KSU Weekly Grain Market Analysis: Cash Grain Basis narrows for Wheat-Corn, wider for Sorghum in KS, but positive for Soybeans in eastern KS)

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, April 27, 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_04-27-18.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, April 27, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – online program link available. A copy of the April 27th recording is 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…

Advertisements

KSU Weekly Grain Market Analysis: U.S. Corn and Wheat Price Scenarios for “New Crop” MY 2018/19

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, April 20, 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_04-20-18.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, April 20, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – online program link available. A copy of the April 20, 2018 recording is 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…

More from the 2018 Ag Commodity Futures Conf, Overland Park, KS, April 5-6 – Experts Overstate Crop Insurance Competition with CME

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 a number presentations are available at the following web location:

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

Following is the second of two articles by KSU Agricultural Economics Art Barnaby and Daniel O’Brien discussing the findings of the conference – with a focus on the relationship between crop insurance and grain futures.  This article is also available at the following web address on the KSU AgManager.info website:

http://www.agmanager.info/crop-insurance/risk-management-strategies/experts-overstate-crop-insurance-competition-cme

 

Experts Overstate Crop Insurance Competition with CME

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 18, 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.  In addition to hedges, convergence is required for crop insurance claims to work properly.  Many in the grain industry still think revenue-based crop insurance tools compete with their grain futures contracts.  Making this argument even more confusing is a new report from Harvard and other Law Schools[i].

[i] Art Barnaby’s Disclaimer.  Harvard Law did contact me and asked me to put together a group of people to discuss these Farm Bill and risk management issues.  I don’t want to speak for the group, but as for myself, I agree very little in this report.  We gave them the other side of the crop insurance, commodity titles, and hedging story, but those comments were not included in their report.

Issue #1: Crop Insurance

As a group, there are still a large number of traders who think government-backed crop insurance competes with them for the farmer’s risk management dollar.  Many of these misunderstandings originated from academic researchers, and more recently by a group of Law Schools. 

The FBLE group (see list of Farm Bill Law Enterprise (FBLE) member institutions in AgManager article) argue the existing Harvest Price Option (HPO) subsidies encourage over-exposure to the futures markets and farmers should not forward price more than a third of their expected crop. 

However, Smith, et al., argue that price coverage is available via private futures market exchanges, therefore revenue insurance is unnecessary.  See Smith, Vincent H., Joseph W. Glauber, and Barry K. Goodwin, “Time to Reform the US Federal Agricultural Insurance Program”, American Enterprise Institute, 2017.    As a result, one academic expert suggests farmers should use futures, and another academician says no, farmers are over-exposed to the futures.

However, both are wrong.  Once farmers plant their crop or hold unpriced inventory they are 100% exposed to the real cash market of potentially falling prices.  Following the one-third argument, farmers would still have two-thirds of their crop exposed to downside price risk.

Issue #2: Limited Put Competition

The USDA-backed revenue insurance provides limited competition to Chicago Mercantile Exchange (CME) traded puts, but not calls.  About 79% of Revenue Protection (RP) insured corn acres are insured at 80% or less.  An 80% RP insured farmer currently has an effective “put” strike at $3.17 (80% X $3.96 for 2018) on new crop corn.  Farmers insured with 80% RP coverage and an average crop will need an October average closing December 2018 corn futures price below $3.17 to trigger payments. 

However, this insurance “put” is way out of the money with current new-crop corn futures trading over $4, so the competition with CME is “small”.   If yields are above average, then the effective RP “put” strike is even lower.  Farmers can always produce their way out of a RP indemnity claim.

Note that the $3.96 corn strike price and October settlement price applies to crop insurance in Kansas, Northern Great Plains states, and Corn Belt states for the 2018 crop insurance contract.  The crop insurance strike price is set earlier and the settlement price is determined earlier in Southern states. 

Issue #3: Call Options

Revenue Protection is mis-named because when prices increase above the base price, RP is no longer a revenue contract.  RP turns in to a yield-protection contract only.  At that point, the only difference between RP and Yield Protection (YP), is that YP indemnifies guaranteed bushels at a below-market price, while RP indemnifies the same lost bushel at the current market price. 

