U.S. Ethanol and Biodiesel Market and Plant Profitability (as of May 29, 2018)

U.S. Ethanol Market & Profitability Situation in May 2018

Given moderate-to-weak ethanol prices, strong distillers grain market demand, and moderately strong corn prices, ethanol plants are estimated to be just marginally covering their costs during the month of May 2018.  The price of ethanol in Iowa during the month of May 2018 is estimated to have averaged $1.3950 per gallon – down from near $1.50 per gallon for much of 2017.  The cost of ethanol production during May 2018 is estimated to be just marginally lower than $1.387 per gallon.  The price of corn in Iowa – being the major input cost for ethanol plants – is estimated to have averaged $3.70 per bushel for May 2018, having risen from a low of $3.13-$3.15 per bushel in November 2017.  The price of distillers dried grains and solubles (DDGS) in May 2018 is projected to be $174 / gallon, up sharply from $109-$116 during Oct-Nov 2017.

As a result, ethanol plants in Iowa are estimated to be only marginally profitable in May 2018 at approximately $0.01 per gallon – being nearly equal to March-April 2018, but up from losses of $0.04-$0.11 per gallon during the December 2017 through February 2018 period.

Biodiesel plants are showing strong profitability in May 2018.  However, biodiesel price data for Iowa were based on an estimate rather than reported data from USDA Agricultural Market Service (AMS) price data. That said, profit estimates for Iowa biodiesel plants are strong enough at approximately $0.32 per gallon, that even if biodiesel prices were $0.15-$0.20 per gallon too high, Iowa biodiesel plants were be making profits of $0.12-$0.17 per gallon produced.

One other factor to note in this analysis is the relationship between ethanol prices and RBOB gasoline prices.  Whereas RBOB gasoline futures prices have been trending strongly higher from near $1.55 per gallon in early October 2017 up to $2.14 in late May 2018, ethanol futures prices have been essentially unchanged to slightly higher during the same period – increasing from $1.46 /gallon in early October 2017 to $1.48 in late May 2018.  Note that during the early December 2017 through early January 2018 period ethanol futures had temporarily fallen to $1.36-$1.37 per gallon.

Overall, the outlook for U.S. ethanol is still positive – given a healthy U.S. economy with accompanying fuel demand, and the likelihood of another successful 2018 growing season for the U.S. corn crop (leading to moderate-to-low U.S. corn prices for the remainder of calendar year 2018.

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Following are some graphics on price and profitability trends in the U.S. ethanol and biodiesel industries, which will soon be available on the KSU AgManager website: http://www.agmanager.info An updated version of the full presentation titled “U.S. Ethanol & Biodiesel Market Situation” will be located at the KSU AgManager.info website – at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

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KSU Corn Market Outlook in Late-May 2018: A Less Overwhelming Supply-Demand Situation in the Corn Market

An analysis of U.S. and World Corn supply-demand factors and “New Crop” 2018/19 Marketing Year supply-demand and price prospects is provided in the following article summary.  This information follows the USDA Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports on May 10, 2018.

A full version of this article will available on the KSU AgManager website http://www.agmanager.info/ at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

Following is the article with supporting Tables and Charts for “Corn Market Outlook in Late-May 2018″

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Overview of the Corn Market Situation in Late-May 2018

Since early February 2018 the outlook for U.S. corn market prices through Summer-Fall of this year has improved significantly.  Increasingly optimistic forecasts for U.S. corn prices in the “new crop” 2018/19 marketing year are based on a combination of 1) expected reductions in 2018 U.S. corn planted acres and production, 2) forecasts of continued strength in U.S. corn usage, and 3) prospects for tighter supplies in terms of reduced ending stocks and percent ending stocks-to-use.  Improved U.S. corn export prospects are expected as a result of 2018 corn production problems for export competitors Argentina and Brazil.  Strong U.S. ethanol demand is also expected to continue due to growing U.S. gasoline demand in a robust economy.

Even with the strength of U.S. corn prices over the past four (4) months, the path of U.S. corn prices through Fall 2018 will be largely driven by the development of and prospects for the 2018 U.S. corn crop.   Kansas State University projections are that if prospects for 2018 U.S. corn production decline markedly below the 14.040 billion bushel (bb) forecast by the USDA – down to say 13.50-13.75 bb or less, then U.S. corn ending stocks would likely fall to 1.450-1.575 bb or less (compared to the USDA’s forecast of 1.682 bb).  If this occurs, then U.S. corn ending stocks-to-use in “new crop” MY 2018/19 would likely decline to 10% or less – compared to the current USDA forecast of 11.53% ending stocks-to-use. 

If these circumstances were to occur, then in Fall 2018 DEC 2018 corn futures would likely move higher to the range of $4.50-$5.00 /bu. or more.  Projected U.S. average cash prices for “new crop” MY 2018/19 would also likely rise – up to the range of $4.00-$4.50 /bu (midpoint = $4.25).  This compares to the current USDA forecast of $3.30-$4.30 (midpoint = $3.80 /bu) on 11.53% stocks/use for “new crop” MY 2018/19 – beginning September 1, 2018.

