On Monday, June 7th the Kansas State University Department of Agricultural Economics and the International Grains Program provided a webinar to Southeast Asian audiences interested in U.S. corn and grain sorghum market perspectives, and the outlook on U.S. Ethanol Profitability with associated Distillers Grains product availability in the near term.
A copy of this presentation which also includes an initial discussion of U.S. Ethanol and Distillers grains market prospects is found at the following web address on the KSU www.AgManager.info website:
The graphics in this presentation are targeted for both domestic U.S. and international grain market audiences, with prices represented in both domestic U.S. and international metric units. Acreages and supply-demand quantities are also presented in both english and metric units in alternative graphics.
The session dealt in particular on the current U.S. and World market outlook of corn and grain sorghum during a time of tight supplies and uncertainty about U.S. and World feedgrain supply-demand and price trends for the remainder of calendar year 2021. The session also focused on current profitability prospects in U.S. ethanol plants, and the likelihood of continued availability of U.S. DDGS (distillers dried grains and solubles) for export into the Southeast Asia region.
The following information stands out in assessing the Kansas, U.S. and World grain market data through 3/27/2021:
The impressive recovery rally in grain futures lead by Corn on Thursday, May 27th – regaining all of the price decline that had occurred since May 20th.
Strength in all cash corn prices & basis in Kansas – with current spot cash prices ranging from $6.81 to $7.24 /bu on 5/27/2021 at key regional elevator locations across the state. Spot corn basis “spiked” stronger within the last few weeks – likely following the roll over in lead basis determining month from CME MAY 2021 to CME JULY 2021 corn futures.
“New Crop” MY 2021/22 corn forward contract bids ranged within $5.26-$5.90 per bushel at the same locations that day – down in a range of $1.34-$1.87 /bu from spot cash bids.
This spot vs new crop bid difference infers that the U.S. grain market expects a successful – sizable U.S. corn crop in year 2021, and that grain prices will move sharply lower into the 2021 fall corn harvest in the U.S..
Continued strong Grain Sorghum (Milo) cash prices in Kansas – BUT which have now trended lower than corn prices in the state in all regions EXCEPT in the southeast part of the state. It appears that demand pull for grain sorghum toward livestock feeding areas in Missouri and Arkansas are heavily impacting sorghum prices in the southeast part of the state. However, unlike for corn, grain sorghum spot market basis bids in Kansas have continued to trend sideways – likely indicating the dependence of local cash milo markets on Chinese import demand (which has been “good” but now “great” in recent weeks.
“New Crop” MY 2021/22 grain sorghum forward contract bids ranged within $5.60-$6.15 per bushel, which was $0.24-$0.88 /bu higher than “new crop” corn forward contract bids at the same locations that day.
Continued High Cash Wheat Prices – even with impending wheat harvest in June-July. As prospects for the 2021 Hard Red Winter Wheat crop in Kansas have drastically improved with recent rains, the wheat market has not declined precipitously. Spot cash wheat basis in Kansas has showed no signs your of seasonal harvest weakening – but that may still occur in coming weeks once harvest begins in earnest.
Extremely tight “current” MY 2020/21 U.S. feedgrain supplies seems to be incentivizing U.S. wheat feeding – which is particularly relevant in western Kansas feedlot areas.
Cash wheat prices at major Kansas markets are 85%-93% of cash corn prices on a per bushel basis, while being 79%-86% of cash corn prices on a per lb basis after lb per bushel adjustments (i.e., assuming 60 lb per bushel for HRW wheat vs 56 lb per bushel for corn).
High 5/27/2021 soybean price closes of $15.37 /bu (CME JULY 2021), $14.87 1/4 for AUG 2021, $14.11 1/2 for SEPT 2021, & $13.78 1/4 for NOV 2021 Soybean futures. Cash soybean prices at selected major Kansas regional locations range within $14.97-$15.32 /bu, with spot soybean basis being very strong as well in recent weeks as basis determination has rolled from CME MAY 2021 soybeans to CME JULY 2021.
However, “new crop” MY 2021/22 forward contract bids ranged within $12.88-$13.28 /bu – down $1.71-2.38 from spot cash prices.
This difference indicates that the soybean market in aggregate expects a successful U.S. soybean crop in year 2021 – and moderately lower prices in Fall 2021 a harvest.
Unique grain market forces and dynamics across the state of Kansas
Strong corn feed demand in western Kansas – especially in the southwest with its concentration of beef feedlots – is driving corn prices higher relative to both sorghum (export demand driven) and wheat. However, the wheat / corn price ratio in the southwest part of the state is likely providing a strong incentive for feeding wheat to livestock.
Strong corn and sorghum feed demand in southeast Kansas – likely indicating strong feed demand pull from Missouri and Arkansas.
Dr. Mattos makes good points on 1) alternative outcome scenarios to be prepared for, 2) how hedging is about risk management, 3) cash flow implications from possible futures margin calls, 4) why margin calls don’t necessarily mean the hedge is unprofitable, and 5) considerations for lifting grain hedges early.
