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Weather And Trade Posturing Is The Primary Source Of Volatility
DR. AARON SMITH
KNOXVILLE, TENN.
Volatility continues to be prevalent in commodity markets. For row crops, the source of the volatility is primarily weather and the on-again-off-again trade posturing between the US and Canada, Mexico, and China. This week trade friction heated up again with the US announcing tariffs would be implemented on steel and aluminum exports from Canada, Mexico, and the European Union. The three parties predictably responded with retaliatory tariffs on US goods. The proposed retaliatory tariffs have a limited impact on agriculture, however the series of tariffs and retaliatory tariffs likely indicates that an agreement on a new NAFTA is not forthcoming any time soon. An exit from NAFTA could have dramatic implications for the agricultural sector. Trade negotiations between the US and China also hit a bumpy patch as the US indicated it would proceed with $50 billion in tariffs in retaliation to intellectual property theft concerns with China. These tariffs have not been imposed at this time but if they were imposed and as a result China imposed retaliatory tariffs it would likely have a strong agricultural component.
This week there was some drought relief in the Southern Plains as precipitation fell across parts of North Texas, Oklahoma, and Kansas. Additionally, rain fell across spring wheat producing areas in Montana and the Dakotas where moderate drought conditions have been reported. The precipitation contributed to more than a 20 cent reduction in wheat futures. Cotton continued to strengthen as West Texas, the coastal bend of Texas and New Mexico received only sporadic amounts of precipitation. Drought fears and the likelihood of increased abandonment in Texas drove harvest cotton futures to over 92 cents/lb. The last time nearby cotton futures were over 90 cents was back in June of 2014.
For the month of May, December corn futures were down 1 ¾ cents opening the month at $4.15 ½ and closing at $4.13 ¾ (trading range of $4.10 ½ to $4.29 ½); November soybean futures were down 10 ½ cents opening the month at $10.44 ¾ and closing at $10.34 ¼ (trading range of $10.02 to $10.60 ½); December cotton futures were up 13.1 cents opening the month at 78.63 and closing at 91.64 (trading range of 78.55 to 93.73); and July wheat futures were 13 ¾ cents opening the month at $5.12 ½ and closing at $5.26 ¼ (trading range of $4.86 ¼ to $5.54). With the weather market in full affect and a great deal of certainty on the trade front continued volatility is very likely.
Corn
Across Tennessee, average corn basis (cash price-nearby futures price) weakened or remained unchanged at Memphis, Northwest Barge Points, Northwest, Lower-middle, and Upper-middle Tennessee. Overall, basis for the week ranged from 16 under to 30 over the July futures contract with an average of 4 over at the end of the week. July 2018 corn futures closed at $3.91, down 15 cents since last Friday. For the week, July 2018 corn futures traded between $3.90 and $4.10. Corn net sales reported by exporters from May 18-24 were within expectations with net sales of 39.1 million bushels for the 2017/18 marketing year and 5.9 million bushels for the 2018/19 marketing year. Exports for the same time period were up 29 percent compared to last week at 74.6 million bushels. Corn export sales and commitments were 96 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31) compared to a 5-year average of 95 percent. Ethanol production for the week ending May 25 was 1.041 million barrels per day, up 13,000 from the previous week. Ethanol stocks were 21.263 million barrels, down 866,000 barrels. Jul/Sept and Jul/Dec future spreads were 9 and 20 cents, respectively.
The Crop Progress report estimated corn condition at 79 percent good-to-excellent and 3 percent poor-to-very poor; corn planted at 92 percent compared to 81 percent last week, 90 percent last year, and a 5-year average of 90 percent; and corn emerged at 72 percent compared to 50 percent last week, 70 percent last year, and a 5-year average of 69 percent. In Tennessee, corn condition was 79 percent good-to-excellent and 3 percent poor-to-very poor; corn planted was estimated at 97 percent compared to 94 percent last week, 97 percent last year, and a 5-year average of 96 percent; and corn emerged at 89 percent compared to 79 percent last week, 89 percent last year, and a 5-year average of 87 percent. In Tennessee, September 2018 corn cash forward con-tracts averaged $4.00 with a range of $3.87 to $4.29. September 2018 corn futures closed at $4.00, down 15 cents since last Friday. December 2018 corn futures closed at $4.11, down 14 cents since last Friday. Downside price protection could be obtained by purchasing a $4.20 December 2018 Put Option costing 33 cents establishing a $3.87 futures floor.
Soybeans
Average soybean basis strengthened or remained unchanged at Memphis, Northwest Barge Points, Northwest, Upper-middle, and Lower-middle Tennessee. Basis ranged from 40 under to 17 over the July futures contract at elevators and barge points. Average basis at the end of the week was 5 under the July futures contract. July 2018 soybean futures closed at $10.21, down 20 cents since last Friday. For the week, July 2018 soybean futures traded between $10.13 and $10.49. Net sales reported by exporters were within expectations with net sales of 10 million bushels for the 2017/18 marketing year and 28.4 million bushels for the 2018/19 marketing year. Exports for the same period were down 28 percent compared to last week at 23.8 million bushels. Soybean export sales and commitments were 99 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31), compared to a 5-year average of 99 percent. July soybean-to-corn price ratio was 2.61 at the end of the week.
