When Basis and Spreads Speak, We Listen Tregg Cronin

Transcription

1 When Basis and Spreads Speak, We Listen Tregg Cronin Cronin Farms, Inc. Halo Commodities

2 Background Fourth Generation, Century Farm in Gettysburg, SD 8,500 acres of corn, soybeans, spring and winter wheat, sunflowers, field peas, lentils 100% no-till since ,000 bushels of on-farm storage Ranch 700 black angus cow/calf pairs along the Missouri River Spent four years with CHS and CHS Hedging buying cash grain and analyzing futures markets

3 Farm Location 25 miles to nearest rail 40 miles to nearest Mainline Shuttle Loader 91 miles to nearest Ethanol Plant Plans for greenfield ethanol plant 30 miles away in miles to nearest Soybean Crush Plant

4 Agenda I. Why Basis and Spreads Matter II. A Look at Current Supply Environment III. What are Basis and Spreads Telling us about 16/17? IV. Money Flow vs. Fundamentals V. Conclusion/Discussion

5 Why Basis and Spreads Matter

6 Why Basis and Spreads Matter Basis Leading indicator to spreads and futures The main device end users have to entice supply to move or remain stored Hundreds of individual decisions on basis combine to form national trends Give us clues about supply and demand

7 Why Basis and Spreads Matter Spreads Influenced by basis and money flow Work in tandem with basis to encourage or discourage movement If end users can t secure grain with basis alone, can resort to buying the spread Amount of carry becomes an economic decision

8 Why Basis and Spreads Matter Spreads Carry needs to cover cost of storage and interest Basis appreciation will hopefully make up the rest

9 Why Basis and Spreads Matter Basis and Spreads Tell the true tale of the market in an environment with HFT, Algos, etc. Provide us with the commercial line of thinking Can help assess futures price direction Most importantly, helps us determine value.

10 Current Supply Environment

11 Current Supply Environment US Awash in Grain

12 Current Supply Environment Combined 21.8bbu of production in 16/17 25,000.0 Combined Corn/Soybean/Wheat Production (mbu) 21, , , , , , ,

13 Current Supply Environment Supply outstrips demand by 3.9bbu and trend is up Total Supply minus Total Demand (mbu)

14 Why Basis and Spreads Matter US Awash in Grain

15 Current Supply Environment Now over 100% of Capacity Utilization 120% 100% 80% Percentage of C/S/W Supply to Total On/Off Farm Storage 95.57% 97.10% 96.99% 98.06% 92.06% 89.66% 91.90% 93.02% 94.08% 90.79% 93.72% 92.75% 81.86% 85.71% 86.88% 78.91% % 60% 40% 20% 0%

16 Current Supply Environment More demand from facilities without delivery market access 90.00% 80.00% Ethanol and Feed Demand 80.80% 75.52% 70.00% 66.24% 60.00% 50.00% 40.00% 30.00% 20.00% 41.94% 37.06% 10.00% 6.47% 0.00% Ethanol as a Percentage of Demand Domestic Demand as a Percentage of Total

17 Current Supply Environment More and more soybeans headed to export market 60.00% Soybean Exports as a Percentage of Total Demand 50.00% 45.75% 49.14% 40.00% 35.59% 30.00% 20.00% 10.00% 0.00%

18 Current Supply Environment Soybean demand becoming increasingly front-loaded By Dec 1, 33% of the soybean crop will be crushed or shipped By comparison, 26% of the corn crop used by Dec 1 Only that high because of residual factor being front-loaded in Q1 Corn demand much more even throughout the marketing year Ethanol now commanding ~40% of total demand Market needs to incentivize soybeans to move early Needs to pay to store corn and wheat

19 Current Supply Environment Consistently raising record production Continued need for permanent storage Temporary and Emergency storage being utilized at an increasing pace More important than ever to watch basis and spreads to help decision making