CME Corn Futures & Kansas Cash Corn Prices & Basis Bids

Since the release of the USDA’s May 10th World Agricultural Supply and Demand (WASDE) report, “old crop JULY 2018 CME corn futures prices have traded in a range of $3.94 ¼ to $4.09 per bushel before closing at $4.08 ½ /bu on May 23rd (Figure 1).   Over the same time period “new crop DECEMBER 2018 CME corn futures prices have traded in a range of $4.12 ¼ to $4.26 ¾ /bu before closing at $4.26 ½ on May 23rd.   Prices for both of these contracts are up $0.45 ¾ /bu or 12.8% from their lows on January 12th following the January 2018 USDA Annual Crop Production Summary, WASDE, and Grain Stocks reports, and the USDA Prospective Plantings and Grain Stocks reports on March 29th.        

In Western Kansas on Wednesday, May 23rd cash corn bids at major grain elevators ranged from $3.54 ($0.55 under JULY 2018 futures) to $3.98 ($0.11 under), and ranged from $3.68 ½ ($0.40 under) to $3.913 ½ ($0.17 under) in Central Kansas.  These prices are much higher than when bids statewide had fallen to $2.66-$2.96 on December 23, 2016, and above marketing loan rates for corn across the state, with corn loans near $2.05 in Central Kansas and $2.19 per bushel in Western Kansas

Cash corn price bids in East Central and Northeast Kansas at major terminal locations were $3.98 ½ – $4.03 ½ on May 23rd, up substantially from the range of $3.26-$3.28 per bushel on 12/23/2016.  Cash corn bids at Kansas ethanol plants on May 23rd ranged from $3.91 ¾ ($0.13 under JULY) to $4.39 ¾ ($0.35 over JULY) – continuing to indicate strength in ethanol demand for corn in Kansas and nationwide.

USDA U.S. Corn Supply-Demand Projections for “Old Crop” MY 2017/18

In the May 10th USDA WASDE report the USDA projected “old crop” MY 2017/18 corn Total Supplies to be unchanged from earlier WASDE reports at 16.947 bb (Table 1 and Figure 6).  Total Use was projected to be the highest on record at 14.765 bb – up from the past record of 14.649 bb a year earlier (Table 1, Figures 7 & 9).  

Continued strength in U.S. gasoline demand resulting from a healthy U.S. economy has supported U.S. ethanol demand – and spurred corn use in ethanol production (Figure 8a).  In spite of a build-up in U.S. ethanol stocks and a moderation in ethanol prices, production has remained at or near record high levels (Figure 8b).  Exports of U.S. ethanol increased sharply in March 2018 to 14.3% of U.S. ethanol production – up from that previous high of 13.2% in December 2011 (Figure 8c).  Most U.S. ethanol exports in 2017 went to Brazil and Canada, and this trend continues in 2018.  

Exports of U.S. corn have increased in volume since early 2018 as the damage to corn crops in export competitors Argentina and Brazil has emerged (Figure 10).  Through May 17th – the 37th week of “old crop” MY 2017/18 – 1.404 bb of U.S. corn had been shipped.  This amounts to 63.1% of the USDA’s projection of 2.225 bb in U.S. exports with 71.2% of the marketing year complete (i.e., 37/52 weeks).  However, total shipments and forward sales of U.S. corn in “old crop” MY 2017/18 through May 17th amounted to 2.105 bb, or 94.6% of the USDA’s projection with 71.2% of MY 2017/18 complete – indicating a positive outlook for “old crop” U.S. corn exports for the remainder of the marketing year through August 31st.

Non-ethanol Food, Seed, and Industrial (FSI) usage has continued to grow to a record high 1.465 bb in “old crop” MY 2017/18.  Feed and Residual use of U.S. corn in “old crop” MY 2017/18 increased to a 10 year high of 5.500 bb – following strong feed demand from year-over-year increases from year 2017 to 2018 in U.S. total red meat and poultry production (Figures 7 & 9).  Production and use of Distillers Dried Grains and Solubles (DDGS) have been robust, with DDGS use for livestock feed and exports remaining strong (Figure 9).

As a result of these supply and use projections for “old crop” MY 2017/18, ending stocks are projected to be 2.182 bb with percent ending stocks-to-use of 14.78% – down from 2.293 bb (15.65% S/U) in MY 2016/17 (Table 1, Figures 11-12).  United States’ corn prices for “old crop” MY 2017/18 are projected in the range of $3.25-$3.55 (midpoint = $3.40 /bu).   

USDA Supply-Demand Projections for “New Crop” MY 2018/19

The USDA provided a forecast of U.S. corn supply, demand, and prices for “new crop” MY 2018/19 In the May 10th USDA WASDE report.  Based on 2018 U.S. corn production projections 88.026 million acres (ma) planted, 80.690 ma harvested, and 2018 U.S. corn average yields of 174.0 bu/ac., the USDA forecast 2018 U.S. corn production to be 14.040 bb – down from 14.604 bb in 2017 (2nd highest on record), and the record high of 15.148 bb in 2018 (Tables 1a-b, Figures 4-5). 

