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Strong Export Demand Needed To Strengthen Prices
DR. AARON SMITH
KNOXVILLE, TENN.
Corn and wheat were mixed; and cotton and soybeans were up for the week. 2016 was an excellent production year for the US: corn production is estimated at 15.2 billion bushels and average yield at 175.3 bu/acre; soybean production is estimated at 4.36 billion bushels and average yield at 52.5 bu/acre; cotton production is estimated at 16.16 million bales and average yield at 803 lbs/acre; and wheat production is estimated at 2.31 billion bushels and average yield at 52.6 bu/acre. The USDA will continue to revise production and yield estimates as additional information becomes available however at this time it is unlikely substantial reductions will occur. As such, in order for prices to strengthen it will be essential for export demand to remain strong (currently only cotton lags behind the five year average export commitments as a percent of total annual estimated exports). At this time, there are three major issues that have the potential to limit agricultural exports:
1) The strength of the USD. The US dollar index is at a 13 year high and the Brazilian Real has depreciated 9 percent in less than a month. A high USD relative to our export competitors makes US agricultural commodities relatively more expensive for importing nations such as China. The full impact of a high US dollar relative to the Brazilian Real will likely not materialize until more is revealed about the South American growing season. This is due to Brazil’s limited stocks of corn and soybeans as a result of large exports and reduced production for last year’s crop. If a large South American crop is confirmed for the current growing season and the USD remains strong compared to the Brazilian Real then US exports of soybeans and corn will be adversely affected in the New Year.
2) Trade agreement uncertainty. There is limited facts on the new administrations potential trade policies, however given the negative connotation trade deals took during the campaign it is unlikely an about face is likely to occur (at least initially). Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (T-TIP) will likely not garner the support to be passed into law. Regardless of political positions on the trade agreements as a whole, both were generally considered favorable to agriculture. What emerges as an alternative to these two trade agreements remains to be seen.
3) Global economic growth. China’s GDP growth rate has slowed and is currently estimated to have its lowest quarterly GDP growth since 2008 (about 6.7 percent). The US and European economies are projected to grow at about 1.5 percent and 1.6 percent, respectively. In general, economic growth increases demand for agricultural products.
This week’s numbers are as of close of markets Thursday.
Corn
December 2016 corn futures closed at $3.42 up 2 cents since last Friday. December 2016 corn futures traded between $3.35 and $3.43 for the week. Across Tennessee, average basis (cash price-nearby futures price) strengthened or remained unchanged at Northwest Barge Points, Northwest, Upper-middle, and Lower-middle Tennessee and weakened at Memphis. Overall, basis for the week ranged from 15 under to 35 over the December futures contract with an average of 6 over at the end of the week. Ethanol production for the week ending November 11 was 1,017,000 barrels per day up 15,000 from last week. Ethanol stocks were 18.609 million barrels, down 620,000 barrels. This week’s Crop Progress report estimated corn harvested at 93 percent compared to 86 percent last week, 95 percent last year, and a 5-year average of 92 percent. Dec/Mar and Dec/Dec future spreads were 7 and 36 cents, respectively. In Tennessee, January 2017 cash forward contracts averaged $3.60 with a range of $3.35 to $3.85.
Corn net sales reported by exporters from November 4-10 were above expectations with net sales of 65.4 million bushels for the 2016/17 marketing year. Exports for the same time period were down from last week at 21.3 million bushels. Corn export sales and commitments were 49 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31) compared to a 5-year average of 46 percent. March 2017 corn futures closed at $3.49 the same as last Friday. December 2017 corn futures closed at $3.78 down 1 cent since last Friday. Downside price protection could be obtained by purchasing a $3.80 December 2017 Put Option costing 32 cents establishing a $3.48 futures floor.
Soybeans
January 2017 soybean futures closed at $9.89 up 3 cents since last Friday. January 2017 soybean futures traded between $9.75 and $9.97. For the week, average soybean basis strengthened or remained unchanged at Memphis, Northwest Barge Points, Northwest, Upper-middle, and Lower-middle Tennessee. Basis ranged from 30 under to 6 over the January futures contract at elevators and barge points. Average basis at the end of the week was 9 under the January futures contract. This week’s Crop Progress report estimated soybeans harvested at 97 percent compared to 93 percent last week, 97 percent last year, and a 5-year average of 95 percent. In Tennessee, this week’s Crop Progress report indicated soybeans harvested at 95 percent compared to 91 percent last week, 85 percent last year, and a 5-year average of 82 percent. January/December soybean-to-corn futures price ratio was 2.89 at the end of the week.
