDA
we expect it will have a strong effect
on feed prices to either the high or
low side. The Federal Reserve Bank’s
policy on interest rates may influence
the dollar’s direction. Rate increases
could lead to a stronger dollar, in turn
keeping feed prices low. A weaker
dollar could lead prices higher.
In December 2015, the Federal
Reserve Bank announced its first
interest rate hike in 10 years, which
bolstered the dollar. But since the start
of the year, the dollar has dropped
from approximately 100 to 96, as of
the second week of February. Yet while
the Fed bears watching, our research
shows an imperfect correlation
between higher interest rates and a
stronger dollar.
3
Changes in weather
Once the 2015 El Niño pattern
wraps up, weather patterns will
shift. La Niña likely will arrive next,
bringing dry weather to the Grain Belt.
Historically speaking, corn and soybean
yields in the years following El Niño
have varied, at times coming in slightly
higher and other times materially lower
(See Figures 2a and 2b).
4
Following the money
When you follow the money,
you see how hedge fund action
correlates with price (Figure 3, page
37). Although investors have avoided
purchasing commodities for more
than one year, and feed prices have
remained low, investors historically do
not remain bearish for long. A change
in trend usually signals a change in
sentiment. Keep an eye on managed
money positions versus the corn price.
When you see hedge funds getting
888.438.8683
Continued on page 37
UDDERTECHINC.COM
machine
wash and
dry
4.66 x 3.1667
6
WELA LongLine
4.66 x 6.5
13
Quick release
buckles-no
velcro to get
matted
Calf Blankets
Agromatic
s
ou lls
u ro
tin at
n
co ll m
a
st
for warmth
3M and Thinsulate are trademarks of 3M
Udder Tech Inc.
Premium Cow Comfort Solutions
THE NUTRITIONIST
SPONSORED BY:
Advanced Nutrition Seminars
AMTS LLC
4.66 x 3.1667
6
FLEX Stall
(800) 800-5824
www.
March 12, 2016 • Issue 5
.net
Join us on the 2nd Wednesday of Every Month
Educational, non-commercial
presentations and conversations
with top industry experts
Forage Laboratory
contact [email protected]
www.progressivedairy.com
35
PD EAST MAIN
A case for higher feed prices, cont’d from page 35
Figure 3
You’re so
Corn: managed money position vs corn price
500,000
$9.00
400,000
$8.00
300,000
lucky!
$7.00
200,000
$6.00
100,000
$5.00
0
$4.00
-100,000
$3.00
-200,000
$2.00
-300,000
6/13
2006
12/13
2007
12/13
2008
12/13
2009
12/13
2010
12/13
2011
Net position
12/13
2012
12/13
2013
12/13
2014
12/13
2015
Corn price
You have been getting
Progressive Dairyman for FREE!
Source: CFTC and ProphetX
153%
1972
27.8
104.4
451.0
332%
1975
28.9
121.1
228.0
88%
1977
30.6
134.0
203.0
51%
1979
32.1
177.0
289.5
64%
1985
34.1
129.3
163.9
27%
1991
34.2
168.6
190.3
13%
1992
37.6
175.8
241.5
37%
1994
41.4
153.0
236.0
54%
2004
42.2
146.0
238.0
63%
2005
43.1
162.0
202.5
25%
2009
44.0
272.0
371.9
37%
2014
47.5
302.0
382.5
27%
2015
48.3
?
?
?
5
Soybean meal after a record crop
You may recall market conditions
in 2014 when soybeans were on
their way to another annual record
yield. Soybean meal price sentiment
was decidedly bearish, and then the
market rallied. The soybean meal price
increased 27 percent from the 2014 low
to the 2015 high.
Whenever we’ve experienced a
record soybean yield, the following
year we’ve seen soybean meal rally 75
percent on average. This trend dates
back to 1970. Most price increases have
ranged from 25 to 80 percent (Table
3). If you exclude large rallies from the
1970s, soybean meal rallies following
a record crop have still averaged about
35 percent. In short, a record yield
doesn’t guarantee preservation of low
prices.
the risk that prices will go up. Again,
there’s more upward price risk for
feed cost increases than there is
downward potential to save more on
costs. You can prepare for any price
scenario that might unfold this year
by turning to your price management
toolbox and incrementally securing
inventory. PD
Futures and options trading involve
significant risk of loss and may not
be suitable for everyone. Therefore,
carefully consider whether such trading
is suitable for you in light of your
financial condition.
1F-zProgressive
BY PHONE:
Circulation
Ad
(800) 320-1424
4.66 x 13.333
26
ONLINE AT:
www.progressivedairy.com/subscribe
?
YOU
DID
KNOW
You will find a customer ID number and expiration date
printed on your magazine cover (see example below). If the
expiration date reads “TIME TO RENEW” or “LAST ISSUE,”
it means you need to let us know right away that you want to
continue to receive Progressive Dairyman.
Customer I.D.
Expiration date
Progressive Dairyman | East Edition
5–DIGIT 50131
123456 TIME TO RENEW
P–12
JOHN DOE
JOHN DOE’S COMPANY
5555 NEZ PERCE DR APT 555
ANYTOWN ID 55555-5555
5–DIGIT 50131
123456 TIME TO RENEW
P–12
JOHN DOE
JOHN DOE’S COMPANY
5555 NEZ PERCE DR APT 555
ANYTOWN ID 55555-5555
P66
P66
Patrick Patton
Chief Operating Officer
Stewart-Peterson Inc.
Serving Dairymen Nationwide | March 12, 2016 | Vol. 30 No. 5
back into commodities, we likely also
will see feed prices rise.
OTHER WAYS TO RENEW
New tech in Tulare
200.0
Read about the cool stuff we saw at World Ag Expo.
78.9
PG. 23
27.5
Plus
1971
Hot flashes
% change
A place in the country
High price
the next
year (T+1)
See how climate change affects
cows, crops and cash flow. PG. 56
4th qtr (T)
low price
April Day Genetics Center is home to elite red and white
cattle and provides an escape from city life for its
owners. PG. 16
Record
yields
If you find a subscription form inserted
in this issue of the magazine, fill it
out and return by mail or fax.
What to expect in 2025
Year (T)
How to prepare
Don’t let your luck run out.
Front month continuous soybean meal price
No one can predict the future, but find out what one
industry expert anticipates for dairies in the next
10 years. PG. 52
Table 3
[email protected]
Feed buyers should be acting on
today’s low prices, insuring against
March 12, 2016 • Issue 5
www.progressivedairy.com
37