Total Supplies of U.S. corn in “new crop” MY 2018/19 are forecast to be 16.272 bb based on 2.182 bb in beginning stocks, 14.040 bb in production, and 50 mb in imports.  This is down from record highs of 16.942-16.947 bb in U.S. corn Total Supplies the last two marketing years (Tables 1a-b, Figure 6). 

Corn-based ethanol production in the U.S. in “new crop” MY 2018/19 is forecast to be a new record high of 5.625 bb – to be driven by expected ongoing growth in U.S. gasoline demand (Table 1a-b, Figures 7-9).  This would be up 50 mb in U.S. corn use for ethanol than in “old crop” MY 2017/18.   

Exports of U.S. corn in “new crop” MY 2018/19 are forecast to decline 125 mb to 2.100 bb – likely on a return to normal corn production on the part of export competitors Argentina and Brazil in 2019 (Figures 7-9).  As of May 17th, a total of 98.6 mb of U.S. corn sales have been made for delivery in “new crop” MY 2018/19 – beginning on September 1, 2018 – equal to 4.7% of the USDA projection of 2.100 bb for the marketing year.

Non-ethanol Food, Seed, and Industrial (FSI) usage is forecast to be up 35 mb to a record high 1.490 bb in “new crop” MY 2018/19.  Feed and Residual use of U.S. corn in “new crop” MY 2018/19 is forecast to be 5.375 bb – down from the 10 year high of 5.500 bb in “old crop” MY 2017/19 – following the impact of higher corn prices on livestock feed usage (Figures 7 and 9).  The USDA made a partially offsetting increase in its projections of increased wheat feeding (up 50 mb) to offset this reduction.  Increased availability of Distillers Dried Grains and Solubles (DDGS) from increased ethanol production will also help offset this forecast direct reduction in corn use for livestock feeding (Figure 9).

Total Use is projected to be the 3rd highest on record at 14.590 bb – down from the record highs of 14.649-14.765 bb the last two years (Table 1 and Figures 7 & 9). 

As a result of these supply and use projections for “new crop” MY 2018/19, ending stocks are projected to be 1.682 bb with percent ending stocks-to-use of 11.53% – down from 2.182 bb (14.78% S/U) in “old crop” MY 2017/18 (Tables 1a-b and Figures 11-12).  United States’ corn prices for “new crop” MY 2018/19 are projected in the range of $3.30-$4.30 (midpoint = $3.80 /bu) – up $0.40 /bu from the midpoint projection of $3.40 /bu in “old crop” MY 2017/18.   This scenario is given a 45% likelihood of occurring by KSU Extension Agricultural Economist D. O’Brien.

Alternative KSU Supply-Demand & Price Forecast for “New Crop” MY 2018/19

Three alternative KSU-Scenarios to the USDA’s forecast for U.S. corn supply-demand and prices are presented in what follows for “new crop” MY 2018/19 (Table 1b).  These projections show how varying 2018 U.S. corn production and use scenarios could affect U.S. corn supply-demand and price outcomes in “new crop” MY 2018/19.  Probability-weights are added to reflect judgements about how likely each scenario is to occur in “new crop” MY 2018/19, i.e., during the September 1, 2018 through August 31, 2019 time period.

A – KSU “Higher 2018 U.S. Corn Production” Scenario for “new crop” MY 2018/19: (25% probability): Assumptions are as follows: 88.026 ma planted, 80.690 ma harvested, 176.6 bu/ac record yield (equal to 2017 record high), 14.277 bb production, 16.509 bb total supplies, 14.645 bb total use, 1.845 bb ending stocks, 12.73% S/U, & $3.60 /bu U.S. corn average price; 

B – KSU “Lower 2018 U.S. Corn Production” Scenario for “new crop” MY 2018/19: (15% probability): Assumptions are as follows: 88.026 ma planted, 80.846 ma harvested, 164.4 bu/ac yield (equal to 2009 yield), 13.291 bb production, 15.523 bb total supplies, 14.204 bb total use, 1.319 bb ending stocks, 9.23% S/U, & $4.50 /bu U.S. corn average price.

C – KSU “Higher 2018 U.S. Corn Exports” Scenario for “new crop” MY 2018/19: (15% probability): Assumptions are as follows: 88.026 ma planted, 80.846 ma harvested, 174.0 bu/ac yield (equal to USDA forecast yield), 14.040 bb production, 16.272 bb total supplies, 2.400 bb exports (up 300 mb from USDA), 14.590 bb total use, 1.208 bb ending stocks, 8.44% S/U, & $5.25 /bu U.S. corn average price.

