SOYBEANS: U.S. VS. BRAZIL

Transcription

1 October 16, 2015 SOYBEANS: U.S. VS. BRAZIL It is truly astonishing some of the changes taking place in the world in which we live. Most everyone is already to the point of nausea following the political debates and yet the fight has only begun. We have one more year of this to go through. On the worldwide front, changes are taking place at a rate close to the speed of sound, including political conflicts between us and Russia in the Middle East and the Ukraine. Oftentimes we pay little attention to what is going on in that area of the world because it is not in our back yard. But let us not forget what is going on outside of the U.S. is going to impact us tremendously. More importantly, a change happening around the world that is impacting U.S. farmers in a big way is currency fluctuations. Everyone is well aware of the strength of the U.S. dollar over the last couple of years. This helps cheapen imports but makes our exports very expensive to foreign buyers. More significantly, the declining value of the Brazilian real is impacting soybean production and exports. What has happened since July 2014 may change worldwide soybean production and exports for several years to come TOUGH TO UNDERSTAND Many producers as well as most of us in the marketing business, frankly, have trouble translating what the change in currencies will do in a specific market. We struggle with this ourselves. Let s see if we can help simplify this so that everyone can get a better handle on what s going on between us and South America. To begin with, look at the chart below on the U.S. dollar versus the Brazilian real. Since July 2014 the real has depreciated by 43% versus the U.S. dollar. Now put yourself in the position of a Brazilian farmer in Mato Grosso, the major soybean producing area in northern Brazil. To further complicate the analysis, we are not only comparing currencies, but in Brazil all prices are based on 60 kilogram bags rather than bushels. So let s see if we can sort through this. In graph #2 on page 2, if you look at the line of soybeans priced in Brazilian real, in June of 2014 a Brazilian producer was receiving 50 reals per bag. He is now receiving over 60 reals per bag. Now assume that he was raising soybeans U.S. Dollars per Brazilian Real The Brazilian Real has depreciated by 43% vs. the U.S. dollar since July 2014 U.S. harvest weather has been ideal across much of the Midwest, and while some areas could see their first freeze this weekend, it is too late to have much impact. One of the few remaining questions is how strong the national soybean yield turns out, as we continue to hear many reports of yields well above average. The 2015 season is just about over. Now the attention turns to South America. As noted in our lead story, producers in Brazil may still have a strong incentive to plant lots of acres, particularly for soybeans. While some areas have suffered from abnormal dryness, there is no significant threat at this time. The top soybean-growing state of Mato Grosso is off to a slow planting start, but it is still early in the year and forecasts call for improved rainfall at the end of the month. The second-biggest soygrowing state, Parana, was 36% planted as of Tuesday, in line with the past couple years. Although soybean futures have acted strong technically, and basis levels have held up relatively well amid the harvest, the prospect of another huge South American crop will continue to hang over the market. Forecasters are already calling for a record Brazilian crop, potentially topping more than 100 million metric tons this year. CROP FOCUS SHIFTING When everything seems to be going against you, remember that airplanes take off against the wind, not with it - Henry Ford

