Crops Marketing and Management Update Department of Agricultural Economics Princeton REC Dr. Todd D. Davis Assistant Extension Professor -- Crop Economics Marketing & Management Vol. 2016 (2) February 17, 2016 Topics in this Month s Update: 1. February 9 th WASDE Update: Minor Adjustments to the Demand Side of Balance Sheets 2. Price Risk Management Alternatives for 2016 Wheat 3. Corn and Soybean Storage Risk Management Alternatives for May Delivery 4. Projected Returns to On-Farm and Off-Farm Storage for Corn and Soybeans 5. How Do I Get on the Email Distribution List to Receive this Newsletter? Topic 1. February 9 th WASDE Update: Minor Adjustments to the Demand Side of Balance Sheets The February WASDE usually makes minor adjustments to the balance sheet as there is no new production information for the US crops and harvest is still a few weeks away for most of South America. Pre-report expectations were for increases in ending stocks for corn, soybeans and wheat because exports are lagging behind last year s pace. Table 1. U.S. Corn Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Area (million) 97.3 95.4 90.6 88.0-2.6 Harvested Area (million) 87.4 87.5 83.1 80.7-2.4 Yield (bushels/acre) 123.1 158.1 171.0 168.4-2.6 ------------------- Million Bushels ------------------- Beginning Stocks 989 821 1,232 1,731 +499.0 Production 10,755 13,829 14,216 13,601-615.0 Imports 160 36 32 50 +18.0 Total Supply 11,904 14,686 15,479 15,382-97.0 Feed and Residual 4,315 5,036 5,315 5,300-15.0 Food, Seed & Industrial 6,038 6,501 6,568 6,595 +27.0 Ethanol and by-products 4,641 5,134 5,209 5,225 +16.0 Exports 730 1,917 1,864 1,650-214.0 Total Use 11,083 13,454 13,748 13,545-203.0 Ending Stocks 821 1,232 1,731 1,837 +106 Stocks/Use 7.4% 9.2% 12.6% 13.6% +1.0% Days of Stocks 27 33 46 50 +4 U.S. Marketing-Year Average Price ($/bu) $6.89 $4.46 $3.70 $3.60 $0.10 Source: February 2016 WASDE - USDA: WAOB. The report made minor adjustments to the corn balance sheet on the supply side by increasing imports by 10 million bushels. On the use side, FSI increased by 25 million bushels due to increased ethanol use. Exports were trimmed by 50 million bushels to a projected 1.65 billion. Corn exports are lagging 22% behind last year s export pace which supports USDA s reduction in projected exports. The net change is an increase of 35 million bushels in stocks pushing 2015-16 ending stocks to 1.837 billion bushels which is an increase of 106 million bushels over last year. The report increased stocks more than the average increase anticipated by analysts. Ending stocks of 1.837 billion bushel can be thought of as a 50 day supply of corn available at the beginning of the 2016-17 marketing-year. The projected MYA price of $3.60/bushel is $0.10 lower than last year s price. The February report reduced global corn stocks to 208.81 million metric ton (MMT) even with increased production projected in Argentina and Brazil. The projected corn crop in Argentina and Brazil is pegged at 27 MMT and 84 MMT, respectively. 1
The December 2016 corn futures contract closed $0.01 ½ lower on the day of the report (February 9) and has traded slightly higher since the report with a close at $3.85 ¾ on February 16 th. Table 2. U.S. Soybean Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Area (million) 77.2 76.8 83.3 82.7-0.6 Harvested Area (million) 76.1 76.3 82.6 81.8-0.8 Yield (bushels/acre) 40 44 47.5 48.0 +0.5 ------------------- Million Bushels ------------------- Beginning Stocks 169 141 92 191 +99.0 Production 3,042 3,358 3,927 3,930 +3.0 Imports 41 72 33 30-3.0 Total Supply 3,252 3,570 4,052 4,150 +98.0 Crushings 1,689 1,734 1,873 1,880 +7.0 Exports 1,317 1,647 1,843 1,690-153.0 Seed 89 97 96 92-4.0 Residual 16 0 49 39-10.0 Total Use 3,111 3,478 3,862 3,701-161.0 Ending Stocks 141 92 191 450 +259.0 Stocks/Use 4.5% 2.6% 4.9% 12.2% +7.2% Days of Stocks 17 10 18 44 +26.3 U.S. Marketing-Year Average Price ($/bu) $14.40 $13.00 $10.10 $8.80 -$1.30 Source: February 2016 WASDE - USDA: WAOB. The February report only reduced projected crushing use by 10 MMT to 1.88 billion bushels as a response to projected lower soybean meal exports. This increased ending stocks to 450 million bushels up 259 million bushels over the previous year. The stocks-use ratio is projected to