Jan/Mar and Jan/Nov future spreads were 9 cents and 4 cents, respectively. Net sales reported by exporters were within expectations with net sales of 52.1 million bushels for the 2016/17 marketing year and 0.02 million for the 2017/18 marketing year. Exports for the same period were up from last week at 111.5 million bushels. Soybean export sales and commitments were 69 percent of the USDA estimated total annual exports for the 2016/17 marketing year (September 1 to August 31), compared to a 5-year average of 68 percent. March 2017 soybean futures closed at $9.98 up 4 cents since last Friday. In Tennessee, January cash contracts average $9.94 with a range of $9.75 to $10.06. November 2017 soybean futures closed at $9.93 up 9 cents since last Friday. November/December 2017 soybean-to-corn price ratio was 2.63 at the end of the week. Downside price protection could be achieved by purchasing a $10.00 November 2017 Put Option which would cost 69 cents and set a $9.31 futures floor.
Cotton
Delta upland cotton spot price quotes for November 17 were 73.04 cents/lb (41-4-34) and 75.79 cents/lb (31-3-35). Adjusted world price (AWP) increased 1.13 cents to 59.2 cents per pound. This week’s Crop Progress report estimated cotton harvested at 61 percent compared to 56 percent last week, 62 percent last year, and a 5-year average of 69 percent. In Tennessee, this week’s Crop Progress report indicated cotton harvested at 93 percent compared to 86 percent last week, 75 percent last year, and a 5-year average of 75 percent. December 2016 cotton futures closed at 73.38 up 4.94 cents since last Friday. December 2016 cotton futures traded between 67.97 and 73.49 cents this week.
Dec/Mar and Dec/Dec cotton futures spreads were -0.84 cents and -2.47 cents, respectively. Net sales reported by exporters were up from last week with net sales of 214,400 bales for the 2016/17 marketing year. Exports for the same period were down from last week at 98,000 bales. Upland cotton export sales were 58 percent of the USDA estimated total annual exports for the 2016/17 marketing year (August 1 to July 31), compared to a 5-year average of 60 percent. March 2017 cotton futures closed at 72.54 up 3.51 cents since last Friday. December 2017 cotton futures closed at 70.91 up 2.04 cents since last Friday. Downside price protection could be obtained by purchasing a 71 cent December 2017 Put Option costing 5 cents establishing a 66 cent futures floor.
Wheat
Wheat net sales reported by exporters were above expectations with net sales of 22 million bushels for the 2016/17 marketing year. Exports for the week were up from last week at 14.8 million bushels. Wheat export sales were 67 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 66 percent. December 2016 wheat futures closed at $4.03 the same as last Friday. December 2016 wheat futures traded between $3.92 and $4.06 this week. December wheat-to-corn price ratio was 1.18.
Dec/Mar and Dec/Jul future spreads were 17 cents and 45 cents, respectively. March 2017 wheat futures closed at $4.20 down 1 cent since last Friday. March 2017 wheat-to-corn price ratio was 1.20. Nationally, the Crop Progress report indicated winter wheat condition at 59 percent good-to-excellent and 9 percent poor-to-very poor; winter wheat planted at 94 percent compared to 91 percent last week, 93 percent last year, and a 5-year average of 95 percent; and winter wheat emerged at 84 percent compared to 79 percent last week, 85 percent last year, and a 5-year average of 84 percent. In Tennessee, winter wheat condition was estimated at 39 percent good-to-excellent and 26 percent poor-to-very poor; winter wheat planted at 85 percent compared to 81 percent last week, 81 percent last year, and a 5-year average of 81 percent; and winter wheat emerged at 54 percent compared to 45 percent last week, 62 percent last year, and a 5-year average of 54 percent. In Tennessee, June/July 2017 cash wheat ranged from $4.12 to $4.63. July 2017 wheat futures closed at $4.48 down 4 cents since last Friday. Downside price protection could be obtained by purchasing a $4.50 July 2017 Put Option costing 31 cents establishing a $4.19 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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