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Futures Prices Plummet From Weather, Trade Threats
AARON SMITH
KNOXVILLE, TENN.
Another substantial drop in corn, soybean, and wheat futures prices this week as a result of positive weather forecasts and an intensifying tit-for-tat trade war with China. Cash soybean offerings in west Tennessee have dipped below $8. Prices are currently searching for a bottom as we are treading in untested waters from a technical standpoint.
In price risk management you often have to take the good with the bad when it comes to price fluctuations. To highlight this phenomenon one only has to look to the soybean and cotton futures markets from March 2018 to today. On March 1, November 2018 soybean futures closed at $10.38. This Friday (July 13) the November soybean contract closed at $8.34, a decrease of $2.04 (20 percent decrease). Conversely, on March 1, December 2018 cotton futures closed at 77.18 cents. This Friday (July 13) the December contract closed at 87.84 cents, an increase of 10.66 cents (14 percent increase).
For a soybean producer who priced 50 percent of estimated production on March 1 and 50 percent today, the average price would be $9.36 [($10.38 + $8.34)/2] or $1.02 more than the current market offering. On the other hand, the cotton producer that priced 50 percent of estimated production on March 1 and 50 percent today would receive an average price of 82.51 cents [(77.18 + 87.84/2)], 5.33 cents less than today’s price. In this simplistic example, pricing 50 percent of the crop before planting took the top out of the cotton market (bad for the producer) and the bottom out of the soybean market (good for the producer). In hindsight, the strategy of pricing 50 percent of production (or some other percent) will always be the second most profitable option – either the spring price (soybeans) or the current price (cotton) will always be higher than the combined average price for each commodity. The challenge in marketing is we do not know which one will be the best alternative until both prices have been realized.
On Thursday, the USDA released the July WASDE and Crop Production reports:
The July Crop Production report estimated U.S. (Tennessee) winter wheat: yield at 48 bu/acre (63 bu/acre), harvested acres 24.8 million (295,000), and production at 1.192 billion bushels (18.6 million bushels).
A detailed analysis of the WASDE report is available at: https://ag.tennessee.edu/arec/Pages/MonthlyCropComments.aspx
Corn
Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at Northwest Barge Points, Northwest, Lower-middle, and Upper-middle Tennessee and weakened at Memphis. Overall, basis for the week ranged from 25 under to 30 over the September futures contract with an average of 1 under at the end of the week. September 2018 corn futures closed at $3.41, down 19 cents since last Friday. For the week, September 2018 corn futures traded between $3.37 and $3.59. Corn net sales reported by exporters from June 29-July 5 were below expectations with net sales of 15.8 million bushels for the 2017/18 marketing year and 5.0 million bushels for the 2018/19 marketing year. Exports for the same time period were down 8 percent compared to last week at 55.0 million bushels. Corn 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 101 percent. Ethanol production for the week ending July 6 was 1.033 million barrels per day, down 34,000 from the previous week. Ethanol stocks were 22.393 million barrels, up 418,000 barrels. Sep/Dec and Sep/Mar future spreads were 13 and 25 cents, respectively.
The Crop Progress report estimated corn condition at 75 percent good-to-excellent and 7 percent poor-to-very poor; and corn silking at 37 percent compared to 17 percent last week, 18 percent last year, and a 5-year average of 18 percent. In Tennessee, corn condition was estimated at 84 percent good-to-excellent and 1 percent poor-to-very poor; corn silking at 83 percent compared 60 percent last week, 78 percent last year, and a 5-year average of 68 percent; and corn doughing at 25 percent compared to 3 percent last week, 12 percent last year, and a 5-year average of 7 percent. In Tennessee, September 2018 corn cash forward contracts averaged $3.43 with a range of $3.20 to $3.74. December 2018 corn futures closed at $3.54, down 19 cents since last Friday. Downside price protection could be obtained by purchasing a $3.60 December 2018 Put Option costing 20 cents establishing a $3.40 futures floor. March 2019 corn futures closed at $3.66, down 17 cents since last Friday.