increase to 12.2% which is about a 44 day supply of soybeans on hand at the start of the 2016-17 marketing-year. The US MYA farm price is projected at $8.80/bushel down $1.30 from the previous year. The report increased global soybean stocks to 80.42 MMT due to increased projected production in Argentina to 58.5 MMT. Brazil s production was unchanged at a record 100 MMT. The November 2016 soybean futures contract closed $0.0075 higher on the day of the report (February 9) and has traded higher since the report with a close at $8.91 on February 16 th. Table 3. U.S. Wheat Supply and Use 2012-13 2013-14 2014-15 2015-16 Change from Estimated Projected Projected 14-15 Planted Acres (million) 55.3 56.2 56.8 54.6-2.2 Harvested Acres (million) 48.8 45.3 46.4 47.1 +0.7 Yield (bushels/acre) 46.2 47.1 43.7 43.6-0.1 ------------------- Million Bushels ------------------- Beginning Stocks 743 718 590 752 +162.0 Production 2,252 2,135 2,026 2,052 +26.0 Imports 123 169 149 120-29.0 Total Supply 3,118 3,021 2,766 2,924 +158.0 Food 945 952 958 967 +9.0 Seed 73 77 81 66-15.0 Feed and Residual 370 226 120 150 +30.0 Exports 1,012 1,176 854 775-79.0 Total Use 2,400 2,431 2,014 1,958-56.0 Ending Stocks 718 590 752 966 +214.0 Stocks/Use 29.9% 24.3% 37.3% 49.3% +12.0% Days of Stocks 109 89 136 180 +44 U.S. Marketing-Year Average Price ($/bu) $7.77 $6.87 $5.99 $5.00 -$0.99 Source: February 2016 WASDE - USDA: WAOB. The February report continued to reduce projected wheat exports by 25 million bushels to 775 million bushels. If realized, this will be the lowest level of exports since the 1971-72 marketing-year. This increased stocks by 25 million bushels to 966 million bushels. This is a stocks-use ratio of 49.3% or about a 180 day supply of wheat available at the start of the 2016-17 marketing-year. The 2015-17 US MYA price is projected at $5 per bushel which is $0.99/bushel lower than the previous year. The report increased global wheat stocks to a record 238.9 MMT which was an increase greater than the pre-report expectations. The July 2016 wheat futures contract closed $0.01 ¾ lower on the day of the report (February 9) and has traded slightly higher since the report with a close at $4.74 on February 16 th. Besides having abundant stocks domestically, world stocks of corn, soybeans and wheat are projected to increase by 2.6, 3.34 and 24.4 Million Metric Tons (MMT), respectively from 2014-15. USDA projects that China s corn stocks will increase by 11 MMT and that China holds about 53% of the world s projected 2015-16 corn stocks which may temper their demand for corn. The issue with China is the age and quality of this corn and the Chinese government s willingness to allow importation of better quality corn to blend with the stored grain of lesser quality. 2
For soybeans, Argentina and Brazil are projected to have 37% and 24% of the world s ending-stocks, respectively. Both countries are storing as a hedge against inflation and a way to preserve monetary value. Still these soybeans will eventually enter the market and compete with U.S. soybeans. Topic 2. Price Risk Management Alternatives for 2016 Wheat Table 4 provides a snapshot of cash-forward contract (CFC) bids for June delivery for select locations in Western Kentucky as reported by DTN. There are only sporadic bids so far with Hopkinsville providing the most consistent bids on a daily basis. Table 4. Cash Wheat Bids for June Delivery - Select Markets in Kentucky Feb Feb Feb Feb 9 10 11 12 Livermore (Perdue) $4.44 $4.43 Sebree (Tyson) Pembroke Eddyville $4.66 $4.70 Henderson $4.69 Owensboro Mayfield Hopkinsville (Elevator) $4.35 $4.39 $4.38 $4.38 Hopkinsville (Siemer Milling) $4.65 $4.69 $4.68 $4.67 Cash wheat prices for June delivery have averaged between $4.49 and $4.55 from February 9 to February 12. As expected, the processor s bid averages about $0.30/bushel above the local elevator. As always, managers should know their costs and monitor the market for risk management opportunities prior to harvest. Average $4.55 $4.59 $4.55 $4.49 Source: DTN Cash Bids for Select Dates Listed Above. Cash Price ($/Bushel) $6.50 $6.25 $6.00 $5.75 $5.50 $5.25 $5.00 $4.75 $4.50 $4.25 $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 Cash CFC Put TVC + Rent TVC $4.25 $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 