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Use Alternative Pricing Tools In Making Market Decisions
DR. AARON SMITH
KNOXVILLE, TENN.
Corn was down; cotton was up; and soybeans and wheat were mixed for the week. Volatility in soybean futures continued this past week as traders adjusted to weather forecasts and USDA supply and demand reports. From Monday to Friday, November soybeans traded down 17, up 29 ½, up 10 ½, down 43 ¾, and down 5. Volatility can provide producers with greater pricing opportunities but it also makes the pricing decision more difficult due to reduced certainty in market direction or fear of pricing too low. As such, it is very important to know how much production you are comfortable pricing at specific price points and executing sales at those price points. Eliminating sales based on emotional responses to changes in the market is strongly suggested, as emotional selling almost never results in a beneficial outcome. Additionally, producers should seek out alternative pricing tools presented in cash, futures, and option markets. The margin requirements and gut wrenching swings in futures prices may cause many producers to avoid entering futures positions however opportunities that are more palatable may be available in cash or option markets.
What a week for cotton! An 8.47 cent gain this week moved harvest cotton futures over 70 cents for the first time since mid-September 2014. Reduced global cotton stocks, global production concerns, and improved demand triggered the rapid increase. Now the question is can this week’s gain be maintained? Weather domestically and in other key cotton producing countries will play an important role in answering this question. However, likely demand will be the factor that determines if cotton can remain above 70 cents moving forward. Three variables in particular: 1) the strength of the USD - if the dollar continues to strengthen or hold gains this will create head winds for exports; 2) global economic stability/growth – improved global (Chinese) economic growth is positive for cotton prices; and 3) cotton price relative to synthetic fibers – higher cotton and lower/flat synthetic could result in further market share erosion.
On Tuesday, the USDA released the July WASDE report. A summary of the report and market reaction can be found on our Monthly Crop Outlook page.
Corn
September 2016 corn futures closed at $3.52 down 3 cents since last Friday. September 2016 corn futures traded between $3.42 and $3.73 for the week. Across Tennessee, average basis (cash price-nearby futures price) strengthened at Northwest Barge Points, Memphis, and Lower-middle Tennessee and weakened at Northwest and Upper-middle Tennessee. Overall, basis for the week ranged from 4 under to 40 over the September futures contract with an average of 13 over at the end of the week. Ethanol production for the week ending July 8 was 1,004,000 barrels per day up 20,000 from last week. Ethanol stocks were 21.131 million barrels, down 426,000 barrels. Corn net sales reported by exporters from July 1-7 were above expectations with net sales of 26.3 million bushels for the 2015/16 marketing year and 27.1 million bushels for the 2016/17 marketing year. Exports for the same time period were down from last week at 48.9 million bushels. Corn export sales and commitments were 99 percent of the USDA estimated total annual exports for the 2015/16 marketing year (September 1 to August 31) compared to a 5-year average of 102 percent.
Sep/Dec and Sep/Mar future spreads were 6 and 14 cents, respectively. This week’s Crop Progress report estimated corn condition at 76 percent good-to-excellent and 5 percent poor-to-very poor; and corn silking at 32 percent compared to 15 percent last week, 23 percent last year, and a 5-year average of 26 percent. In Tennessee, this week’s Crop Progress report indicated corn condition at 68 percent good-to-excellent and 9 percent poor-to-very poor; corn silking at 81 percent compared to 55 percent last week, 71 percent last year, and a 5-year average of 74 percent; and corn dough or beyond at 11 percent compared to 6 percent last year and a 5-year average of 12 percent. In Tennessee, September 2016 cash forward contracts averaged $3.56 with a range of $3.33 to $3.77. December 2016 corn futures closed at $3.58 down 4 cents since last Friday. Downside price protection could be obtained by purchasing a $3.60 December 2016 Put Option costing 25 cents establishing a $3.35 futures floor. March 2017 corn futures closed at $3.66 down 4 cents since last Friday.
Soybeans
August 2016 soybean futures closed at $10.72 down 11 cents since last Friday. August 2016 soybean futures traded between $10.57 and $11.41. For the week, average soybean basis strengthened at Memphis, Upper-middle, and Northwest Tennessee and weakened at Northwest Barge Points and Lower-middle Tennessee. Basis ranged from 39 under to 35 over the July futures contract at elevators and barge points. Average basis at the end of the week was 4 under the August futures contract. Net sales reported by exporters were within expectations with net sales of 13.4 million bushels for the 2015/16 marketing year and net sales of 20.1 million bushels for the 2016/17 marketing year. Exports for the same period were up from last week at 14.6 million bushels. Soybean export sales and commitments were 106 percent of the USDA estimated total annual exports for the 2015/16 marketing year (September 1 to August 31), compared to a 5-year average of 103 percent. August/September soybean-to-corn price ratio was 3.05 at the end of the week.