20 What are Cash Markets Telling us about 2016/17?

21 2016/17 Analog years can be a helpful guide Current stocks/use ratio for corn is 16.4% Have been six other years since 2000 which had a stocks/use ratio over 13% 2000/ / / / / /10 Current stocks/use ratio for soybeans is 11.7% Have been two years since 2000 with a stocks/use ratio over 11% and four years over 8% 2000/ / / /07

22 2016/17 Current stocks/use ratio implying $2.50 price received $8.00 Corn Price Received vs. Stocks/Use Ratio $7.00 $6.00 y = x R² = $5.00 $4.00 $3.00 [CELLRANGE], [Y[CELLRANGE], VALUE] [Y VALUE] $2.00 $1.00 $ % 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 22.00%

23 2016/17 Current stocks/use ratio implying $4.60 price received Soybean Price Received vs. Stocks/Use Ratio $16.00 $14.00 y = x x R² = $12.00 [CELLRANGE], [Y[CELLRANGE], VALUE] [Y VALUE] $10.00 $8.00 $6.00 [CELLRANGE], [Y [CELLRANGE], VALUE] [Y VALUE] $4.00 $2.00 $ % 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%

24 2016/17 CZ6/CH7 was trading at weakest carry of any of the selected years until FND Despite the fact largest sheer bushels since the 1980 s, and no deliveries on FND c carry vs c a year ago before spread rallied to +2.75c on LTD

25 2016/17 Similar story for CH7/CK7 until FND with spreads trading 73% of full carry -7.25c carry compares with -5.75c a year ago before it inverted in March

26 2016/17 What about cash markets? Spot PNW Corn Shuttles are bid +72/74H vs. +73/75H a year ago BNSF Shuttle Freight bid $150/car vs. -$200/car a year ago Spot CIF Barge Bids +39Z vs. +53Z a year ago Illinois River barge Freight 250% vs. 320% a year ago Cedar Rapids, IA Ethanol -10Z vs. +6Z a year ago Decatur, IL +17Z vs. +26Z a year ago Blair, NE -10Z vs. -9Z a year ago

27 2016/17 One of the most important calculations cash traders make is for delivery equivalence Uses export bids at the Gulf and cost of freight to NOLA Provides a good snapshot on export demand for corn Helps form opinions about deliveries Excellent way to gauge relative supply of a market

28 2016/17 Spot Cash trading at or above delivery equivalence through December (11/28)

29 2016/17 River market weakened but still trading close to DVE for Dec (11/30) Inverted by 8c from LH-Dec to Jan

30 2016/17 So what does corn trading at or above DVE mean? Cash corn along the river is relatively tight No reason to suspect deliveries against the December futures A market with the most supply in 10-years doesn t usually trade at DVE Should be supportive or bullish to calendar spreads, even though CZ/CH saw weakness last week River market trading as though demand is stronger than expected, or supply is smaller than expected Farmer retention

31 2016/17 From an exporter s point of view: Cash trading at/above DVE usually a signal to buy the futures spread Either market will rally, bushels will get sold and basis will ease or: Trader takes delivery cheaper than he can buy it from the cash market From a river elevator s point of view: Cash trading at/above DVE tells him to sell current bid as cash market is not paying to store Cash is inverted by 7c which helps offset CZ/CH carry of c Not a bearish situation

32 2016/17 SF7/SH7 trading at -9.00c or 86% of full carry vs c a year ago Select years saw spreads generally weaken through December and into January

33 2016/17 Similar story for SH7/SK7 with spread at 76% of full financial carry -7.75c compares with -6.25c a year ago

34 2016/17 What about cash markets? Spot CIF Barge Bids +25F vs. +73Z a year ago, +83F average Illinois River barge Freight 250% vs. 320% a year ago Cedar Rapids, IA Crush -22F vs. -14F a year ago, -8F average Decatur, IL Crush -3F vs. +20F a year ago, +15F average Mankato, MN Crush -43F vs. -30F a year ago Evansville, IL -5F vs. +28F a year ago, +23F average

35 2016/17 Spot Cash trading sharply below delivery equivalence through March Illinois River trading 10-13c above DVE a year ago through Dec