Futures Price ($/Bushel) Figure 1. Comparison of Price Risk Management Strategies for 2016 Wheat. Figure 1 illustrates the ability of a cash-forward contract (CFC) at $4.50, a put with a $4.70 strike price that costs $0.28/bushel and cash sales at harvest to cover total variable cash costs excluding rent (red dash line at $3.41/bushel) and the total variable cash costs plus cash rent (black dash line at $6.08/bushel) targets. The 2016 wheat crop is going to provide a challenge for those who planted wheat on rented land as a price of $6.08/bushel is needed to break-even over total cash variable costs plus cash rent. Farmers who planted wheat on owned land and who are only worried about covering cash variable costs may be able to use CFC or put options to protect revenue and meet cash cost obligations. Managers need to monitor pricing opportunities to protect their downside risk as best as possible. 3
Topic 3. Corn and Soybean Storage Risk Management Alternatives for May Delivery Let s look at the risk management alternatives available if corn and soybeans are stored into May. The black dashed line in Figure 3 is the per bushel total variable cash cost + cash rent + on-farm storage cost from October to May assuming a harvested yield of 175 bushels/acre. These costs are based on the 2015 crop enterprise budgets for Western Kentucky with an emphasis on covering cash costs. Ideally you would strive to cover total economic costs plus provide a return for family living, debt payments, management and future business growth. Consider the black line at $3.54/bushel a minimum price needed to cover the cash costs of farming and storing grain. Cash-forward contracts for May delivery are listed on DTN at an average of $3.72/bushel which would be a $0.18/bushel return over total cash variable costs, rent and storage. Similarly, a hedge with May futures would lock in a price at $3.70 and a return of $0.16/bushel over the pricing objective. A just-in-the-money put option with a $3.65 strike price would place a floor $0.05/bushel above the objective. A benefit of a put is that it provides flexibility to benefit from higher prices if May futures rally between now and the expiration on April 22, 2016 (Figure 2). Cash CFC Futures Put TVC+Rent+Storage $5.25 $5.00 $4.75 $4.50 $4.25 A May cash-forward-contract (red line) at $3.72 would provide a $0.18/bushel return over total cash variable costs, rent and storage (black line at $3.54/bushel). Hedging with a May Futures contract (green line) at $3.64 will lock in a cash price of $3.70/bushel at an expected basis of +$0.06/bushel. This hedge would lock in a return of $0.16/bushel A just-out-of-the-money put (orange line) at a $3.65 strike price costs $0.12 and will lock in a floor at $3.59/bushel and a $0.05/bushel return. When May Futures are at $3.75, the put is better than the hedge. When May Futures are at $3.77, the put is better than the CFC. The May put expires on April 22, 2016, so risk coverage ends on that date. Cash Price $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 $3.00 $3.20 $3.40 $3.60 $3.80 $4.00 $4.20 $4.40 $4.60 Futures Price Figure 2. Comparison of Price Risk Management Alternatives for Storing Corn from October 2015 to May 2016. Price risk management alternatives for soybeans are illustrated in Figure 3. The pricing objective of $8.43/bushel will cover the per bushel cash total variable production costs, cash rent and on-farm storage from October to May based on the state average yield of 52 bushels/acre. The average CFC for May 2016 is $8.93/bushel which would be a $0.50/bushel return (red line). Similarly, hedging with May soybean futures (green line) would lock in a price at $8.77 assuming a basis of +$0.05/bushel which would be a $0.38 return over the pricing objective. An inthe money put with an $8.90 strike price costs $0.28/bushel and would provide a floor that is $0.24 above the pricing objective. When May futures are at $8.99/bushel or higher, the put option is better than the hedge. Similarly, when May futures at $9.16/bushel or higher, a put is better than the CFC. Remember that the put option will expire on April 22, 2016 which will end your price protection. 4