World Corn Supply-Demand – With & Without China

World corn production of 1,056.1 million metric tons (mmt) is projected for “new crop” MY 2018/19, up 1.9% from 1,036.7 mmt in “old crop” MY 2017/18, but down 2.1% from the record high of 1,078.3 mmt in MY 2016/17 (Figures 13-14a, Table 2).  The “new crop” 2018/19 marketing year begins September 1, 2018 and continues through August 31, 2019.  Production in Argentina of 41.0 mmt in 2019 would be a “rebound” from the short crop of 33.0 mmt projected in 2018.  Similarly, production in Brazil of 96.0 mmt in 2019 would also be a “rebound” from the short crop of 87.0 mmt projected in 2018.  The 2018 corn harvests for Argentina and Brazil occur in the later half of “old crop” MY 2017/18, i.e., February through August 2018.

World corn total supplies of 1,250.9 mmt in “new crop” MY 2018/19 are forecast to be down moderately from 1,264.2 mmt in “old crop” MY 2017/18, but up from the record high of 1,288.3 mmt in MY 2016/17. 

World corn exports of a 158.0 mmt are projected for “new crop” MY 2018/19, up 4.6% from 151.1 mmt in “old crop” MY 2017/18, but down 1% from the record high of 159.7 mmt in MY 2016/17 (Table 3).

Projected World corn ending stocks of 159.2 mmt (14.6% S/U) in “new crop” MY 2018/19 are down 18.3% from 194.85 mmt (18.2% S/U) in “old crop” MY 2017/18, 30.1% from the record high 227.5 mmt (21.4% S/U) in MY 2016/17, and 210.0 mmt (21.2% S/U) in MY 2015/16  (Figure 13-14a, Tables 8-9).  Projected Foreign (Non-U.S.) corn ending stocks of 116.4 mmt (13.2% S/U) in “new crop” MY 2018/19, is down 16.5% from 139.4 mmt (16.5% S/U) in “old crop” MY 2017/18, and is down from 169.3 mmt (20.0% S/U) in MY 2016/17.  

An alternative view of the World corn supply-demand is presented if Chinese corn usage and ending stocks are isolated from the World market (Figures 14b-c, Tables 7-9).  “World-Less-China” corn ending stocks are projected to be 98.65 mmt (11.7% S/U) in “new crop” MY 2018/19, down from 115.3 mmt (13.9% S/U) in “old crop” MY 2017/18, and down from 126.8 mmt (15.3% S/U) in MY 2016/17.  These figures show that World stocks-to-use of corn less China’s direct influence are projected to be approximately 20% lower (i.e., 11.7% S/U for the “World-Less-China” versus 14.6% S/U for the “World” overall in “new crop” MY 2018/19). 

At the same time, these figures also show that Chinese ending stocks of corn as proportion of the World total are declining – down from 51.5% in MY 2015/16, to 44.3% in MY 2016/17, to 40.8% in “old crop” MY 2017/18, and now projected to be 38.0% in “new crop” MY 2018/19 (Tables 2-9).  The deliberate actions in recent years – taken by the Chinese government to reduce feedgrain stockpiles  is impacting the relative amount of World total corn stocks they hold.  These actions may eventually increase Chinese import demand for U.S. feedgrains if and when China has a severe short crop situation that they are not able to anticipate ahead of time.

KSU Weekly Grain Market Analysis: Focusing on Ethanol and Bioenergy Costs-Returns

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, May 18, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_05-18-18.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, May 18 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 18th  recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

U.S. Ethanol and Biodiesel Market-Profitability Graphics through 5/17/2018 (via KSU AgManager)

Following are some graphics on price and profitability trends in the U.S. ethanol and biodiesel industries, which will soon be available on the KSU AgManager website: http://www.agmanager.info An updated version of the full presentation titled “U.S. Ethanol & Biodiesel Market Situation” will be located at the KSU AgManager.info website – at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

Observations from the 2018 Ag Commodity Futures Conf, Overland Park, KS, April 5-6 – No Consensus on Fixing Arbitrage to Cause Grain Price Convergence

The 2018 Agricultural Commodity Futures Conference was held in Overland Park, Kansas on April 5-6, 2018.  This meeting was sponsored by the Commodity Futures Trading Commission and the Center for Risk Management Education and Research in the Kansas State University Department of Agricultural Economics.

The agenda for this conference and an number presentations are available at the following web location:

http://www.k-state.edu/riskmanagement/conference.html

Following is the first of two articles by KSU Agricultural Economics Art Barnaby and Daniel O’Brien discussing the findings of the conference – with a particular focus on the functions, efficiency, and performance of grain cash and futures markets.  This article is also available at the following web address on the KSU AgManager.info website:

http://www.agmanager.info/fixing-arbitrage-cause-convergence-no-consensus

Fixing Arbitrage to Cause Convergence; No Consensus

Prepared by

G. A. (Art) Barnaby, Jr. (barnaby@ksu.edu) , Professor, Dept. of Agricultural Economics

Daniel O’Brien (dobrien@ksu.edu), Extension Agricultural Economist

K-State Research and Extension, Kansas State University, Manhattan, KS 66506

April 16, 2018.