36 2016/17 From an exporter s point of view: Cash trading sharply below DVE encourages procurement from the grower Cash inverted by 7c from Dec to Feb, so still encouraging sales From a River Elevator s point of view: Could encourage heavy deliveries against the SF with cash trading 15-19c below DVE Heavy deliveries should weaken board spreads Weak cash and weak spreads not a bullish situation

37 Money Flow vs. Fundamentals

38 Money Flow vs. Fundamentals Cash market and spreads mostly supportive to the corn market Yet futures continue to struggle in a range Large Spec Net Position- 11/22/ /9/2007 1/9/2008 1/9/2009 1/9/2010 1/9/2011 1/9/2012 1/9/2013 1/9/2014 1/9/2015 1/9/2016

39 Money Flow vs. Fundamentals Gross Commercial Long (End User) maintains very large long position. Last week was among top 20 all time. Gross Commercial Long Position - 11/22/

40 Money Flow vs. Fundamentals Funds maintain solid net long in soybeans ~ 108,506 caks Current position is over double the 52-week average Funds short -83,188 contracts at this point a year ago Large Spec Net Position - 11/22/ /2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014 1/2/2015 1/2/2016

41 Money Flow vs. Fundamentals Gross Commercial Long position of 216,698 contracts Compares with 323,548 contracts a year ago and 52-week average of 299,103 contracts Gross Commercial Long - 11/22/ /2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014 1/2/2015 1/2/2016

42 Money Flow vs. Fundamentals Combined Index Long of 592,152 contracts compares with 552,983 a year ago and 569,157 on the 52-week average Peak of 900,642 contracts in 2010 Combined Index Fund Positions for C/S/W - 11/15/ , , , , , ,000

43 Money Flow vs. Fundamentals Soybean Index Long up 35-40,000 contracts y/y while corn and wheat flat Combined Index Fund Positions for C/S/W - 11/15/ , , , , , ,000

44 Money Flow vs. Fundamentals Managed funds holding sizable net long in soybeans vs. net shorts in corn and wheat Funds are main reason a market can have basis, spreads and futures not in agreement as we do now Smaller index fund positions lessen effect on spreads during roll periods Just as important to pay attention to commercial activity as managed funds Funds are followers, commercials are the leaders

45 Conclusion/Discussion

46 Conclusion/Discussion When the noise gets too loud, we can always rely on basis and spreads to help navigate Corn market has a bullish cash structure and the weakest carries of any of our well supplied analogs up until delivery Managed funds holding sizable net short position, working against commercial efforts to secure physical CZ6/CZ7 spread is trading at c vs c at this time a year ago, implying a tightening situation into next marketing year Question really comes down to whether crop is smaller than thought, demand is stronger than expected or farmer retention is higher than the market was anticipating? Combination of all three? How cash and spreads respond to the top and bottom ends of our range will guide realistic price discovery for the rest of 2016/17

47 Conclusion/Discussion DTN National Corn Basis Index

48 Conclusion/Discussion March Options

49 Conclusion/Discussion Soybean market is the exact opposite of the corn market Very weak cash and spread structure against very high futures prices relative to supply Cash and Spreads suggest futures are overvalued relative to supply and demand Trepidation about South American growing season?

50 Conclusion/Discussion Zhengzhou Glass Futures

51 Conclusion/Discussion Coal, Rebar and Zinc Futures

52 Conclusion/Discussion Garlic Bulb Futures

53 Conclusion/Discussion Chinese Currency Weakness

54 Conclusion/Discussion Soybean market is the exact opposite of the corn market Chinese currency weakness causing speculative flows into commodities Thermal and coking coal at record highs, iron ore at 2-yr highs, glass futures at 2-yr highs, Steel Rebar futures at 2-yr highs and garlic bulb futures new record highs, up 80% y/y Managed Fund Long twice as large as a year ago; Index funds own 40,000 contracts more than a year ago Futures and cash can only decouple for so long

55 Conclusion/Discussion DTN National Soybean Basis Index

56 Conclusion/Discussion January Options

57 Thank You Questions?

58 Tregg Cronin Cronin Farms, Inc. Halo Commodities