This is only complicated because the critics make it complicated in order create confusion among decision-makers, when it is actually simple.  Should farmers be paid for their crop losses at a below-market price, or at the current market price?

Issue #4: Put Option Competition with Commodity Programs

The Farm Service Agency’s (FSA) Price Loss Coverage (PLC) provides a free “put” on old crop held in “inventory”.  While the crop has been harvested, the PLC payment rate is applied to 85% of the farmer’s base acres times the historical program yield and subject to sequestration cuts.  This payment procedure removes any yield risk, unlike the new-crop out-of-the money “put” in RP.  The PLC “put” corn strike of $3.70 is based on the after-harvest 12-month national Marketing Year Average (MYA) price.  USDA’s MYA price is normally about 15 to cents lower than futures and PLC payments are made about a year after harvest, if any. 

Agricultural Risk Coverage (ARC) also provides some old crop “put” protection, but it is more complicated than PLC because the payment is tied to the county yield and the strike price is a 5-year Olympic average of the USDA-determined price.  The current Olympic average USDA price is $3.95 X 86% setting the effective corn “put” strike at $3.40 with an average county yield.  Both PLC and ARC have a price stop-loss at the loan rate.  There can be a little slippage because the ARC-PLC trigger payments are based on NASS prices and loan payments are triggered by the FSA-determined county price (explained below). 

For those who are “concerned” about small farmers, their crop yields are less likely to be highly correlated with the county yield.  If a farmer were to farm the entire county, then there is no difference between their enterprise unit yield and the county yield.  Nearly all farmers can cite cases where they received no ARC payments, but the county across the road did receive an ARC payment.  So as a replacement for put option price protection, ARC is a bit iffy, especially on small farms.  Again, any ARC payments are made only on 85% of the base acres, about a year after harvest, and subject to sequestration cuts, if any ARC payment is due.

Issue #4: Marketing Loans

At very low price levels, the FSA loan rate is effectively a free “put” on all farmer-produced bushels with no effective payment limit.  The current national loan rate for corn is $1.95 and $5.00 for soybeans, therefore the loan provides a “put” that has been way out-of-the-money for years.  Effectively, the loan rate on corn and soybeans provides a “put” with a near zero value.  However, the wheat national loan rate of $2.94 did trigger in Kansas and many other counties after the 2016 wheat harvest, and created an in-the-money “put”.  Note that the loan rate price is set by county.  Rather than requesting an FSA loan at the loan rate, farmers can elect to take Loan Deficiency Payments (LDP).  An LDP payment is the difference between the loan rate and the FSA-determined Posted County Price (PCP).  The PCP is a daily USDA price and is not the same as the NASS MYA price. 

Most farmers just claim the LDP, but farmers can take a loan on all harvested bushels at the county loan rate price.  Unlike a put where farmers pay premium for a CME put, farmers can take the loan and receive cash.  They will receive the loan in cash and at the end of 9 months they can pay off the loan at the lesser of the PCP or PCP plus interest, keep the difference, and avoid the payment limit.  Farmers have the option to pay the loan off early.  This is a non-recourse loan, therefore at the end of 9 months, farmers can forfeit the grain to the government and keep the loan proceeds.  Most farmers don’t forfeit grain because they gain more by repaying the loan at a PCP price that is normally lower than the loan rate.  The loan gain, similar in concept to loan right down, will approximately equal to the LDP.

The loan puts a price floor in the market for farmers, but not the market.  Because farmers can pay the loan off at the PCP, the farmer’s minimum price is the loan rate, but the cash market can still go lower and did on 2016 wheat.  There were days when the Kansas LDP wheat payment was over 40 cents a bushel.  During this period the loan rate was providing a deep in-the-money free “put” and was in direct competition with CME traded puts.

In most years, the LDP payments are not a factor.  The corn and soybean loan rates are so far out-of-the-money and provide almost no competition with CME traded puts.  The only recent exception was 2016 wheat when the LDP did trigger on wheat in many counties.  When prices are near the loan rate, there is no reason farmers would purchase puts when they are effectively receiving “free” puts from FSA.

