Grain Futures Markets & National Cash Indices Review & Observations thru Feb 27, 2015
PHI Market Analysis Manager Virg Robinson
Corn: The spot interior cash basis unchanged w/w. There is carry in both the cash & futures
markets. The spot cash basis is firmer w/w. The cash pipe is well balanced. Producers are
incremental sellers on flat price / basis strength. Consumers, both domestic and importer, are
moving away from hand-to-mouth and looking to fix long term needs. This is a shift in strategy
and helps underpin price / basis. Weekly export sales & shipments, in aggregate, remain on
track to meet current USDA projection. Producer cash sales will be metered by price strength
or as cash flow needs necessitate. On-hand world coarse grain supply is forecast to be ample.
There’s strong competition in corn / coarse grains export markets. Private sources are
projecting another large Chinese crop for 2015/16. Their domestic supply, while pricey, is
adequate. The long-term direction of their import / export program is anything but clear.
Strong U.S. Dollar throttles importers like Japan and South Korea. China’s ability to source
protein supply from multiple regions is gaining more traction. This adds additional price
volatility / risk to USA producer moving forward. The Feb ‘15 WASDE & USA stocks reports
trimmed supply BUT not to the extent of a game-changer. Next report is 3/10/15.
The CME March ‘15 contract is positioned to trade in a range from $3.65 - $4.25. Small
speculative interests (short-term traders) have increased their presence in the market. Their
tendency to quickly flip-flop position adds price velocity as demonstrated the last few weeks.
Light sporadic producer selling and firm user demand underpins values. December ’15 futures
contract (new crop) is positioned to trade in $3.94 - $4.39 range. An incremental cash sale /
short hedge or put option purchase (vertical put spread) when price is at or above upper end
of aforementioned price ranges is prudent price risk management. Please note the presence
of continued price volatility given small speculator (trader) quickly changing position,
upcoming 3/10 WASDE report, U.S. / world crop size, quality & use debate, 2015 U.S. / North
America acreage and crop prospect, China, uncertain macroeconomic backdrop, geopolitical
tensions and day to day reaction to U.S. and global WEATHER. Funds / speculators are
capable of accentuating price moves. Given the present price discovery environment the use
of corn options, puts and calls, to manage price risks remains worthy of consideration for
both producer and consumer.
Soybean Complex: The interior spot basis is steady w/w. Old crop futures forward price
curve remains a fraction of full carry. The sum of this implies cash pipe is in need of
inventory. February WASDE report indicated overall healthy supply BUT lower than January.
U.S. & So American producers are pricing cash on flat price / basis strength. The world stocks
/ use ratio is currently 31% vs. one year ago at 24%. Spot U.S. crush margin (synthetic Gross
Processing Margin / GPM) is strong and more profitable than one year ago. This helps
underpin soybean & soy products flat price & basis values. Aggregate soybean and soy
product export sales and shipments remain solid. The sum of these factors makes for choppy
/ volatile price discovery. Canada, in addition to South America, will be fierce competitors in
oilseed & product export sales moving forward. If weather cooperates both countries have
intentions of producing large new crops. Producers need acknowledge that supply, in hand
and the forecast for next season, is projected to be ample. Brazilian weather and logistics
remain concerning in select regions of soybean growing areas. These add volatility to the
market.
During the next few days the May ‘15 CME futures contract is positioned to trade in a wide range
from $9.53 - $10.69. Be advised abrupt swings in price will continue. The Nov ’15 futures contract
(new crop) is positioned to trade in range $9.51 - $10.34. Please acknowledge that a large western
hemisphere supply is in hand with prospect for big 2015 world production. Making an incremental
cash sale / short hedge / put option purchase at the upper end of aforementioned price ranges is
prudent price risk management. Risk mitigation could include owning out-of-the money puts or
vertical put spreads to create price floor. Price volatility is MODERATE / HIGH and reflected in
option premiums. The May ‘15 soybean meal futures contract is projected to trade in a range from
$321 - $365. The May ‘15 soybean oil contract is projected to trade in a range from $0.3005 $0.3490. It’s currently not advisable to establish a new long position at / or above the highs of
aforementioned soy product price ranges but rather at / near the lows of the ranges, respectively.
Expect soybean complex PRICE VOLATILITY TO REMAIN HIGH as export demand (China in
particular), large western hemisphere supply, pace of USA sales and distribution, SA weather and
logistics, exchange rates, uncertain macroeconomic & geo-political backdrop, speculative /
investor positioning and strong U.S. processing margin drives price discovery.
Wheat (all classes): Current U.S. and world stocks to use ratios are 33 and 28 percent,
respectively. World ratio is modestly larger y/y and indicates adequate global supply (see lead
graphic). Large global supply promises continued battle for export sales among major
exporters. USA winter seeding’s down y/y. Cuban wheat and rice imports will be modest in
global perspective but welcome news (Cuban lack of finance noted). USA wheat export sales
have shown glimpses of strength. Frequent downward adjustments in USA price have been
required to better align with other global competitors. Exchange rates, geo-political tensions
and assorted global weather concerns (including areas of USA) have made USA varieties and
availability attractive from time to time BUT not consistently. Market participants will continue
monitoring crop conditions, U.S. and global, for weeks to come. Weather and currency
influenced markets, particularly when world demand has improved, can quickly become more
choppy / volatile. USA wheat is currently priced above domestic corn and therefore a less
desirable USA feed choice. However, the price gap has narrowed in the last few weeks.
There’s a fair amount of wheat in European areas that will be fed to livestock. This will
displace corn / DDGs to minor extent and should have little effect on wheat global balance
sheet. May 2015 CME Chicago wheat futures contract (SRW) is positioned to trade in a range
from $4.93 - $5.47. A move toward the high of range will attract new incremental sale / put
option strategy. New crop, July 2015, will attract new incremental sale near $5.55.The May
2015 Kansas City wheat futures contract (HRW) is positioned to trade in a range of $4.97 -
$5.87. New crop, July 2015, will attract new sale near $6.04.The May 2015 Minneapolis wheat
futures contract (HRS) is positioned to trade in a range of $5.23 - $6.09. New crop, July ’15, will
attract new sale near $6.04. Price volatility is moderate.
Virg Robinson
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