Soybeans
Average soybean basis strengthened at Northwest Barge Points, Northwest, and Lower-middle Tennessee, and weakened at Memphis and Upper-middle Tennessee. Basis ranged from 45 under to 28 over the August futures contract at elevators and barge points. Average basis at the end of the week was 6 under the August futures contract. August 2018 soybean futures closed at $8.18, down 59 cents since last Friday. For the week, August 2018 soybean futures traded between $8.11 and $8.79. Net sales reported by exporters were below expectations with net sales of 5.8 million bushels for the 2017/18 marketing year and 10.0 million bushels for the 2018/19 marketing year. Exports for the same period were down 22 percent compared to last week at 27.0 million bushels. Soybean export sales and commitments were 102 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 102 percent. September soybean-to-corn price ratio was 2.42 at the end of the week. Aug/Sep and Aug/Nov future spreads were 6 and 16 cents, respectively. September 2018 soybean futures closed at $8.24, down 59 cents since last Friday. The Crop Progress report estimated soybean condition at 71 percent good-to-excellent and 7 percent poor-to-very poor; soybeans blooming at 47 percent compared to 27 percent last week, 32 percent last year, and a 5-year average of 27 percent; and soybeans setting pods at 11 percent compared to 6 percent last week and a 5-year average of 4 percent. In Tennessee, soybean condition was estimated at 83 percent good-to-excellent and 1 percent poor-to-very poor; soybeans emerged at 96 percent compared to 89 percent last week, 94 percent last year, and a 5-year average of 88 percent; soybeans blooming at 42 percent compared to 24 percent last week, 37 percent last year, and a 5-year average of 22 percent; and soybeans setting pods at 10 percent compared to 5 percent last year and a 5-year average of 3 percent. In Tennessee, Oct/Nov 2018 soybean cash contracts average $8.41 with a range of $8.18 to $8.72. November 2018 soybean futures closed at $8.34, down 60 cents since last Friday. Downside price protection could be achieved by purchasing an $8.40 November 2018 Put Option which would cost 41 cents and set a $7.99 futures floor. Nov/Dec 2018 soybean-to-corn price ratio was 2.36 at the end of the week.
Cotton
Delta upland cotton spot price quotes for July 12 were 87.74 cents/lb (41-4-34) and 89.49 cents/lb (31-3-35). Adjusted World Price (AWP) increased 1.58 cents to 76.17 cents. Net sales reported by exporters were up from last week with net sales of 121,600 bales for the 2017/18 marketing year and 251,400 bales for the 2018/19 marketing year. Exports for the same period were down 38 percent compared to last week at 257,400 bales. Upland cotton export sales were 109 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 105 percent.
The Crop Progress report estimated cotton condition at 41 percent good-to-excellent and 27 percent poor-to-very poor; cotton squaring at 59 percent compared to 42 percent last week, 59 percent last year, and a 5-year average of 55 percent; and cotton setting bolls at 21 percent compared to 12 percent last week, 18 percent last year, and a 5-year average of 15 percent. In Tennessee, cotton condition was estimated at 90 percent good-to-excellent and 1 percent poor-to-very poor; cotton squaring at 80 percent compared to 72 percent last week, 73 percent last year, and a 5-year average of 61 percent; and cotton setting bolls at 20 percent compared to 8% last week, 11 percent last year, and a 5-year average of 8 percent. December 2018 cotton futures closed at 87.84, up 3.39 cents since last Friday. For the week, December 2018 cotton futures traded between 84.14 and 89.3 cents. Dec/Mar and Dec/Dec cotton futures spreads were -0.22 cents and -6.5 cents, respectively. Downside price protection could be obtained by purchasing an 88 cent December 2018 Put Option costing 6.07 cents establishing an 81.93 cent futures floor. March 2019 cotton futures closed at 87.62, up 3.34 cents since last Friday. December 2019 cotton futures closed at 81.34, up 2.36 cents since last Friday.
Wheat
In Tennessee, July 2018 wheat cash contracts ranged from $4.54 to $5.28 for the week. Wheat net sales reported by exporters were below expectations with net sales of 5.0 million bushels for the 2018/19 marketing year. Exports for the week were down 26 percent compared to last week at 10.5 million bushels. Wheat export sales were 24 percent of the USDA estimated total annual exports for the 2018/19 marketing year (June 1 to May 31), compared to a 5-year average of 35 percent. The Crop Progress report estimated winter wheat harvested at 63 percent compared to 51 percent last week, 65 percent last year, and a 5-year average of 61 percent; spring wheat condition at 80 percent good-to-excellent and 3 percent poor-to-very poor; and spring wheat headed at 81 percent compared to 58 percent last week, 76 percent last year and a 5-year average of 69 percent. In Tennessee, the Crop Progress report estimated winter wheat harvested at 98 percent compared to 94 percent last week, 98 percent last year, and a 5-year average of 93 percent.
September 2018 wheat futures closed at $4.97, down 18 cents since last Friday. September 2018 wheat futures traded between $4.71 and $5.14 this week. September wheat-to-corn price ratio was 1.46. Sep/Dec and Sep/Jul future spreads were 15 cents and 45 cents, respectively. December 2018 wheat futures closed at $5.12, down 18 cents since last Friday. July 2019 wheat futures closed at $5.42, down 15 cents since last Friday. Downside price protection could be obtained by purchasing a $5.50 July 2019 Put Option costing 47 cents establishing a $5.03 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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