2 SOYBEANS: U.S. VS. BRAZIL (continued) based on U.S. dollars. In June of 2014 he would have been receiving $11.00 per bushel and now would be receiving about $7.00 per bushel. The primary currency used in the export market is U.S. dollars. So if you are buying soybeans from Brazil in June of 2014 you would have been paying nearly $11.00 per bushel and now you re paying slightly over $7.00 per bushel! If you re buying soybeans from the U.S. today, you would be paying closer to $9.00. REVERSE THE ROLE Now look at the chart of the central Illinois soybean prices in dollars versus reals. In June 2014 you would have been receiving $15.00 per bushel and now $9.00 per bushel. Since January of this year, if priced in Brazilian real the price would have gone from 26 real per bushel to 36. So the bottom line is that the Brazilian farmer is being encouraged financially to produce more soybeans and the U.S. is being encouraged to produce less. GETTING CRUSHED The term crush has always been synonymous with processing of soybeans. Now the word crush in soybeans means something more detrimental we are getting crushed in the world export market. For 2015/16, U.S. exports are now seen falling 9.1% to billion bushels while Brazil s exports are expected to rise 10.5% to billion bushels surpassing the U.S. by 24%. Put another way, Brazil is expected to capture 44.5% of the world export market this year versus the U.S. share of 36%. This is going to be a very difficult trend to turn around. WHAT DOES IT ALL MEAN? There is some very good news in this whole story. That is, even with very large carryover supplies of soybeans worldwide, market prices are still holding up very solidly. Chinese demand continues to grow, and we do not see that changing. So at current price levels one has to assume that the overall bearish fundamentals are discounted in this market. Farmer holding is also tight, helping support the market. Soybean meal prices in the futures market are inverted giving a strong indication of very strong demand for soybean meal. The concern is at what point will this camel s back break. The fundamentals are not strong enough domestically to support soybean prices above $10.00 as we see it. It would take a significant drop in planted acres this coming spring or a substantial weather problem in order to propel prices above the $10.00 mark. Seasonally, 22% of the highs since 1970 in the cash market have occurred in the month of September. That s not the case this year since the October highs have already taken it out. If the market doesn t peak early, the odds of a high normally don t increase until we get into May. Even after the first of the year, the tops have occurred in January only one time and in March only one time. The top has never occurred in December or February. The lows on the other hand, either come early or they come late. At this stage, the odds of the lows switch to the July/August timeframe where 36% of the bottoms have occurred. MARKET STRATEGIES At this point we obviously are very concerned with the long-term trend in exports and the ability to get the U.S. share back. That s going to take some time and a readjustment in the value of currencies in both the real and the U.S. dollar. But for now, the technical trend in soybeans is up, and don t fight the trend. We have taken profits on hedges and are sitting on the sidelines so plan on doing that. The odds of making any additional cash sales between now and January are fairly slim. The next good marketing opportunity will likely occur in March and we will need to evaluate it at that point in time. Central IL Soybean Price in U.S. Dollars and in Brazilian Real Sorriso, Mato Grosso, Brazil Soybean Price in U.S. dollars/bu and Brazilian Reals per 60 kg Bag Brazilian real 40 U.S. Dollars 16 Brazilian Real/60 kg bag 70 USD/bu Brazilian real/bu (left scale) Brazilian real/bu (left scale) $/bu $/bu

3 FUNDAMENTALS COMMENTARY The 2015/16 marketing year continues to be characterized by slow export demand for U.S. corn, soybeans and wheat due to the strong dollar and large world supplies of all three crops. Out of those crops, corn export sales are now lagging expectations the worst. While corn export sales picked up modestly in the week ended Oct. 8, export commitments for 2015/16 were still nearly 32.5% behind a year earlier and were well under the five-year average. Sales equaled only 25% of USDA s export forecast versus a 5-year average of 42% of final exports. At the current pace, sales would only reach billion bushels. As we have noted, corn exports should pick up during the second half of the marketing year with competition declining as Brazil s big second-crop corn exports wind down. However, it s now doubtful they can catch up enough to hit USDA s current export forecast. As noted in the lead story, USDA cut its forecast for 2015/16 soybean exports last week and now sees them 9% below last year s record high. U.S. soybean sales have picked up with Brazil s 2014/15-crop export campaign winding down. However, export commitments for 2015/16 are still lagging 23.4% behind a year earlier and trail the five-year average as can be seen at right. The wheat export outlook remains dismal. With more than a third of the marketing year over, U.S. export sales trail last year by 17.8% and while USDA trimmed its export forecast by 50 million bushels last week, it still sees exports down only about 0.5% from last year. At the current pace, U.S. wheat exports would only hit 750 million bushels, so USDA may make further cuts. UPCOMING SPEECHES 12/10/15 New Harmony, IN - First Bank Evansville 1/13/16 Fort Worth, TX - Farm Credit Bank of Texas 2/17/16 Memphis, TN - MidSouth Farm & Gin Show 2/28/16-3/1/16 New Orleans, LA - Agricultural Economic Symposium Call or visit Million Bu 2,000 1,800 1,600 1,400 1,200 1, / / /15 5-year average Source: USDA 400 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Million Bu 1,200 1, CONTENTS Corn Export Commitments 2,000 Million Bu 1,750 1,500 1,250 1, / / /15 5-year average Source: USDA 0 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Soybean Export Commitments Wheat Export Commitments 2015/16 0 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Lead story Fundamentals News Analysis Corn... 6 Soybeans Management/Biofuels..10 Wheat / /15 5-year average USDA Target 1,850 USDA Target 1,675 USDA Target 850 Rice Cotton Hogs Cattle Feed/Inputs Financials/Energy Positions BREPORT@BROCKREPORT.COM 3