Good, timely work by Fabio Mattos – a valued colleague and agricultural economist from UNL.
The Wild Side of Commodity Markets: Hedging in Times of High Volatility
Commodity markets go through periods with low volatility when we generally see small variations in prices, as well as periods with high volatility, when we tend to see large swings in prices. Regardless of the degree of price volatility in the market, producers can always use marketing contracts as a way to hedge the price risk of their operation. Even though the general mechanics of hedging are the same in periods of low volatility and high volatility, some aspects of hedging become more evident in times of high volatility. In this article, we will discuss some of these aspects focusing on hedging with futures contracts.
Futures contracts are one of many marketing contracts that we can use to hedge the price of our commodities. When we sell in the futures market, we are locking in the futures price for delivery in a given month in the future, which eliminates futures price risk. Regardless of what happens with the futures price between now and the delivery month, our futures price is already locked in and we know exactly what it will be at delivery time. On the other hand, the basis remains open when we hedge with futures contracts. Therefore, we are able to eliminate futures price risk (which is relatively large) but we still carry basis risk (which is relatively small).
For example, let us say that last fall a grain producer was planning to store some soybeans to sell in May 2021 and she decided to hedge it using futures contracts for May 2021 delivery. On October 7, 2020 this producer sold her grain using the soybean futures contract for May 2021 delivery at $10.30/bu. Let us also assume that, based on her historical records, she was expecting a basis of -$0.60/bu in May. In this case, she was looking at a realized price of $9.70/bu upon delivery in May (=locked-in futures price plus expected basis). As long as the actual basis in May is really -$0.60/bu, she will receive $9.70/bu upon delivery. As for the futures price, it is already locked in and she does not need to worry about it anymore.
Let us think of two scenarios with high volatility to discuss this hedge
Scenario 1: The futures price goes down during the hedge (between October 2020 and May 2021). Hypothetically, let us imagine that we go through a period of high volatility and the spot price offered by the local elevator in the producer’s cash market turned out to be $6.00/bu in May 2021 and the futures price was $6.60/bu, giving us a basis of -$0.60/bu. The producer would then sell her grain in her cash market for $6.00/bu and offset her futures contracts. She would buy back the futures contract at the current price of $6.60/bu and leave the futures market with a profit of $3.70/bu (sold at $10.30/bu when the hedge was placed, bought at $6.60/bu when the hedge was lifted). In total, the producer would receive $9.70/bu, i.e. $6.00/bu from the local elevator plus $3.70/bu gained in the futures market. In this scenario, the producer made money in the futures market, which helped her offset the lower price in her cash market. Since the basis at delivery was as expected, the producer ended up receiving $9.70/bu as anticipated at the beginning of the hedge.
Scenario 2: The futures price goes up during the hedge (between October 2020 and May 2021). Again let us imagine that we go through a period of high volatility and the spot price offered by the local elevator in the producer’s cash market turned out to be $15.85/bu in May 2021 and the futures price was $16.45/bu, giving us a basis of -$0.60/bu. The producer would then sell her grain in her cash market for $15.85/bu and offset her futures contracts. She would buy back the futures contract at the current price of $16.45/bu and leave the futures market with a loss of $6.15/bu (sold at $10.30/bu when the hedge was placed, bought at $16.45/bu when the hedge was lifted). In total, the producer would still receive $9.70/bu, i.e. $15.85/bu from the local elevator minus $6.15/bu lost in the futures market. In this scenario, the producer lost money in the futures market, which did not allow her to benefit from the higher price in her cash market. Since the basis at delivery was as expected, the producer ended up receiving $9.70/bu as anticipated in the beginning of the hedge.
Take-away point #1: hedging is about risk management When prices went up during the hedge in Scenario 2, the producer could have received a higher price without the hedge. If she had not used futures contracts to hedge her grain, she would have just sold to the local elevator in May for $15.85/bu and would have had no loss in the futures market. However, without the hedge, she would have been carrying price risk, which means that she could have made more money as prices went up just as likely she could have made less money if prices had gone down. Without the hedge, the producer would be wondering whether she would be able to receive $15 per bushel for her grain (as in Scenario 2), or if she would end up receiving just $6 per bushel (as in Scenario 1). When we do not hedge, we are fully exposed to the ups and downs of prices in the market.
When we hedge with futures contracts (or any other type of contract), we need to remember that we are doing that to reduce our risk. Hedging is about risk management, which means that we will not be able to take advantage of higher prices in case the market goes up but we will be protected against lower prices in case the market goes down. There is no way to get around this trade-off. If we do not hedge because we want to be able to hit a home run and sell at the highest price of the season, we will be exposed to the ups and downs of the market and we may as well end up selling at the lowest price of the season. If we want to reduce our price risk and get protection against lower prices, we will not be able to benefit from higher prices in case the market goes up. We need to be comfortable with this idea when we make a decision to hedge.