$12.00 Cash CFC Futures Put TVC+Rent+Storage Cash Price $11.50 $11.00 $10.50 $10.00 $9.50 $9.00 $8.50 $8.00 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 A May cash-forward-contract (red line) at $8.93 would provide a $0.50/bushel return over total cash variable costs, rent and storage (black line at $8.43/bushel). Hedging with a May Futures contract (green line) at $8.77 will lock in a cash price of $8.82/bushel at an expected basis of +$0.05/bushel. This hedge would lock in a return of $0.38/bushel An in-the money put at a $8.90 strike price (orange line) costs $0.28 and will lock in a floor with a profit of $0.24/bushel. However, when May Futures are at $8.99, the put is better than the hedge. When May Futures are at $9.16, the put is better than the CFC. The May put expires on April 22, 2016 which will end the price protection. $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00 $10.50 Futures Price Figure 3. Comparison of Price Risk Management Alternatives for Storing Soybeans from October 2015 to March 2016 Topic 4. Projected Returns to On-Farm and Off-Farm Storage for Corn and Soybeans The projected returns over storage, shrink and opportunity costs for on-farm and off-farm storage for corn and soybeans are shown in Tables 5 8 to help guide the timing of marketing grain in storage. Historical basis for locations in Western Kentucky from 2001 to 2014 are used with current futures market quotes to develop price expectations for each month from November 2015 to July 2016. The basis information is provided by the Kentucky Farm Bureau Federation. To provide some sensitivity analysis, the basis is assumed to be one standard deviation higher and lower which would cover perhaps 68% of the potential basis outcomes. For even more sensitivity analysis, the basis is assumed to be two standard deviations higher or lower which might capture 95% of the potential basis variability. Don t worry about the statistics just think of the sensitivity analysis as considering basis that appreciates more than expected (+ standard deviations) or basis appreciating less than expected (- standard deviations). The projected returns to on-farm storage for corn are shown in Table 5. Remember that the returns in Table 5 that have the most certainty are the returns for the cash-forward-contract price assumptions as those prices can be guaranteed with certainty by a contract. The rest of the returns in Table 5 are subject to futures market and basis volatility. Table 5. Projected Returns to On-Farm Storage for Corn from October 2015 to July 2016 1/ Expected Basis +$0.091 +$0.083 +$0.014 -$0.077 -$0.084 -$0.074 -$0.067 -$0.055 -$0.083 CFC (DTN) +$0.091 +$0.083 +$0.014 -$0.079 -$0.043 -$0.049 -$0.065 -$0.071 -$0.084 +1-std dev +$0.091 +$0.083 +$0.014 +$0.026 +$0.048 +$0.040 +$0.052 +$0.067 +$0.101 + 2 std dev +$0.091 +$0.083 +$0.014 +$0.129 +$0.181 +$0.154 +$0.171 +$0.189 +$0.285-1 std dev +$0.091 +$0.083 +$0.014 -$0.180 -$0.217 -$0.188 -$0.186 -$0.177 -$0.266-2 std dev +$0.091 +$0.083 +$0.014 -$0.283 -$0.349 -$0.302 -$0.306 -$0.299 -$0.450 The returns to storage include the opportunity cost of not selling corn at harvest. This cost is calculated at a 5% annual interest rate. Farms highly leveraged with higher interest rates also have larger opportunity costs. 5
At current futures prices and various basis assumptions, managers might consider February/March as a good time to think about selling corn from on-farm storage. Under an optimistic basis (+1 std. dev.), there could be potential returns of $0.048/bushel if stored until March. With pessimistic basis expectations (-1 std. dev.), February may not be a bad time to think about selling some corn to minimize loss. Currently basis is similar to the expected basis which suggests possible returns of -$0.084/bushel if stored until March 2016. Table 6 shows the projected returns to off-farm storage for corn from October 2015 to July 2016. The returns to off-farm storage are lower than on-farm storage due to the higher storage fee off-farm and a slightly larger shrink factor. If basis appreciates more than expected, (+1 std. dev.), then the return could be -$0.223/bushel in March 2016. Given that off-farm storage is more expensive than on-farm storage, managers need to pencil out the potential return from the market for storing grain an additional month to