Summary

Kansas State University and the Commodity Futures Trading Commission (CFTC) recently held a joint conference on the lack of convergence in grain futures and many other futures trading issues.  Convergence is required for COOPs, grain elevator hedges, farmer hedges and crop insurance claims to work properly.  Without convergence, there is no connection between futures and cash markets, and grain future markets are not likely to survive in the long run without a reliable basis relationship with local cash prices.  Futures are not trading grain; they are trading the value of a shipping certificate that is received by the long when delivery occurs.  Non-convergence occurs when there is no credible threat of delivery.  Shipping certificate receivers have the right to store the grain and pay the storage indefinitely, currently 5 cents/month for corn and soybeans.  They also have the right to pick the date to load the grain out on a train/barge. 

Most grain industry traders don’t favor the Variable Storage Rate (VSR) mechanism now used on Chicago Mercantile Exchange (CME) Wheat futures contracts, and it appears there is little chance that VSR will be applied to corn and soybeans.  Other options for defining storage obligations in the CME wheat futures contracts included: 1) returning to a fixed storage rate; 2) fixed storage at a higher rate; 3) a seasonally adjusted storage rate; 4) a computer model estimated implied market “value of storage” with a committee adjusting the storage rate; 5) expanding the number of entities who can make delivery; and 6) a change to a no-storage futures contract.  Most participants at this conference were opposed to cash settlement and required load out of grain futures. 

Indexed funds, computerized trading, “Spoofing”, livestock contracts, etc. were also covered at this conference, but not included in this summary.  Papers and power point slides from the conference are located at:

http://www.k-state.edu/riskmanagement/conference.html

Issue #1: CME Algorithm

CME has eliminated pit trading in favor of computerized matching of buy-sell orders.  Surprising, it is not the oldest futures contract bid that is filled first.  To the surprise of many participants, CME has an algorithm that determines which contracts are filled first.  There was one very upset participant that stated his order was not filled, even though his bid was higher than CME’s posted close.  His question was how was that possible?  Answer, that is how the algorithm works[ii].  Some participants questioned the “equity” and “fairness” of a CME algorithm determined queue order for filling contracts.  (See note at end of article on how the CME Algorithm functions)

Issue #2: Variable Storage Rate (VSR) Mechanism for CME Wheat & KS HRW Wheat Futures

As expected the Variable Storage Rate (VSR) generated a lot of discussion. There were a number of grain traders who made it very clear they don’t like VSR.  The argument is VSR leaves the long guessing what the storage cost will be, resulting in reduced liquidity in the deferred contracts. 

Dr. Scott Irwin, University of Illinois, made the case that non-convergence was caused by the futures stated storage rate being set below the market value for storage.  Multi-national grain elevators with delivery rights don’t deliver grain, they deliver a shipping certificate that only they can create.  In addition to delivery, these certificates are sold in a secondary market, but they will sell at a price that is higher or equal to the non-convergence.  If one could buy shipping certificates and gain by arbitraging the futures, then the arbitrage profit would be bid to zero almost immediately.

Dr. Irwin, as the acknowledged primary developer of the VSR, surprised many participants when he didn’t strongly defend it.  He spent most of his presentation talking about non-convergence in the corn market, rather than the wheat market.  He appeared to be more supportive of using the results from a mathematical model’s estimated “market” value of storage, and then a designating committee to determine whether to make any adjustments to the storage rate. If the CME wants to use a different model to adjust the storage rate and the math is made public, then one would expect that to work too.  However, if there is a committee that makes the final decision, then it adds another level of uncertainty; will they act or just go with the status quo?  This committee would likely add a whole new round of controversies about trading futures.

He also suggested that a seasonal storage rate might work for corn.  If one remembers after the first round of non-convergence in KC wheat in the early 2000’s, the exchange added a protein requirement for the first time and a seasonal storage rate.   However, those changes didn’t prevent the most recent round of non-convergence in HRW wheat.  Apparently indicating the higher seasonal rates applied at that time were not sufficient to bring about convergence in the HRW wheat futures contract.

Issue #3: No Storage Grain Futures Contracts

One participant argued for no-storage futures contracts.  Without a storage requirement, it would allow more entities to make delivery and arbitrage futures contract.  Alternatively, CME argues there is only one new crop supply provided each year (two, if you count Brazil) therefore, futures must include storage so that a market mechanism exists to reflect grain prices and grain storage costs.  Those supporting a “no-storage futures contract” counter that clearly someone will store grain, regardless of the futures contract.  They state that there are plenty of farmers who are willing to store grain and most of that grain is unpriced.  They indicate that markets will need to provide a return to storage, even with a no-storage futures contract, but that may require higher deferred prices.

Issue #4: Including Farmer Storage In Delivery of Grain Futures Contracts

Another participant suggested CME should allow farmers to store the grain at the futures storage rate, when delivery elevators don’t want to store grain.  The storage would need to be certified by USDA, utilizing local Farm Service Agency (FSA) offices would likely be certification of choice.  There would also be questions in the case of farm bankruptcies, whether the long still owns the grain the buyer has paid for plus the storage?  For this delivery alternative to be workable, there would need to be rules and procedures developed on how the grain would be moved from farm storage to load out on a train/barge. 