September 2016 soybean futures closed at $10.65 down 3 cents since last Friday. Aug/Sep and Aug/Nov future spreads were -7 cents and -15 cents, respectively. This week’s Crop Progress report estimated soybean condition at 71 percent good-to-excellent and 6 percent poor-to-very-poor; soybeans blooming at 40 percent compared to 22 percent last week, 33 percent last year, and a 5-year average of 31 percent; and soybeans setting pods at 7 percent compared to 5 percent last year and a 5-year average of 5 percent. In Tennessee, this week’s Crop Progress report indicated soybean condition at 74 percent good-to-excellent and 6 percent poor-to-very poor; soybeans emerged at 97 percent compared to 92 percent last week, 90 percent last year, and a 5-year average of 90 percent; soybeans blooming at 35 percent compared to 15 percent last week, 21 percent last year, and a 5-year average of 26 percent; and soybeans setting pods at 10 percent compared to 4 percent last year and a 5-year average of 7 percent. November/December 2016 soybean-to-corn price ratio was 2.95 at the end of the week. In Tennessee, October/November 2016 cash forward contracts averaged $10.74 with a range of $10.20 to $11.27 at elevators and barge points. November 2016 soybean futures closed at $10.57 the same as last Friday. Downside price protection could be achieved by purchasing a $10.60 November 2016 Put Option which would cost 66 cents and set a $9.94 futures floor.
Cotton
October 2016 cotton futures closed at 73.86 up 7.94 cents since last Friday. Adjusted world price (AWP) increased 3.67 cents to 60.07 cents per pound. Delta upland cotton spot price quotes for July 14 were 73.32 cents/lb (41-4-34) and 76.07 cents/lb (31-3-35). Net sales reported by exporters were down from last week with net sales of 55,200 bales for the 2015/16 marketing year and 113,700 bales for the 2016/17 marketing year. Exports for the same period were down from last week at 148,700 bales. Upland cotton export sales were 106 percent of the USDA estimated total annual exports for the 2015/16 marketing year (August 1 to July 31), compared to a 5-year average of 106 percent.
This week’s Crop Progress report estimated cotton condition at 54 percent good-to-excellent and 11 percent poor-to-very poor; cotton squaring at 57 percent compared to 42 percent last week, 57 percent last year, and a 5-year average of 62 percent; and cotton setting bolls at 19 percent compared to 11 percent last week, 16 percent last year, and a 5-year average of 19 percent. In Tennessee, this week’s Crop Progress report indicated cotton condition at 79 percent good-to-excellent and 3 percent poor-to-very poor; cotton squaring at 75 percent compared to 50 percent last week, 59 percent last year, and a 5-year average of 64 percent; and cotton setting bolls at 17 percent compared to 6 percent last week, 10 percent last year, and a 5-year average of 10 percent. December 2016 cotton futures closed at 74.28 up 8.47 cents since last Friday. Dec/Oct and Dec/Mar cotton futures spreads were -0.42 cents and -0.09 cents, respectively. December 2016 cotton futures traded between 65.88 and 75 cents this week. Downside price protection could be obtained by purchasing a 75 cent December 2016 Put Option costing 5.3 cents establishing a 69.7 cent futures floor. March 2017 cotton futures closed at 74.19 up 8.26 cents since last Friday.
Wheat
In Tennessee, July cash prices averaged $4.23 with a range of $3.87 to $4.40 for the week. Nationally, the Crop Progress report indicated winter wheat harvested at 66 percent compared to 58 percent last week, 62 percent last year, and a 5-year average of 65 percent; spring wheat condition at 70 percent good-to-excellent and 7 percent poor-to-very poor; and spring wheat headed at 91 percent compared to 74 percent last week, 87 percent last year, and a 5-year average of 64 percent. In Tennessee, winter wheat harvested was estimated at 97 percent compared to 94 percent last week, 97 percent last year, and a 5-year average 95 percent.
September 2016 wheat futures closed at $4.24 down 11 cents since last Friday. September 2016 wheat futures traded between $4.23 and $4.51 this week. September wheat-to-corn price ratio was 1.20. Net sales reported by exporters were below expectations with net sales of 11.7 million bushels for the 2016/17 marketing year. Exports for the week were down from last week at 14.6 million bushels. Wheat export sales were 35 percent of the USDA estimated total annual exports for the 2016/17 marketing year (June 1 to May 31), compared to a 5-year average of 34 percent. Sep/Dec and Sep/Jul future spreads were 25 cents and 72 cents, respectively. December 2016 wheat futures closed at $4.49 down 7 cents since last Friday. December wheat-to-corn price ratio was 1.25. July 2017 wheat futures closed at $4.96 up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $5.00 July 2017 Put Option costing 48 cents establishing a $4.52 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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