Take-away point #2: there are cash flow implications of margin calls in the futures market When we hedge using futures contracts, we have to deal with the margin system in the futures market. There are good reasons for the existence of the margin system in the futures market, which is beyond the point of this article. What matters here is that we need to post an initial margin deposit when we start our futures hedge and then we are subject to margin calls during the hedge. Margin calls are additional deposits to our margin account in case we are losing money in the futures market. Essentially, the general idea behind margin calls is to make sure that all participants in the futures market will keep a minimum balance in their accounts and hence will still be able to honor their contracts regardless of how much money they may be losing.
In our example in Scenario 2, as the futures price was increasing between October 2020 and May 2021, our producer was losing money in the futures market with her short position. Let us assume that the producer was hedging 30,000 bushels with futures contracts for May 2021 delivery. As the futures price increased from $10.30/bu when the hedge was placed on 10/6/2020 to $16.45/bu when the hedge was lifted on 5/11/2021 (Figure 1), the producer received margin calls in 47 days out of the 149 days of the hedge for a total of $184,500 in margin calls (Figure 2).
As we can see in Figure 2, in the 47 days with margin calls during this hedge, the value of the additional deposits that the producer had to make ranged from $300 to $12,750. Just as an exercise, if we divide the total value of margin calls ($184,500) by the number of margin calls (47), we would be looking at an average value of $3,925 per margin call. This has important cash flow implications because the producer had to have the equivalent of $184,500 in available funds during the hedge in order to meet the 47 margin calls.
The magnitude of margin calls depends on the amount of bushels hedged in the futures market. If the producer were hedging less (more) than 30,000 bushels in this example, there would have been less (more) than $184,500 in margin calls. Regardless, the main point is that it becomes more likely to receive margin calls in periods of high volatility. In some cases, like in Scenario 2 in our example (which is based on actual futures price in the last few months), these margin calls can be substantial. Therefore, it is essential to account for the possibility of margin calls when we hedge with futures contracts, especially in times of high volatility.
Take-away point #3: margin calls do not necessarily mean that you will receive less money at the end of the hedge
Although it is certainly painful to receive margin calls (even more so 47 of them as in our example), they do not necessarily mean that we will receive a lower price at the end of the hedge. Back to Scenario 2 in our example, in May 2021 we have a spot price offered by the local elevator in the producer’s cash market at $15.85/bu and the futures price at $16.45/bu. Since the producer initially sold in the futures market at $10.30/bu and now is buying at $16.45/bu to offset the futures contracts and lift the hedge, she is losing $6.15/bu in the futures market. Given that she hedged 30,000 bushels, a loss of $6.15/bu adds up to a total loss of $184,500 (=$6.15/bu x 30,000 bu).
As we have discussed before, $184,500 is exactly the total value of margin calls received during the hedge. Therefore, margin calls do not represent “additional” losses to the hedger. With or without margin calls, the producer is losing $184,500 in our example (or $6.15/bu on 30,000 bushels). The margin calls mean that this loss happens in “installments” during the hedge instead of being “charged” in full at the end of the hedge.
Furthermore, since the basis at delivery was -$0.60/bu as expected, the producer ended up receiving $9.70/bu as anticipated at the beginning of the hedge. Regardless the amount or value of margin calls, the final price received by the producer at the end of the hedge in this example is still $9.70/bu because the basis at delivery turned out to be – $0.60/bu as expected.
Take-away point #4: the question that often comes up…what if I lift the hedge while I am still holding my grain?
In a situation like Scenario 2 in our example, one could ask whether it would be “better” to offset the futures contracts and get out of the hedge before May 2021 in order to avoid more margin calls. After all, the market is going up and we do not need protection against lower prices. This is certainly a possibility, but there are at least two key points to consider before making this decision. First, if we lift the hedge, we will be carrying unhedged grain and we will no longer have any protection if the market happens to go down. In times of high volatility, prices can go down just as fast as they go up, so this is when hedging becomes particularly important. Second, as we discussed before, margin calls are often painful and inconvenient, but they do not imply a lower price at the end of the hedge. As long as the basis does not change, the frequency or magnitude of margin calls will not affect the final price that we expect to receive at the end of the hedge.
No one can tell for sure whether it is “better” to lift the hedge with futures contracts in this situation. Sometimes it may be, sometimes it may not. Either way, one should at least consider carefully the points discussed above before making this decision.
In this article, we discussed hedging with futures contracts in times of high volatility. In particular, we focused the discussion on some points related to margin calls. The general ideas about hedging and risk management apply to any type of marketing contract, but the discussion related to margin calls is specific to futures contracts. Given the high level of volatility that we have observed in commodity markets in the recent past, it is never too much to revisit the points discussed above and keep them in mind as we make marketing decisions involving futures contracts. There are a few other dimensions that could be explored within the points discussed above, as well as there are other points that could be discussed, but we will leave them for future articles.
Fabio Mattos, Assistant Professor Department of Agricultural Economics University of Nebraska-Lincoln firstname.lastname@example.org (402) 472-1796
A copy of this presentation which also includes an initial discussion of U.S. Ethanol and Distillers grains market prospects is found at the following web address on the KSU www.AgManager.info website:
The graphics in this presentation are targeted for both domestic U.S. and international grain market audiences, with prices represented in both domestic U.S. and international metric units. Acreages and supply-demand quantities rae also presented in both english and metric units in alternative graphics.