Issue #5: Whole Farm Crop Insurance (WRCI)

WFCI contracts are whole-farm insurance with RMA premium discounts and guarantees based the farm’s prior 5 years of tax return incomes.  The WFCI should not be used by farmers that use CME traded futures and options, because the gains are not counted in the historical 5 years of income that set the guarantee.  However, hedging losses in one’s brokerage account are not included in a claim settlement, resulting in a lower indemnity payment.  WFCI insured farmers who want to manager some of their price risk will need to use derivatives offered by elevators such as forward contracts. 

One should not rule out the possibility that a WFCI insured farmer could set up a separate LLC organization to hold one’s futures trades and remove those trades from the farm tax return.  This would require professional help from an attorney and tax accountant to keep futures gains-losses separate from farm income.  This is another example of government policy generating unintended consequences.

The CME could argue the WFCI provides direct competition for their farmer customer who uses private tools to manage price risk.  However, at this point, WFCI has been sold mostly to farmers growing crops that are not traded on the CME or in locations where the price basis is unpredictable, providing another example of why it is important that convergence occurs and gives some predictability to the cash basis.

Conclusions

FSA’s PLC and Marketing Loans provide direct competition with CME-traded puts WHEN markets are extremely low.  However, currently the “strike” for these program are low enough that the “put” protection is way out-of-the-money for corn and soybeans, but these USDA programs have provided recent “put” protection on wheat.     

Revenue insurance and ARC provide limited competition with CME traded puts, but currently these “put” derivatives are out-of-the-money on corn and soybeans.  If policy makers want to eliminate any “small overlap” with traded puts or the commodity programs, they would remove the “put” (revenue) from RP and retain the HPO.

The HPO is NOT competition with calls.  HPO turns the revenue insurance product into a yield guarantee only.  When HPO triggers, the RP is the same guarantee as YP, but YP indemnifies the lost bushel at a below-market price while RP indemnifies the lost bushel at the current market price.  As a result, RP is a complement to futures because it maintains the hedge on forward-priced bushels.  Both YP and RP contracts require a yield loss greater than the yield guarantee to trigger any payments.

 

KSU Weekly Grain Market Analysis: Seeking perspective wrt the Chinese Soybean Tariff Issue

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, April 6, 2018 are available on the Kansas University www.AgManager.info website at the following KSU web address:

https://agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_04-06-19.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, April 6, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – online program link available. A copy of the April 6th recording will be available at the KSU Agriculture Today website after the program has been aired.

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

KSU Soybean Market Outlook in Late-March 2018 – New Soybean S-D and Price Expectations for “New Crop” MY 2018/19

An analysis of U.S. and World soybean supply-demand factors and 2018-2019 price prospects following the USDA’s March 8th World Agricultural Supply Demand Estimates (WASDE) report, and the March 29th USDA Prospective Plantings and Grain Stocks reports will be available on the KSU AgManager website (http://www.agmanager.info/default.asp).

Following is a summary of the article on Soybean Market Outlook – with the full article and accompanying analysis to be available on April 2, 2018 on the KSU AgManager website at the following web address:

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

************************.

Summary

A. Some Perspective on the World Soybean Market

Since 2014, World soybean market prices have been declining in response to the “large crop – low price” supply-demand regime that has been caused by consecutive record World soybean production years for 2014 through 2017, with large crops regularly occurring in South America and the United States.  Strong demand for soybean imports from China, Japan, and other Asian countries have supported World soybean prices.

Longer term, from MY 2007/08 to “old crop” MY 2017/18, this strong upward trend in World soybean production (up 5.6% annually) has “out-paced” increases in World soybean use (up 5.0% per year).  As long as growth in World soybean production continues to outpace World soybean usage, then World soybean stocks will remain at high levels with prices continuing at their current “moderate” levels – being affected positively be ongoing strength in demand, but held “in check” by more than adequate world supplies.  

