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Trade Negotiations, Weather Drive Export Sales, Cause Concern In Making Planting Decisions
DR. AARON SMITH
KNOXVILLE, TENN.
Soybean prices continue to whipsaw based on news/speculation regarding three issues: 1) China-U.S. trade negotiations; 2) Brazilian weather – specifically dry conditions in the northeast; and 3) export sales (1 and 2 are driving 3). Availability of export data has been reduced due to the partial government shutdown leading to a greater divergence in export sales estimates. USDA reports can be viewed as a type of baseline line that provides market participants with a common estimate to base trading decisions on. This is not to say that the USDA estimates are correct or more accurate than estimates provided through other market sources, however the USDA estimates provide an equal starting point for market participants. Individual opinions, about the accuracy of the USDA’s estimates, will deviate substantially and allow traders to roll the dice one way or the other.
Evaluating relative prices between corn, soybeans, and cotton can assist producers when finalizing 2019 planting decisions. In January, the December corn contract has averaged $4.02 and the November soybean contract $9.50 – a soybean-to-corn price ratio of 2.36. However, it is important to consider harvest cash (local) price offers (ie. subtract harvest basis from harvest futures prices) when making determinations regarding relative prices. For example, in Memphis, the average daily reported 2019 harvest cash price offerings for January were $3.97 (-0.05 basis) and $9.28 (-0.22 basis) – a soybean-to-corn price ratio of 2.33. For soybean-to-corn price ratios, the higher the ratio (for example 3.2) the greater the incentive to plant soybeans, the lower the ratio (for example 2.1) the greater the incentive to plant corn. This assumes that relative yields and cost of production are held constant. Since 2000, the national corn-to-soybean price ratio has averaged 2.55, in Tennessee the average has been 2.45. Thus, there is currently an incentive for many producers to consider planting corn rather than soybeans.
A similar calculation can be made between cotton and corn prices or cotton and soybean prices. However, the unique equipment compliment required for cotton requires additional analysis of the availability and cost to produce, harvest, and process cotton. If harvest equipment or custom harvesting is cost prohibitive or a producer is unable to procure the equipment, then price ratio becomes irrelevant in the planting decision.
Corn
Ethanol production for the week ending January 11 was 1.051 million barrels per day, up 51,000 from the previous week. Ethanol stocks were 23.351 million barrels, up 97,000 barrels. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened at Memphis and weakened at Northwest Barge Points, Northwest, and Upper-middle Tennessee. Overall, basis for the week ranged from 15 under to 6 over the March futures contract with an average of 5 under at the end of the week. March 2019 corn futures closed at $3.81 up 3 cents since last Friday. For the week, March 2019 corn futures traded between $3.71 and $3.83. May 2019 corn futures closed at $3.90, up 4 cents since last Friday. Mar/May and Mar/Dec future spreads were 9 and 22 cents.
In Tennessee, September 2019 corn cash forward contracts averaged $3.85 with a range of $3.72 to $4.03. December 2019 corn futures closed at $4.03, up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $4.10 December 2019 Put Option costing 29 cents establishing a $3.81 futures floor.
Soybeans
Average soybean basis weakened at Northwest Barge Points, Memphis, Northwest, and Upper-middle Tennessee. Basis ranged from 60 under to 18 under the March futures contract at elevators and barge points. Average basis at the end of the week was 39 under the March futures contract. March 2019 soybean futures closed at $9.16, up 6 cents since last Friday. For the week, March 2019 soybean futures traded between $8.91 and $9.20. March soybean-to-corn price ratio was 2.40 at the end of the week. May 2019 soybean futures closed at $9.30, up 7 cents since last Friday. Mar/May and Mar/Nov future spreads were 14 and 39 cents.
In Tennessee, October/November 2019 soybean cash contracts average $9.05 with a range of $8.76 to $9.27. November 2019 soybean futures closed at $9.55, up 3 cents since last Friday. Downside price protection could be achieved by purchasing a $9.60 November 2019 Put Option which would cost 55 cents and set a $9.05 futures floor. Nov/Dec 2019 soybean-to-corn price ratio was 2.37 at the end of the week.
Cotton
Delta upland cotton spot price quotes for January 17 were 71.62 cents/lb (41-4-34) and 73.37 cents/lb (31-3-35). March 2019 cotton futures closed at 73.89, up 1.4 cents since last Friday. For the week, March 2019 cotton futures traded between 72.21 and 74.66 cents. Mar/May and Mar/Dec cotton futures spreads were 1.43 cents and 0.88 cents. May 2019 cotton futures closed at 75.32, up 1.29 cents since last Friday.
December 2019 cotton futures closed at 74.77, up 1.13 cents since last Friday. Downside price protection could be obtained by purchasing a 75 cent December 2019 Put Option costing 4.56 cents establishing a 70.44 cent futures floor.
Wheat
March 2019 wheat futures closed at $5.17, down 2 cents since last Friday. March 2019 wheat futures traded between $5.08 and $5.23 this week. March wheat-to-corn price ratio was 1.36. Mar/May and Mar/Jul future spreads were 6 cents and 11 cents. May 2019 wheat futures closed at $5.23, down 2 cents since last Friday.
In Tennessee, June/July 2019 wheat cash contracts ranged from $5.06 to $5.50 for the week. July 2019 wheat futures closed at $5.28, down 1 cent since last Friday. Downside price protection could be obtained by purchasing a $5.30 July 2019 Put Option costing 29 cents establishing a $5.01 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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