The session dealt in particular on the current U.S. and World market outlook of corn during a time of tight supplies and uncertainty about U.S. and World corn supply-demand and price trends for the remainder of calendar year 2021.
Daniel O’Brien, Extension Agricultural Economist – Kansas State University
May 17, 2021
A. Ethanol Price and Profitability Trends
Ethanol Sales Prices (per gallon): The selling price of ethanol via tank car and truck shipment out of Iowa ethanol plants is estimated to have averaged near $2.49 / gallon during May 1-14, 2021. This compares to $1.28 /gallon in the 2018/19 U.S. corn marketing year (September 2018-August 2019), $1.21 /gallon during Sept 2019-Aug 2020 (MY 2019/20), and $1.61 per gallon so far through mid-May 2021 in “current crop” MY 2020/21.
Corn Input Purchase Prices (per bushel): During the May 1-14, 2021 period, corn input purchase prices for Iowa ethanol plants are estimated to have averaged near $7.29 /bu. This compares to $3.61 /bu in the 2018/19 U.S. corn marketing year (September 2018-August 2019), $3.42 during Sept 2019-Aug 2020 (MY 2019/20), and $4.95 per bushel so far through mid-May 2021 in “current crop” MY 2020/21.
DDGS Sales Prices (per ton at 10% moisture): During the May 1-14, 2021 period,distillers dried grains (DDGS) (10% moisture)for Iowa ethanol plants are estimated to have averaged near $239 per ton. This compares to near $136 /ton in the 2018/19 U.S. corn marketing year (September 2018-August 2019), near $140 /ton during Sept 2019-Aug 2020 (MY 2019/20), and near $200 per ton so far through mid-May 2021 in “current crop” MY 2020/21.
Ethanol Cost of Production (per gallon): During the May 1-14, 2021 period,cost of productionfor Iowa ethanol plants is estimated to have averaged near $2.45 per gallon. This compares to near $1.46 /gallon in the 2018/19 U.S. corn marketing year (September 2018-August 2019), $1.35 /gallon during Sept 2019-Aug 2020 (MY 2019/20), and $1.75 /gallon so far through mid-May 2021 in “current crop” MY 2020/21.
Profitability of Ethanol Production (per gallon): Using an Iowa State University model and applying price estimates from Kansas State University, ethanol plants in Iowa and other Midwestern U.S. states were operating on average at an estimated profit of $0.03 per gallon during May 1-14, 2021. Ethanol plants in the U.S. had been operating unprofitably since August 2018, with average loses of -$0.18 /gallon in the 2018/19 U.S. corn marketing year (September 2018-August 2019), -$0.14 /gallon during Sept 2019-Aug 2020 (MY 2019/20), and -$0.14 /gallon through mid May 2021 in “current crop” MY 2020/21.
B. Ethanol Production & Stocks Trends
U.S. Ethanol Production: Since the beginning of the “new crop” 2019/20 marketing year (MY) for U.S. corn on September 1, 2020 through May 7, 2021, U.S. ethanol production has averaged 935,000 barrels per week (b/w) – with a range of 658K to 991K b/w over the 36 week period. At this average pace throughout the remaining 16 weeks of “current crop” MY 2020/21, U.S. ethanol production would reach 14.335 billion barrels in “current crop” MY 2020/21. Further, at a rate of 2.83 gallons of ethanol per bushel of feedgrain used for ethanol production (corn and/or grain sorghum), a total of 5.065 billion bushels (bb) of feedgrains would be used for ethanol production in the current marketing year.
The USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) report on May 12, 2021 have a forecast in “current crop” MY 2020/21 of 4.975 bb of U.S. corn would use in ethanol production, and that 10 million bushels (mb) of U.S. grain sorghum would be used for Food, Seed, and Industrial (FSI) uses – which includes industrial ethanol production as well as seed use.
At this time, combined U.S. corn and grain sorghum use for ethanol production in “current crop” MY 2020/21 (i.e., for the September 1, 2020 through August 31, 2021 period) is on pace to be 5.065 billion bushels, up 1.8% from the USDA’s projection of 4.975 billion bushels.
U.S. Ethanol Stocks: United States’ ethanol stocks have averaged 21,435,111 barrels per week since the beginning of the “current crop” MY 2020/21 in early September 2020 – through May 7, 2021. This weekly average of U.S. ethanol stocks is down 5.3% from the previous 12 month marketing year average for MY 2019/20 of 22,636,102 barrels per week.
From the week of June 4, 2010 through May 7, 2021, average weekly U.S. ethanol production has increased by 263.1 barrels per week. During this same time, weekly average U.S. ethanol ending stocks have increased by 9,962.8 barrels per week.
However, for the week ending May 7, 2021 U.S. ethanol ending stocks were estimated to be 19,393,000 barrels, down 9.5% from the “current year” MY 2020/21 average of 21,435,111 barrels – helping to support ethanol market prices.