Jul/Aug and Jul/Nov future spreads were 5 and 16 cents, respectively. August 2018 soybean futures closed at $10.26, down 20 cents since last Friday. The Crop Progress report estimated soybeans planted at 77 percent compared to 56 percent last week, 65 percent last year, and a 5-year average of 62 percent; and soybeans emerged at 47 percent compared to 26 percent last week, 34 percent last year, and a 5-year average of 32 percent. In Tennessee, soybeans planted were estimated at 63 percent compared to 50 percent last week, 51 percent last year, and a 5-year average of 44 percent; and soybeans emerged at 39 percent compared to 25 percent last week, 27 percent last year, and a 5-year average of 24 percent. In Tennessee, Oct/Nov 2018 soybean cash contracts average $10.20 with a range of $10.04 to $10.43. November 2018 soybean futures closed at $10.37, down 16 cents since last Friday. Downside price protection could be achieved by purchasing a $10.40 November 2018 Put Option which would cost 50 cents and set a $9.90 futures floor. Nov/Dec 2018 soybean-to-corn price ratio was 2.52 at the end of the week.
Cotton
Delta upland cotton spot price quotes for May 31 were 92.15 cents/lb (41-4-34) and 93.90 cents/lb (31-3-35). Adjusted World Price (AWP) increased 3.55 cents to 79.88 cents. July 2018 cotton futures closed at 93.3 cents, up 4.09 cents since last Friday. For the week, July 2018 cotton futures traded between 89.57 and 96.4 cents. Net sales reported by exporters were up from last week with net sales of 16,700 bales for the 2017/18 marketing year and 238,100 bales for the 2018/19 marketing year. Exports for the same period were down 7 percent compared to last week at 373,300 bales. Upland cotton export sales were 113 percent of the USDA estimated total annual exports for the 2017/18 marketing year (August 1 to July 31), compared to a 5-year average of 100 percent. Jul/Oct and Jul/Dec cotton futures spreads were 0.06 cents and -0.94 cents, respectively.
Oct 2018 cotton futures closed at 93.36, up 5.84 cents since last Friday. The Crop Progress report estimated cotton planted at 62 percent compared to 52 percent last week, 61 percent last year, and a 5-year average of 59 percent; and cotton squaring at 7 percent compared to 6 percent last year and a 5-year average of 3 percent. In Tennessee, cotton planted was estimated at 88 percent compared to 75 percent last week, 87 percent last year, and a 5-year average of 74 percent; and cotton squaring at 1 percent compared to 2 percent last year and a 5-year average of 1 percent. December 2018 cotton futures closed at 92.36, up 5.71 cents since last Friday. Downside price protection could be obtained by purchasing a 93 cent December 2018 Put Option costing 7 cents establishing an 86 cent futures floor.
Wheat
In Tennessee, June/July 2018 wheat cash contracts ranged from $5.07 to $5.59 for the week. July 2018 wheat futures closed at $5.23, down 20 cents since last Friday. July 2018 wheat futures traded between $5.15 and $5.54 this week. July wheat-to-corn price ratio was 1.34. Wheat net sales reported by exporters were within expectations with net sales of 1.1 million bushels for the 2017/18 marketing year and net sales of 10 million bushels for the 2018/19 marketing year. Exports for the week were up 22 percent compared to last week at 16.3 million bushels. Wheat export sales were 96 percent of the USDA estimated total annual exports for the 2017/18 marketing year (June 1 to May 31), compared to a 5-year average of 105 percent. The Crop Progress report estimated winter wheat condition at 38 percent good-to-excellent and 34 percent poor-to-very poor; winter wheat headed at 73 percent compared to 61 percent last week, 79 percent last year, and a 5-year average of 75 percent; spring wheat planted at 91 percent compared to 79 percent last week, 95 percent last year, and a 5-year average of 89 percent; and spring wheat emerged at 63 percent compared to 37 percent last week, 77 percent last year, and a 5-year average of 68 percent. In Tennessee, winter wheat condition was estimated at 70 percent good-to-excellent and 4 percent poor-to-very poor; winter wheat headed at 98 percent compared to 96 percent last week; and winter wheat coloring at 73 percent compared to 28 percent last week and 69 percent last year.
Jul/Sep and Jul/Jul future spreads were 17 cents and 70 cents, respectively. September 2018 wheat futures closed at $5.40, down 19 cents since last Friday. July 2019 wheat futures closed at $5.93, down 10 cents since last Friday. Downside price protection could be obtained by purchasing a $6.00 July 2019 Put Option costing 52 cents establishing a $5.48 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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