B. China-U.S. Trade Tensions

The potential for soybean market disruptions from trade policy-related confrontations between the U.S. and China has emerged as an issue in early 2018.  These economic – geopolitical tensions so far have not resulted in official direct tariffs or import limitations by China on U.S. soybeans.  However, it is reported that Chinese buyers of soybeans have responded by aggressively pursuing Brazilian soybean imports, and to a degree have at least moderated their purchases of U.S. soybeans in recent months.  So, although no official action has been taken by China against U.S. soybean imports, such tensions have to a degree already affected U.S. soybean trade by “pressuring” Chinese buyers to redirect their buying focus toward Brazil, Argentina, Paraguay, and wherever else globally they can secure soybean and oilseed products.

C. Soybean Market Response to the March 8th & 29th USDA Reports

Since the USDA released its World Agricultural Supply and Demand Estimates (WASDE) report on March 8th soybean futures prices had moved primarily lower.  From the March 8th close of $10.64, CME MAY 2018 Soybean futures prices have traded from a high of $10.63 on 3/9/2018 down to a low of $10.09 ¼ on March 23rd, before closing at $10.18 on Wednesday, March 28th – the day prior to the USDA Quarterly Stocks & Prospective Plantings reports on March 29th.  Then on the day of the March 29th USDA reports, CME MAY 2018 Soybean futures responded positively, trading from a low of $10.12 ½ to a high of $10.50 ¾ before closing at $10.44 ¾ – up $0.26 ¾ per bushel for the day.

Kansas cash soybean prices at terminals in central and eastern Kansas ranged from $9.42 ¾ to $9.89 ¾ /bu on March 29th – with basis ranging from $1.02 under to $0.60 under MAY 2018 Soybean futures.  That same day in western Kansas, major grain elevator bids ranged from $9.10 to $9.45 per bushel – with basis ranging from $1.35 under to $1.00 under. 

D. World Soybean Supply-Demand Findings in the March 8th WASDE USDA Report

On March 8th for the “old crop” 2017/18 marketing year (MY) to end on August 31, 2018, the USDA projected the following.

First, that World soybean total supplies would be 437.5 million metric tons (mmt) (down 3.0%) with total use of 34.8 mmt (up 4.2%) for “old crop” MY 2017/18. With supplies moving lower and demand increasing, there has been a moderate “tightening” of projected World ending stocks of soybeans. 

Second, that World soybean exports will continue trending higher – up to a record high to 150.6 mmt in the “old crop” 2017/18 marketing year.  This amount of World soybean exports of 150.6 mmt in “old crop” MY 2017/18 would be up from previous records of 147.5 mmt last year, and 132.6 mmt two years ago.   World soybean exports have been growing annually at a 9.1% rate since the 2007/08 marketing year.

Third, that World soybean ending stocks would be a 94.4 mmt in “old crop” MY 2017/18 – down from the record high of 96.65 mmt in MY 2016/17, but still up from 78.3 mmt in MY 2015/16.  Overall, World soybean ending stocks have grown at an 8.0% rate annually since the 2007/08 marketing year.

Fourth, that World soybean percent ending stocks-to-use (% S/U) would be 27.5% – the 2nd highest on record but down from the record high of 29.3% last year, while being up from 24.9% and 25.7% the two years prior.

E. U.S. Soybean Supply/Demand for “Old Crop” MY 2017/18 & “New Crop” MY 2018/19

The USDA released their soybean production, supply-demand and price projections for the U.S. for “old crop” MY 2017/18 in the March 8th WASDE report, for “new crop” MY 2018/19 in its February 23rd USDA Ag Outlook Forum projections, for 2018 planted acres in the March 29th Prospective Plantings report, and for November-February 2018 usage of U.S. soybeans and March 29th Grain Stocks report.   

U.S. soybean plantings are forecast to be 88.982 million acres (ma) in 2018, down from 90.142 ma in 2017, and 83.433 ma in 2016.  Harvested acres are forecast by Kansas State University to be 88.222 ma in 2018 (99.15% harvested-to-planted – latest 5 year average), down 1.45% from 89.522 ma in year 2017, but up 6.7% from 82.696 ma in 2016. 