Following are some graphics on U.S. Ethanol Market price and profitability trends. This information is available at the following KSU AgManager web-address:
Agricultural Economists Daniel O’Brien, Guy Allen and Mark Wood presented information on a) domestic U.S. grain markets (O’Brien), b) international grain market factors (Allen), and c) grain enterprise cost of production estimates for 2021 and the profitability of current “new crop” MY 2021/22 forward contract prices for corn, grain sorghum, hard red winter (HRW) wheat, and soybeans (Wood).
The recording and a copy of this presentation is found at the following web address on the KSU www.AgManager.info website:
This presentation was targeted for both domestic U.S. and international grain market audiences, with prices represented in both domestic U.S. and international metric units. The session dealt with market outlook of corn, grain sorghum, hard red winter (HRW) wheat, and soybeans for the remainder of year 2021. It also contains information regarding market expectations for the upcoming USDA World Agricultural Supply and Demand Estimates (WASDE) report on Wednesday, May 12, 2021.
Daniel O’Brien, Extension Agricultural Economist – Kansas State University
The whirling dervish action of the last month in the grain markets has moderated within the last week+ – raising questions about what price trends to expect in coming weeks. With the following events anticipated in U.S. grain markets over the next 2 months, markets are likely to stay volatile (both up and down) in coming weeks.
These factors are:
a) South American Soybean supplies coming in a matter of weeks that will compete with U.S. soybean exports,
b) indications of strong HRW wheat feeding occurring in Kansas-Oklahoma-Texas in response to strong feedgrain prices,
c) the first official USDA grain market supply-demand and price projections for 2021 due out with the USDA Outlook Conference on February 18-19, 2021,
d) U.S. Hard Red Winter wheat to break dormancy in March during a time of dry weather in the U.S. central and southern plains,
e) the USDA Prospective Plantings and Grain Stocks reports both to be released on March 31st,
f) the ongoing export demand activity of China and other countries for U.S.,
g) limits on wheat exports by Black Sea Region countries to protect domestic supplies and try to control domestic food price inflation, and
h) other anticipated factors affecting U.S. and world grain markets (South American labor strikes affecting exports, etc., etc., …).
When South American soybean supplies come available for China to purchase, it may be the first bit of market information that will lead to a moderation in soybean and grain prices overall – until other supply-demand factors emerge. The March 31st USDA Prospective Plantings and Grain Stocks reports have the potential to impact grain markets significantly, especially for new crop DEC 2021 Corn and NOV 2021 Soybean futures IF sizable increases in 2021 U.S. corn and soybean acreages are projected.
The March 31st USDA Grain Stocks reports for corn and wheat will be ESPECIALLY critical for “current crop” MY 2020/21 U.S. grain market supply-demand and price prospects. IF corn and/or wheat feeding is markedly stronger than anticipated, THEN corn and wheat ending stocks projections and % stocks/use projections could tighten up considerably, and cause extreme corn and wheat price volatility through spring planting and early summer 2021.
It is shaping up to be a volatile time in the grain markets from now through at least May-early June 2021.
Kansas State University Department of Agricultural Economics
January 24, 2021
Trends in grain futures markets since the January 12th USDA World Agricultural Supply and Demand Estimates (WASDE) report have been first up and then down. The key question now is what are prospect for corn futures markets in the short run (i.e., the week of January 25-29th), and in the intermediate run through – say – the key March 31, 2021 USDA Grain Stocks and Prospective Plantings reports. And also, whether corn, soybean, and/or Kansas hard red winter (HRW) wheat futures have been more or less impacted by the post-WASDE report downturn in prices.
A. Corn Futures Market Trends & Analysis
Regarding the corn market, CME MARCH 2021 Corn futures opened at $4.91 1/2 /bu on January 12th before the USDA report release, trading up to a high of $5.17 1/2 that same day, and then up to as high as $5.41 1/2 on 1/13/2021 before closing at $5.24 1/2 in that day’s trading. After volatile action in a range of $5.12 3/4 to $5.36 1/2 afterwards and a close of $5.24 1/4 on 1/21/2021, prices dropped $0.23 3/4 to $5.00 1/2 /bu on Friday, January 22nd. So, after starting at $4.91 1/2 /bu pre-report on 1/12/2021, CME MARCH 2021 Corn futures prices firt rose and then fell to $,.00 1/2 per bushel on 1/22/2021.
In the following KSU Weekly Grain Market Review through Friday, January 22nd, probability-weighted projections of U.S. corn market scenarios for “new crop” MY 2020/21 are included – generally acknowledging the impact of high U.S. cash corn prices on corn use in the U.S domestic ethanol, wet corn milling and livestock feeding industries, and projecting a moderation in corn futures and U.S. cash corn prices from current levels for the remainder of this marketing year through August 31, 2021 barring other unforeseen issues such as U.S. corn crop production problems in Spring 2021.
