JSA Select Pricing Update

The below comments are from the JSA group:

To all,

This week marks the end of the fall corn and soybean pricing period for 2018 JSA Select.  As harvest quickly approaches, we feel it is important to not only look back over the market this summer, but to also give our views on how we see the post-harvest and winter time frames playing out as it relates to futures prices.

This year our final fall corn futures price was $3.72 (CZ8) and our final fall soybean futures price was $10.01 (SX8).

As we look back at this past spring and summer, we always like to look at the decisions we’ve made as a means of evaluating how we can do better.  This past year, with corn especially, proved to be particularly tough given the strong fundamentals and the negative impact of the tariff/trade war.  On the soybean side, we are continually reminded just how important China is as a consumer/buyer of soybeans representing nearly 65% of world trade.

Our strategy on soybeans recently has been to be patient for a $10 in front of the price simply due to the fact that we have seen a $10 at some point every year since 2006.  There have certainly been times since 2006 that beans have had a very bearish fundamental outlook, but China always seemed grow at a pace to buy what the market felt was excess production.  Fortunately, this year we had opportunities at that $10 level  throughout the spring and early summer.  But, as we look forward, there is no question things have changed.  Soybean ending stocks in the US for 2019 are expected to nearly double what they are this year and our relationship with China in the current political environment is extremely poor.  We will admit that in early May when all the rumblings started about a trade spat with China, we did not envision the severity of what has transpired.  Currently, we feel this trade war may have as much as another 6 months to a year or more to sort itself out, which is not good for beans.  And even if the “Trade War” has some form of resolution, we doubt the US will be in as good of a position as we were as China works hard to find other protein alternatives.  The only bright spot down the road on soybeans is the harsh economic environment both Brazil and Argentina find themselves in right now.  We doubt China can be too comfortable relying so heavily on South America long term.  As we look forward on soybean prices, we feel most of the bearish sentiment is priced in with futures and basis near decade lows.  We have a little bit more caution that we have not seen the highest yield out of the USDA yet, so a push towards $8.00 SX is possible.  At that point, we would look to sell puts or re-own futures against our current winter and summer 2019 sales which stand at 60% and 20% respectively.

Corn this summer was particularly difficult given how fundamentally strong the outlook was and still is. We have world ending stocks near all-time lows and US ending stocks at the lowest since the drought year of 2012. This year, the US will export and consume nearly 500 Mbu more than it will grow taking ending stocks to the lowest level in over 5 years.  In years with ending stocks at 12% of usage or lower and production below usage, we see strong price biases in the past.  The chart below shows the 7 years we have been in this situation since 1988.  In 5 of the 7 years, we saw highs in December corn made after harvest with the only other 2 years being major drought year when the market rallies sharply into harvest in anticipation of poor yields.  The way to read the chart below is to look at the circles on the bottom showing crop years below 12% stocks to use ratios and production below usage for the year.  The date above those circles at the top of the page is the date December corn made its high.  If you were to look at this history at face value you would say rather confidently that we have not seen the highs of Dec corn yet which currently stand at 4.295 set on May 24th.  However, we are in the midst of a trade war that has US agriculture bearing a huge brunt of the burden in price as countries that buy our Ag products leverage them with tariffs as a means of strengthening their bargaining position.  This has been a very unfortunate development for the US farmer.  In our view, the Chinese trade war would play out more so in soybeans than anything else and we did not anticipate the pressure corn would receive.  To have a high for Dec corn in May is very rare and in fact it has only happened one other time in history.  In late May and early June we were not overly anxious about the drop in the market as we felt it was a short term trade war effect that would end soon.  This assumption was incorrect as the divide with the US and many other countries besides China escalated.

Corn Ending Stocks 0831

As we look forward in corn we cannot shake the strong fundamental outlook it has. We may not be able to make a new high in Dec corn after harvest, but we feel reasonably confident that we will see a meaningful rally from current levels. Our exports this year we feel will be a new record at over 2.5 Bbu versus the USDA at 2.350 Bbu currently. We also feel feed and ethanol demand will remain strong. We will be looking at a place to buy back the winter and summer corn positions that currently stand at 20% in the very near future (perhaps next week). Although we cannot know for sure, we feel strongly that we have not seen the last of $4 corn for this upcoming crop year.

There is also a brewing acreage battle out there between corn and soybeans.  The fundamentals look quite bearish for soybean acres in the US and supportive to more corn acres, but we feel that at current corn levels it will be very hard to deviate much from current farmer rotations.  As we look to next spring, the corn market looks a lot different at another year of 90 mil acres versus 95 mil acres.  We feel the market will have to respond in some way to incentivize that acreage switch given the lack of producer free cash flow.  It is that recognition we are looking for the begin pricing CZ9.  Our initial targets for the 2 year CZ9 corn are $4.25 which we feel have a reasonable shot of hitting after harvest in Nov/ Dec 2018.

Thank You,

Tim Ellerbrock
Farmer Marketing Adviser
C: 217-430-8539
tellerbrock@ursacoop.com

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