The 2018 U.S. average soybean yield is forecast at 48.5 bu/ac, down from a KSU-adjusted estimate of 49.79 bu/ac in 2017, and from the 2016 record of 52.0 bu/acre.  This KSU adjustment to the most recent official USDA estimate on March 8th was made following the March 29th grain stocks report.  The USDA estimate of March 1, 2018 U.S. soybean stocks came in approximately 65 mb larger than trade estimates. Given that estimates of U.S. soybean domestic crush, exports, and seed use for the November-February 2018 quarter are known with some accuracy, it seems that the unexplained increase in U.S. soybean stocks on March 1st may be due to the USDA underestimating the size of the 2017 U.S. soybean crop. 

As a result, if 2017 soybean planted and harvested acreage are left unchanged, and 65 mb is added to the size of the 2017 U.S. soybean crop, then this KSU-adjusted estimate of 2017 U.S. soybean yields is raised to 49.79 bu/ac – up from the latest USDA’s official 2017 U.S. soybean yield  estimate of 49.1 bu/ac.

Soybean production in the U.S. in 2018 is forecast to be 4.279 billion bushels (bb), down from the KSU-adjusted record high of 4.457 bb in 2017 (vs the latest USDA estimate of 4.392 bb – see discussion above), but up from 4.296 bb in 2016.  After these adjustments, projected “new crop” MY 2018/19 U.S. soybean total supplies are forecast at 4.924 bb, up from a KSU-adjusted 4.783 bb in “old crop” MY 2017/18, and from 4.515 bb in MY 2016/17.  Record high U.S. soybean total use of 4.415 bb is forecast for “new crop” MY 2018/19, up from 4.163 bb in “old crop” MY 2017/18, and from 4.213 bb in MY 2016/17. 

With previously mentioned changes in 2017 U.S. soybean production resulting from the outcome of the March 29th Grain Stocks report, the KSU-adjusted USDA projection for “new crop” MY 2018/19 U.S. soybean ending stocks equals 509 million bushels (mb) (11.52% stocks/use), down from a KSU-adjusted estimate of 620 mb in “new crop” MY 2017/18 (14.89% stocks/use), but up from 302 mb in MY 2016/17 (7.17% stocks/use).  

United States’ soybean prices are projected to average $9.40 /bu in “new crop” MY 2018/19, up from $9.30 /bu in “old crop” MY 2017/18, but down from $9.47 in MY 2016/17, and comparable to $8.95 /bu in MY 2015/16, and $10.10 /bu in MY 2014/15.   It is estimated by Kansas State University that these KSU-adjusted USDA projections for “new crop” MY 2018/19 have a 55% probability of occurring.

F. Two Alternative KSU U.S. Soybean S/D Forecasts for “New Crop” MY 2018/19

To represent possible alternative outcomes from the KSU-adjusted USDA February 23rd projection for “new crop” MY 2018/19, two potential KSU-Scenarios for U.S. soybean supply-demand and prices are presented.   

KSU Scenario 1) “HIGHER 2018 U.S. Soybean Production” Scenario for “new crop” MY 2018/19 (25% probability): 

88.982 ma planted, 99.15% harvested-to-planted, 88.222 ma harvested, 52.0 bu/ac average yield, 4.588 bb production, 5.233 bb total supplies, 2.350 bb exports, 2.000 bb domestic crush, 135 mb seed & residual use, 4.485 bb total use, 748 mb ending stocks, 16.68% Stocks/Use, & $8.50 /bu U.S. soybean average price.

KSU Scenario 1) “LOWER 2018 U.S. Soybean Production” Scenario for “new crop” MY 2018/19 (20% probability): 

88.982 ma planted, 99.15% harvested-to-planted, 88.222 ma harvested, 42.0 bu/ac average yield, 3.705 bb production, 4.350 bb total supplies, 2.000 bb exports, 1.960 bb domestic crush, 135 mb seed & residual use, 4.095 bb total use, 255 mb ending stocks, 6.23% Stocks/Use, & $11.00 /bu U.S. soybean average price.  

*****

KSU Weekly Grain Market Analysis: A “360 View” of Grain Markets on USDA Grain Stocks and Prospective Plantings Day

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, March 30, 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_03-30-18.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, March 30, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the March 30th recording is 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…

KSU Weekly Grain Market Analysis: U.S. Soybean S-D Price Scenarios for “New Crop” MY 2018/19

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, March 23, 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_03-23-18a.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, March 23, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the March 23rd recording is 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…