This weekly review also contains a preliminary projection of the U.S. corn supply-demand for “next crop” MY 2021/22 based on estimates. The first alternative to consider is the impact of no change in U.S. corn planted acres (90.819 million acres or “ma”) in year 2021 from 2020 levels. This scenario is compared to a 2.5% increase in U.S. corn planted acres up to 93.089 ma. Under the “no change” scenario, U.S. corn production with 5 year U.S. average corn yields of 173.4 bu/acre is projected to be 14.393 billion bu (bb). Under the +2.5% scenario, 2021 U.S. corn production is forecast to be 14.753 bb. This three million acre difference in 2021 U.S. corn planted acres is projected to be the difference between $4.40-4.45 /bu and $3.87 /bu in “next crop” MY 2021/22 season average U.S. corn prices in the U.S. for “next crop” MY 2021/22.
B. Soybean Market Trends & Analysis
Regarding the soybean market, CME MARCH 2021 Soybean futures opened at $13.72 1/2 /bu on January 12th before the USDA report, trading up to a high of $14.28 1/4 that same day, and then up to as high as $14.36 1/2 on 1/13/2021 before closing at $14.06 1/4 in that day’s trade. After two days of sideways trading, the MARCH 2021 soybean contract then trended lower, down to a close of $13.70 1/4 on 1/21/2021, and then a further decline of $0.58 1/2 on Friday, January 22nd down to a close of $13.11 3/4 that same day. So, after starting at $13.72 1/2 /bu before the USDA report release on 1/12/2021, prices first rose and then fell to below that level down to $13.11 3/4 on 1/22/2021. Although both MARCH 2021 corn and soybean futures have followed a similar pattern in the post-January 12, 2021 USDA WASDE report period, corn futures have “held up” better than has soybeans relatively speaking. It is possible that with strong Chinese import demand for U.S. soybeans that soybean futures may have “over bid” the post-January WASDE price rise more so than for corn futures.
In the following KSU Weekly Grain Market Review through Friday, January 22nd, probability-weighted projections of U.S. soybean market scenarios for “new crop” MY 2020/21 are included – focusing exclusively on the impact of varying U.S. soybean export outcomes on the soybean market for the remainder of the current marketing year. U.S. soybean market prices would likely “swing sharply” on outcomes of either a 30 million bushel (mb) up to 2.260 bb, or a 60 mb increase up to 2.290 bb in projected U.S. soybean exports from the USDA January 12th WASDE projection level for “new crop” MY 2020/21. Conversely, a decrease of 150 mb down to 2.080 bb in the U.S. soybean export figure for “new crop” MY 2020/21 for whatever reason would have a significant negative impact on U.S. soybean market price prospects. This scenario could occur if there is a larger and/or earlier harvested 2021 South American soybean crop than is now anticipated by the USDA.
C. Hard Red Winter (HRW) Wheat Market Trends & Analysis
In the hard red winter (HRW) wheat market, the CME MARCH 2021 Kansas HRW Wheat futures contract opened at $5.96 1/4 /bu on January 12th before the USDA report, trading up to a high of $6.26 1/2 that same day, and then up to a high as $6.60 on 1/15/2021 before closing at $6.43 on the 15th. After trading sideways to lower for a couple days, the MARCH 2021 Kansas HRW wheat contract closed at $6.35 3/4 on 1/21/2021, and then declined $0.22 1/2 on Friday, January 22nd down to a close of $6.13 1/4. Taken all together, after starting at $5.96 1/4 /bu prior to the USDA report on 1/12/2021, prices first rose and then fell to a close of $6.13 1/4 on 1/22/2021. In comparison to MARCH 2021 corn and soybean futures, Kansas HRW Wheat has followed a similar pattern to corn in the post-January 2021 USDA WASDE report period, more-so than has soybeans.
In the following KSU Weekly Grain Market Review through Friday, January 22nd, probability-weighted projections of U.S. wheat market scenarios for “current crop” MY 2020/21 are included – focusing exclusively on the impact of varying U.S. wheat export outcomes on U.S. wheat prices for the remainder of the current marketing year. U.S. wheat market prices would likely “swing sharply” on outcomes of either 50 million bushel (mb) increases or decreases in U.S. wheat exports from the USDA January WASDE projection of 985 million bushels (mb) for “new crop” MY 2020/21 ending on May 31, 2021. Such changes could lead to a $0.30 swing in U.S. wheat season average prices from the USDA’s projection of $4.85 /bu in the January 12, 2021 USDA WASDE report.
The following article provides an analysis of “U.S. Grain Sorghum and World Coarse Grain Markets” based on grain market information available through December 31, 2020. Information for this analysis comes from the December 10, 2020 USDA information, including the USDA NASS Crop Production report, the World Agricultural Supply and Demand Estimates (WASDE) report, and other available market price information through Thursday, December 31, 2020.
Daniel M. O’Brien, Extension Agricultural Economist – Kansas State University
Grain sorghum prices in the U.S. have trended sharply higher from mid-August to late-December 2020. Strong Chinese demand for U.S. grain sorghum exports have been the primary driver in this market.