One of the grain merchandizers attending suggested that farmers should have their futures orders filled first.  As explained above, CME’s algorithm determines order that contracts are filled, and that the mechanism used by the CME within that algorithm is not transparent to the public in general or to farmers with futures positions in particular.

Conclusions

There was still no agreement on what the true cash price is for wheat, but at least everyone agreed there was non-convergence in wheat markets.  One participant wanted the protein requirement in the futures contract raised from 10.5% to 11%.  Currently, the Kansas HRW wheat futures contract does require 11% protein, but will accept 10.5% protein with a $0.10 per bushel discount.  It was surprising that many conference participants essentially considered the Kansas HRW wheat futures contract protein requirement to be the discounted 10.5% protein level rather than the 11% par value as stated in the contract.

One key takeaway from this conference was that nearly all of agriculture agrees that convergence is necessary for short hedges and crop insurance to work.  Proposed fixes include VSR, a model determined storage rate with a committee to make the final decision on storage rate changes, fixed storage at a higher rate, a seasonal adjusted fixed storage rate, and no-storage futures contracts.  However, there was no consensus on what if any changes to make to futures to cause convergence.  Among these participants, there was little support for strictly requiring “forced” load-out or cash settlement of grain contracts. They did agree that if there is no connection between futures and cash, then the grain futures are unlikely to survive. 

Lack of convergence also effects crop insurance as tool to cover a farmer’s short hedge.  Crop insurance coverage combined with CME hedging tools will be covered in the next AgManager update.

An Additional Note on How the CME Matching Algorithm Works

A grain trader provided us with the following response on how the CME order matching algorithm works.

“Almost all of the CME ag contracts are matched using tag 1142 (Match Algorithm Value) = “K” (“Algorithm K”). CME generically defines Algorithm K as a “split FIFO/pro-rata algorithm.” However, there are multiple rounds of allocation under Algorithm K:

  • Round 1: Top-Order Allocation: A top order allocation is given to the first incoming order that betters the market and is filled at a 100% between a minimum of 1 lot and a maximum of 100 lots (note the maximum for KC wheat contracts is 50 lots).
  • Round 2: Lead Market Maker Allocation: CME makes various vague statements about there being the possibility of a “lead market maker allocation” after the top order allocation. None of the CME’s published materials confirm whether there is a lead market maker allocation for the ag contracts and, if so, how big is that allocation?
  • Round 3: FIFO Allocation: 40% of the volume after the top-order and LMM allocations is allocated via FIFO.
  • Round 4: Pro-Rata Allocation: 60% of the volume after the top-order and LMM allocations is allocated via pro-rata, with order size and time being the variables for allocation.
  • Round 5: Top-Leveling Allocation: Any participant that did not receive an allocation via pro-rata allocation receives a 1-lot allocation, if volume remains.
  • Round 6: FIFO Allocation: Any volume remaining after top-leveling allocation is allocated via FIFO.”

 

U.S. Ethanol and Biodiesel Market-Profitability Graphics: Through Late-March 2018

Following are some graphics on U.S. Ethanol and Biodiesel Market price and profitability trends in the , which will soon be available on the KSU AgManager website:  http://www.agmanager.info/

The full presentation titled “U.S. Ethanol & Biodiesel Market Situation” made for WILL (Illinois Public Radio) on Tuesday, March 27th and will be located at the KSU AgManager.info website – at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

 

Following are the graphics of this presentation.

 

 

KSU Corn Market Outlook in March 2018: Weighing U.S. Corn Market Prospects through Fall 2018

An analysis of U.S. & World Corn supply-demand factors and price prospects through the “new crop” 2018/19 marketing year from Kansas State University is provided in the following article summary.  This information follows the USDA World Agricultural Supply and Demand Estimates (WASDE) reports on March 8, 2017 and the Grains & Oilseeds Market Outlook given at the USDA Outlook Forum on February 23, 2018 in Arlington, Virginia.

A full version of this article is available on the KSU AgManager website http://www.agmanager.info/ at the following web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

Following is a summary of the article on “Corn Market Outlook in March 2018″

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Summary

1. Overview

Since the USDA’s March 8th Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports, MAY 2018 CME corn futures prices have traded mostly sideways in a mixed manner.  Longer term – MAY 2018 Corn futures have been trending sharply higher – from a low of $3.53 ¾ on January 12, 2018 to a close of $3.86 ¾ on March 15th.      

Since both the January 12th USDA Annual Crop Summary and WASDE reports, dry conditions in Argentina and southern Brazil, and concerns about dry conditions in the U.S. western Corn Belt have supported corn market prices.  Although the World corn market is still in a “large supply – low price” situation, prospects for lower 2018 South American corn supplies and export competition for the U.S. have provided support for corn market prices, and provided selling opportunities for both “old crop” 2017 and “new crop” 2018 U.S. corn production. 