guide sales. The projected margins, using current futures market prices, will require significant basis appreciation for positive returns to off-farm storage Table 6. Projected Returns to Off-Farm Storage for Corn from October 2015 to July 2016 1/ Expected Basis -$0.194 -$0.199 -$0.264 -$0.352 -$0.356 -$0.342 -$0.332 -$0.316 -$0.340 CFC (DTN) -$0.194 -$0.199 -$0.264 -$0.354 -$0.315 -$0.316 -$0.329 -$0.331 -$0.341 +1-std dev -$0.194 -$0.199 -$0.264 -$0.249 -$0.223 -$0.228 -$0.212 -$0.194 -$0.156 + 2 std dev -$0.194 -$0.199 -$0.264 -$0.146 -$0.091 -$0.114 -$0.093 -$0.072 +$0.027-1 std dev -$0.194 -$0.199 -$0.264 -$0.455 -$0.488 -$0.456 -$0.451 -$0.438 -$0.524-2 std dev -$0.194 -$0.199 -$0.264 -$0.558 -$0.621 -$0.570 -$0.570 -$0.560 -$0.707 There is a lot more red ink for the projected returns to off-farm storage. For most basis expectations, the February to March window seems to provide the best potential for the smallest loss from storing corn. Extreme basis appreciated is needed to cover all storage costs. The projected returns to on-farm storage for soybeans are shown in Table 7. The soybean futures market has even less carry than currently in the corn market. Projected returns to on-farm storage until March 2016 is a loss of $0.20/bushel assuming the expected basis (Table 7). If basis strengthens to +1 std. dev., then a potential return to onfarm storage in March could be $0.099/bushel. Table 7. Projected Returns to On-Farm Storage for Soybeans from October 2015 to July 2016 1/ Expected Basis -$0.164 -$0.058 -$0.107 -$0.200 -$0.190 -$0.377 -$0.276 -$0.270 -$0.199 CFC (DTN) -$0.164 -$0.058 -$0.107 -$0.245 -$0.214 -$0.212 -$0.222 -$0.276 -$0.313 +1-std dev -$0.164 -$0.058 -$0.107 -$0.055 +$0.099 -$0.003 -$0.167 -$0.170 +$0.164 + 2 std dev -$0.164 -$0.058 -$0.107 +$0.091 +$0.389 +$0.371 -$0.057 -$0.070 +$0.526-1 std dev -$0.164 -$0.058 -$0.107 -$0.345 -$0.480 -$0.751 -$0.385 -$0.370 -$0.561-2 std dev -$0.164 -$0.058 -$0.107 -$0.491 -$0.769 -$1.125 -$0.494 -$0.470 -$0.923 If basis appreciates more than expected (+1 std. dev.), then the projected return to storage to March is a profit of $0.099/bushel. Basis will need to appreciate by 2 std. dev. for a chance of larger positive storage returns. 6
Table 8. Projected Returns to Off-Farm Storage for Soybeans from October 2015 to July 2016 1/ Expected Basis -$0.311 -$0.205 -$0.254 -$0.347 -$0.337 -$0.524 -$0.423 -$0.417 -$0.346 CFC (DTN) -$0.311 -$0.205 -$0.254 -$0.392 -$0.361 -$0.359 -$0.369 -$0.423 -$0.460 +1-std dev -$0.311 -$0.205 -$0.254 -$0.202 -$0.048 -$0.150 -$0.314 -$0.317 +$0.017 + 2 std dev -$0.311 -$0.205 -$0.254 -$0.056 +$0.242 +$0.224 -$0.204 -$0.217 +$0.379-1 std dev -$0.311 -$0.205 -$0.254 -$0.492 -$0.627 -$0.898 -$0.532 -$0.517 -$0.708-2 std dev -$0.311 -$0.205 -$0.254 -$0.638 -$0.916 -$1.272 -$0.641 -$0.617 -$1.070 If basis appreciates more than expected (+2 std. dev.), the projected return to storage to March is $0.242/bushel. However, DTN CFC bids suggest that returns to off-farm storage will be negative for most basis expectations. The projected returns to off-farm soybean storage are shown in Table 8. The greater fees associated with offfarm storage and lack of significant carry in the soybean futures market makes it difficult to pencil out a positive return to storage unless there is much stronger basis appreciation than expected. If basis appreciates more than expected (+2 std. dev.) then storing soybeans until March 2016 gives a projected return to storage of $0.242/bushel. If basis is average or even with CFC to fix price, the projected returns to off-farm soybean storage are negative. Topic 5. How Do I Get on the Email Distribution List to Receive this Newsletter? If you would like to receive each month s newsletter by email, send an email to todd.davis@uky.edu and request to be added to the email distribution list. The Crops Marketing and Management Update is published monthly usually after the release of the USDA: WASDE report. You can find this issue and past issue on the UK Agricultural Economics Department s website at: http://www.uky.edu/ag/agecon/extcmmu.php Todd D. Davis Assistant Extension Professor Extension Economist Crop Economics Marketing & Management Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND KENTUCKY COUNTIES, COOPERATING 7