A. Strength in Kansas Grain Sorghum Cash Bids & Basis
The strength of current demand for U.S. grain sorghum is evident in cash bids and extremely positive basis bids at Kansas country elevator and grain terminal locations – with the state of Kansas being a predominant U.S. sorghum production area. Over the 3 year 2018 – 2020 period, Kansas accounted for 62.6% of U.S. grain sorghum production on average:
% KS Sorghum Production of U.S. = [224,853,333 bu.KS 2018-2020 avg Prodn] ÷ [359,072,000 bu.S 2018-2020 avg Prodn]
At both the Garden City Coop grain elevator in Southwest Kansas, and the Canton Terminal elevator affiliated with the Mid Kansas Coop in Central Kansas, grain sorghum cash bids on 12/31/2020 were $6.14 per bushel, equaling a basis of $1.30 /bu. over MARCH 2021 Corn futures closing @ $4.84 /bu. These grain sorghum cash bids compare to corn bids of $5.14 /bu (basis = $0.30 over) at Garden City, and $4.67 /bu (basis = 0.17 under at Canton) the same day.
B. “New Crop” 2021 Forward Contracts for Sorghum
Along with stronger cash bids for grain sorghum, stronger “new crop 2021” forward contract bids for sorghum for delivery to local Kansas grain elevators and terminals in fall 2021 are likely to encourage farmers to increase grain sorghum planted acreage in spring 2021.
On Thursday, 12/31/2020, “new crop” 2021 grain sorghum harvest forward contract bids in Garden City of $4.72 per bushel (basis = $0.37 over DEC 2021 Corn futures) compared to $4.65 (basis = $0.30 over) in Canton. These “new crop” bids compared to corn forward contract bids of $4.35 (basis = $0.00 or “even par” with DEC 2021 Corn Futures) in Garden City, and $4.10 ($0.17 under) in Canton.
C. Key Grain Sorghum Market Factors in Late 2020-Early 2021
Factor #1: Sorghum Supply-Demand vs Price Trends:
Although U.S. grain sorghum prices have trended sharply higher since summer 2020, only moderate changes have occurred in aggregate USDA U.S. grain sorghum supply-demand & price estimates for “current” MY 2020/21 (MY).
However, percent (%) ending stocks-to-use has declined significantly from 19.05% in MY 2018/19 (an 8 year low in U.S. grain sorghum export), to 7.71% in “old crop” MY 2019/20 to 8.11% in “current” MY 2020/21 (Table 1, Figures 8ab).
Over the course of their July through December 2020 USDA World Agricultural Supply and Demand Estimates (WASDE) reports, increases by the USDA in their projection of U.S. sorghum exports have been offset by decreases in ethanol use in the Food, Seed & Industrial use category, while forecast feed & residual use has remained unchanged (Table 1, Figures 5a, 6a, 7ab).
Kansas ethanol plants have not listed a public bid offer for grain sorghum purchases during much of the September-December 2020 period according to USDA Agricultural Marketing Service reports. The strength in U.S. sorghum export demand has bid grain sorghum prices “out of” the ethanol input market relative to the lower price of corn.
As part of the U.S. feedgrain and World coarse grain complex, U.S. grain sorghum markets are usually affected by price trends in the much larger U.S. corn market. Over the July-December 2020 period, USDA forecasts of U.S.,World & “World-Less-China” corn ending stocks and % stocks-to-use for “current” MY 2020/21 actually DID decline appreciably – resulting in increasing U.S. corn prices, which helped to also support U.S. grain sorghum prices (Figure 8a).
The Key Point: In recent marketing years when Chinese demand for U.S. grain sorghum exports has been stronger, U.S. sorghum cash prices and basis levels have somewhat “separated” or “distinguished” themselves from corn market prices. Restated, during times of strong U.S. grain sorghum exports to China, U.S. sorghum market prices have behaved somewhat independent of the corn market. These situations contrast with other marketing years of more “average” Chinese import demand for U.S. sorghum, where sorghum markets have operated in a competitive export pricing environment with corn focusing on feed and ethanol use (Table 1, Figure 8ab).
Cumulative U.S. sorghum export shipments strong but not record high in “current” MY 2020/21 when compared marketing years since MY 2012/13. However, forward sales of U.S. grain sorghum exports have been “bullish” through 12/24/2020 (Table 1, Figure 7ab).
Shipments of U.S. grain sorghum of 125.5 mb through 12/24/2020 included 90.4 mb to known export destinations (99.99% to China), with an additional 35.1 mb shipments to “unknown destinations” in “current” MY 2020/21.
Of the 74.8 mb of U.S. Sorghum forward sales that are yet to be shipped, 97% have been made to China interests. The USDA has acknowledged the strength of U.S. grain sorghum exports by raising its U.S. export forecast to 275 million bushels (mb) in “current” MY 2020/21, up from 93 mb in MY 2018/19 and from 204 mb in “old crop” MY 2019/20 in its WASDE reports (Table 1).
This level of U.S. grain sorghum exports would be the largest since 352 mb in MY 2014/15 and 342 mb in MY 2015/16.