Even with these concerns about 2018 South American corn supply prospects, it continues to be true that any significant corn futures or cash market price rallies through Spring-early Summer 2018 are likely to be limited by ending stocks of U.S. corn in the 2.000-2.250 billion bushel (bb) range. This is coupled with ending stocks-to-use of 14.0%-15.0% for the “old crop” 2017/18 marketing year.   However, in Spring-early Summer 2018 the U.S. corn market is likely again to have to weigh the annual risk of weather-limiting 2018 U.S. corn production prospects (i.e., the possibility of 2018 U.S. corn production less than 13.500 bb??) and tighter ending stocks (less than 1.500 bb??) in “new crop” MY 2018/19.  And that risk again is likely to further provide both “old crop” 2017 and “new crop” 2018 pricing opportunities in Spring-Summer 2018.

One positive long-term factor in the U.S. corn market is the considerable “tightening up” that is forecast for foreign (non-U.S.) corn supply-demand balances in the “old crop” 2017/18 marketing year.   If this occurs, it would lead to larger U.S. corn export shipments in spring-early summer 2018 than are currently happening, and support even higher U.S. corn prices in Spring-Summer 2018 than are represented by MAY 2018 through DEC 2018 Corn futures contracts.

2. Kansas Cash Corn Prices & Basis Bids

In Western Kansas on Wednesday, March 15th cash corn bids at major grain elevators ranged from $3.32 ($0.55 under MAY 2018 futures) to $3.74 ($0.13 under), and ranged from $3.43 ¾ ($0.43 under) to $3.61 ¾  ($0.25 under) in Central Kansas.  These prices still are still much higher than a year ago when bids statewide had fallen to $2.66-$2.96 on December 23, 2016.  These prices were still above marketing loan rates for corn across the state, with corn loans near $2.05 in Central Kansas and $2.19 per bushel in Western Kansas

Cash corn price bids in East Central and Northeast Kansas at major terminal locations were $3.65 ¾ – $3.70 ¾ on March 15th, up from the range of $3.26-$3.28 per bushel on 12/23/2016.  Cash corn bids at Kansas ethanol plants on March 15th ranged from $3.73 ¾ ($0.15 under MAY) to $4.13 ¾ ($0.25 over MAY) – indicating continuing strength in ethanol demand for corn in Kansas and nationwide.

3. Major Corn Market Considerations for Winter-Spring 2018

First, although the corn market is likely to be responsive to any early season 2018 U.S. corn production threats, the anticipation of large beginning stocks of 2.000-2.100 bb for “new crop” MY 2018/19 will likely “mitigate” of “soften” the immediate price response of the market – more-so than if beginning stocks were down to 1.250-1.500 bb.  If no significant production risk emerges in summer 2018, then these large “old crop” MY 2017/18 carryover ending stocks will limit 2018 corn crop forward pricing prospects.

Second, low prices for U.S. corn will help maintain strong usage for domestic U.S. ethanol and wet milling production, as well as livestock feeding through at least spring 2018 if not into the summer months. 

Third, the USDA has so far projecting at least “moderate” continued strength in U.S. corn exports of 1.900 bb for “new crop” MY 2017/18 – with this number likely increasing IF South American corn production prospects continue to suffer.  United States’ corn export shipments had been “slow” to date in the current marketing year, but have increased markedly in recent weeks.  The USDA maintains its optimism for “new crop” MY 2018/19 U.S. corn exports because of a) low U.S. corn prices to date, b) expectations of significantly tighter foreign stocks and percent (%) stocks-to-use for corn, and c) the eventual “using up” of competing South American corn exports in spring 2018.   

Current forecasts are for 2018 Brazilian corn production to be 94.5 million metric tons (mmt) in this marketing year – versus 98.5 mmt last year – with harvests lasting from February through May.  However, forecasts are for 2018 Argentina corn production to be 36.0 mmt in this marketing year – versus 41.0 mmt a year ago – with harvests lasting from March through May.  The Argentina production figure is at risk to falling further.  To the degree that 2018 corn production in Argentina and southern Brazil is limited by crop weather issues, there will likely be subsequent support U.S. corn export prospects.

Fourth, a continuing threat exists of U.S. and Foreign economic and/or financial system disruptions that could impact grain, energy, and other commodity markets in 2018.  World geo-political events could provide “shocks” to U.S. and World energy and grain markets which could in turn impact grain prices in either direction depending on the circumstances, the countries involved, and their role in global corn export trade.

4. USDA Supply-Demand & Price Forecasts

In the March 8th WASDE report, the USDA left unchanged its projections of a) 2017 U.S. corn production of 14.604 bb – down from the record high of 15.148 bb in 2016, and b) “old crop” MY 2017/18 total supplies of 16.947 bb – up marginally from a year earlier.  Total use is forecast at 14.820 bb – raised 225 mb from the February WASDE on prospects for a) higher ethanol use of 5.575 bb (raised 50 mb), and b) higher exports of 2.225 bb (raised 175 mb).  Ending stocks are projected to be a 2.127 bb (14.35% Stocks/Use) – down 225 mb from February, and down from 2.293 bb (15.65% S/U) in MY 2016/17.  United States’ corn prices are projected to average $3.35 /bu (range of $3.15-$3.55).  This is down $0.01 /bu from $3.36 /bu from MY 2016/17.