During the weeks ending 12/17/2020 and 12/24/2020, the U.S. shipped 5.1 mb and 6.4 mb of grain sorghum, respectively, compared to the average pace of 5.7 mb per week to meet USDA’s projection of 275 mb by August 31, 2021, the end of “current” MY 2020/21.
Factor #3: “Cross-Market Effects” on U.S. Grain Sorghum Prices
Grain sorghum cash market prices have been affected in a “cross-market” manner by broader trends in the U.S. corn markets – particularly by trends in corn futures from which grain sorghum basis adjustments are made. Then as movements in soybean and/or wheat futures would impact corn futures, then grain sorghum prices would be affected as well “across grain markets”.
Consequently, the strong uptrends that have occurred in U.S. and World soybean, corn and wheat futures markets during the August-December 2020 period have impacted grain sorghum markets through corn futures – from which basis adjustments are made to determine grain sorghum cash prices.
D. A Futures-Based Forecast of U.S. Grain Sorghum Prices for the “Current Crop” 2020/21 Marketing Year
Marketing year average U.S. farm prices for grain sorghum are projected to be $5.09 per bushel using a combination of 2021 CME corn futures contract prices, U.S. monthly cash grain sorghum prices and basis estimates available through December 31, 2020 (Figure 1bc).
This Kansas State University projection of $5.09 /bu for “current” MY 2020/21 U.S. grain sorghum average farm prices compares to the USDA’s projection of $4.40 /bu in the December 10, 2020 World Agricultural Supply and Demand Estimates (WASDE) report (Table 1, Figures 1bc, 8ab, 9a). Corn futures prices have moved sharply higher since the December 10th WASDE report – raising expectations for how the USDA may adjust its grain sorghum price projection in the upcoming January 12, 2021 WASDE report.
In the following table are calculations used in to generate this KSU $5.09 /bu projection of U.S. grain sorghum average farm prices for the “current crop” 2020/21 marketing year. “Current crop” MY 2020/21 started on September 1, 2020 and will last through August 31, 2021.
In the table above, actual USDA reported monthly cash prices for September through November 2020 are used, along with corn futures contract closes for MARCH 2021, MAY 2021, JULY 2021, and SEPTEMBER 2021 as of 12/31/2020.
Basis estimates for September – November 2020 are based on monthly average lead futures contract prices less cash prices. The most recent November 2020 calculated U.S. grain sorghum basis is used for December 2020 through August 2021 projections in combination with corn futures closing prices on December 31, 2020.
USDA monthly weighted average cash grain sorghum marketing percentages are used to calculate a weighted average U.S. grain sorghum farm price for the “current crop” MY 2020/21 marketing year ending on August 31, 2021.
A weakness of this method is that it does not account for potential seasonal changes in grain sorghum basis that may occur in coming months, in this case from December 2020 through August 2021. And to the degree that current corn futures prices are either accurate or inaccurate predictors of their own future price levels, this forecast approach is inaccurate as well.
However, given the difficulty of making accurate forecasts of future market supply-demand outcomes for grain sorghum and other grains as well, this corn futures-based forecast using the most current market information available seemingly has some merit.
D. World Coarse Grain Supply-Demand Prospects
World coarse grain production of a record high 1,447.82 million metric tons (mmt) is projected for “current” MY 2020/21, up 2.6% from 1,411.46 mmt in “old crop” MY 2019/20, and up 3.6% from the 1,397.60 mmt in MY 2018/19 (Figure 10). The “new crop” 2020/21 marketing year began on September 1, 2020 and will continue through August 31, 2021.
World coarse grain total supplies of 1,779.37 mmt in “current” MY 2020/21 are forecast to be up 1.2% from 1,758.29 mmt in “old crop” MY 2019/20, and up 0.7% from 1,767.78 mmt in MY 2018/19. “World-Less-China” total supplies of 1,280.45 mmt are projected for “current” MY 2020/21, up 0.06% from 1,279.69 mmt in “old crop” MY 2019/20, and up 11.3% from the 1,311.00 mmt in MY 2018/19 (Figure 10).
World coarse grain exports of 226.90 mmt are projected for “current” MY 2020/21, up 9.1% from 208.06 mmt in “old crop” MY 2019/20, and up 6.6% from 212.81 mmt in MY 2018/19 (Figure 10).
Projected World coarse grainending stocks of 318.78 mmt, and 21.83% ending stocks/use in “current” MY 2020/21 are 6 and 7 year lows, respectively. These projections for “new crop” MY 2020/21 are down from 331.51 mmt (23.2% S/U) in “old crop” MY 2019/20, from 346.86 mmt (24.4% S/U) in MY 2018/19, from 370.66 (27.0% S/U) in MY 2017/18, and from the record highs of 386.06 mmt (27.9% S/U) in MY 2016/17 (Figures 10-11).
Projected “World-Less-China” coarse grain ending stocks are estimated to be an 8 year low of 126.44 mmt (10.96% ending stocks/use) in “new crop” MY 2020/21, being down from 130.56 mmt (11.54% S/U) in “old crop” MY 2019/20, and down from 136.44 mmt (12.03% S/U) in MY 2018/19 (Figures 12-13).