At the Agricultural Outlook Forum in Arlington, Virginia on February 23, 2018, the USDA forecast that a) 2018 U.S. corn production would be 14.390 bb – based on 90.0 million acres (ma) planted, 82.7 ma harvested, and a yield of 174.0 bu.  Total use is forecast at 14.520 bb – with projections of ethanol use at 5.650 bb (a record high), non-ethanol food seed and industrial use at 1.495 bb (also a record high), exports of 1.900 bb (down 325 mb from the current marketing year), and feed and residual use of 5.475 mb (down 75 mb from this year).  After a KSU-adjustment for lower beginning stocks based on the March 8th WASDE report, ending stocks are projected to be a 2.047 bb (14.10% Stocks/Use) – with both being down moderately from “old crop” MY 2017/18 levels.  United States’ corn prices are projected to average a KSU-adjusted $3.45 /bu (up $0.05-$0.10 from this year).  It is probable that the export projection for “new crop” MY 2018/19 may be raised in coming months due to South American production problems – causing these ending stocks and % stocks-to-use estimates to tighten further. This scenario is given a 50% likelihood of occurring by KSU Extension Agricultural Economist D. O’Brien.

5. Alternative KSU Supply-Demand & Price Forecast for “New Crop” MY 2018/19

Two alternative KSU-Scenarios for U.S. corn supply-demand and prices are presented for “new crop” MY 2018/19.  These projections are to show how varying 2018 U.S. corn production outcomes could affect U.S. corn supply-demand and price outcomes in “new crop” MY 2018/19. 

A – KSU “Higher 2018 U.S. Corn Production” Scenario for “new crop” MY 2018/19: (25% probability): Assumptions are as follows: 90.000 ma planted, 82.700 ma harvested, 176.6 bu/ac record yield (equal to 2017 record high), 14.605 bb production, 16.782 bb total supplies, 14.600 bb total use, 2.182 bb ending stocks, 14.95% S/U, & $3.30 /bu U.S. corn average price; 

B – KSU “Lower 2018 U.S. Corn Production” Scenario for “new crop” MY 2018/19: (25% probability): Assumptions are as follows: 90.000 ma planted, 82.700 ma harvested, 164.4 bu/ac yield (equal to 2009 yield), 13.596 bb production, 15.773 bb total supplies, 14.315 bb total use, 1.458 bb ending stocks, 10.19% S/U, & $4.20 /bu U.S. corn average price;

6. World Corn Supply-Demand – With & Without China

World corn production of 1,041.7 million metric tons (mmt) is projected for “old crop” MY 2017/18, down 3.1% from the record of 1,075.2 mmt in MY 2016/17, but still up 7.0% from 973.45 mmt in MY 2015/16.  World corn total supplies of 1,273.6 mmt in “old crop” MY 2017/18 are forecast to be down moderately from the record high 1,290.2 mmt in MY 2016/17, but up from 1,183.2 mmt in MY 2015/16. 

World corn exports of a 155.9 mmt are projected for “old crop” MY 2017/18, down 2.4% from the record high of 159.8 mmt in MY 2016/17, and up 30.2% from 119.7 mmt in MY 2015/16.  Projected World corn ending stocks of 199.2 mmt (18.5% S/U) in “old crop” MY 2017/18 are down from the record high 231.9 mmt (21.9% S/U) in MY 2016/17, and from 215.0 mmt (22.2% S/U) in MY 2015/16.  Projected Foreign (Non-U.S.) corn ending stocks of 145.1 mmt (17.0% S/U) in “old crop” MY 2017/18 are down from 173.6 mmt (21.9% S/U) in MY 2016/17, and from 170.9 mmt (23.1% S/U) in MY 2015/16.  

An alternative view of the World corn supply-demand is presented if Chinese corn usage and ending stocks are isolated from the World market.  “World-Less-China” corn ending stocks are projected to be 119.6 mmt (14.35% S/U) in “old crop” MY 2017/18, down from 131.1 mmt (15.9% S/U) in MY 2016/17, but up from 104.2 mmt (13.9% S/U) in MY 2015/16.  These figures show that World stocks-to-use of corn less China’s direct influence are projected to be approximately 22% lower (i.e., 14.35% S/U for the “World-Less-China” versus 18.5% S/U for the “World” overall in “old crop” MY 2017/18).  

At the same time, these figures also show that Chinese ending stocks of corn as proportion of the World total are declining – down from 51.5% in MY 2015/16, to 43.4% in MY 2016/17, and down to 39.9% in “old crop” MY 2017/18.  The deliberate actions in recent years – taken by the Chinese government to reduce feedgrain stockpiles – is impacting the relative amount of World total corn stocks they hold.  These actions may eventual increase Chinese import demand for U.S. corn and grain sorghum.

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