4 WORLD NEWS ANALYSIS CHINESE SOYBEAN IMPORTS FIRM While China s monthly soybean imports fell further off the record high set in July, they were stronger than expected and were up a strong 44.3% over September Chinese customs data put September soybean imports at 7.26 million metric tons (MMT), down from 7.78 MMT in August and 9.5 MMT in July, but above a forecast of 6.47 MMT made by the China National Grain and Oils Information Center last month. China s January-September 2015 soybean imports of MMT were up 13% from a year earlier and imports for the 2014/15 marketing year (September-October) reached 78.3 MMT, topping USDA s forecast of 77.0 MMT. This suggests USDA could raise its 2015/16 forecast for Chinese imports slightly. The firm Chinese demand should help underpin soybean prices. WEAK REAL SPURS BRAZIL SOY SALES As mentioned in this week s lead story, Brazilian soy producers are seeing totally different market signals than U.S. producers due to the weak Real. With soybean prices in reals much higher than a year ago, producers have forward sold much more of their crop. In the top growing state of Mato Grosso, producers had priced 47.9% of their 2015/16 production by Oct. 1, up from just 32% last year and the 5-year average of 46.8%, accordng to Imea, the state agricultural economics institute. INDIA MULLS HIGHER WHEAT TARIFF India is considering boosting its import duty on wheat to 25% from the current 10% in a further effort to curb imports from Australia and France, and support use of domestic wheat, government sources told Reuters News Service on Thursday. India imposed the current 10% duty in August, after going eight years without any tariff on wheat imports. The tax is scheduled to be in effect until March 31 of next year. A higher import tariff would be another negative for wheat prices, which are primarily driven by export trade. With world wheat supplies at the highest level in years, the market certainly does not need new barriers to trade. However, India may still be heading toward larger wheat imports not too far down the road. While the country still has a sizeable domestic wheat surplus, USDA expects its ending stocks at the end of 2015/16 to be less than half of what they were at the end of 2012/13, following a drop in production this year due to adverse weather. NO PACT ON UKRAINE EXPORTS Last week we reported Ukraine s government had reached a tentative agreement with exporters on shipment levels for wheat, corn and other grains. The pact reportedly would have capped grain exports at 36 MMT, including 16.5 MMT of wheat and 16 MMT of corn. However, Ukrainian traders told Reuters News Service the government and traders had failed to sign the draft memorandum as scheduled on Thursday. The lack of an agreement has created uncertainty in Ukraine s grain markets. It is unclear when the document could be signed, traders said. EU DEFEATS GMO IMPORT OPT-OUT European lawmakers have overwhelmingly rejected a proposal that would have let countries restrict or ban the use of imported genetically modified crops that have already secured European Union approval. The Environment Committee of the European Parliament rejected the draft law by a vote of 47-3 on Tuesday. Many lawmakers argued the plan was unworkable and would lead to the reintroduction of border controls, according to Reuters. The bill was designed to mirror a law passed earlier this year that lets member countries opt out of allowing producers to plant genetically modified crops approved for cultivation by the European Union. The rejection is no doubt a relief for the biotech industry as approval of such a law could have created chaos for the industry. While only one GM crop, Monsanto s Mon-810 corn, is approved for cultivation in the EU, more than 60 GM crops, mostly corn and soybean varieties, are approved for import. WORLD WEATHER HOTSPOTS Some locations in the northwest U.S. Corn Belt saw hard freezes on Friday morning and freezes were expected to extend into the lower Midwest on Saturday, but any crop impact will be minimal. The Midwest and the Plains will continue to see near-ideal harvest weather most of next week, with little rain expected. A rain event is forecast for Oct , but corn harvest should already be winding down in most areas by then and only minor delay should result with soils currently dry. The rain will benefit winter wheat areas from eastern Kansas across Missouri, central/southern Illinois and into Indiana. Brazil s dry northern growing areas will see little rainfall before late next week, but forecasts call for a wetter weather pattern next Thursday into Oct. 30, which should provide enough rainfall to boost planting of summer crops in the top soy state of Mato Grosso and neighboring Goias state. Areas from Paragua Mato Grosso do Sul into Parana will have favorable soil moisture and there should be enough breaks in rains to allow decent planting progress. Parts of southern Russia received some beneficial rains this week, but very little significant precipitation is likely to occur across most of Ukraine over the next 10 days to two weeks, World Weather says. Scattered rains should be seen Wednesday into Friday across a small portion of southern Russia into western Ukraine, bringing some crop improvement

5 NATIONAL NEWS ANALYSIS MISSISSIPPI DOESN T MAKE GRADE This week s lead story, which focuses on Brazil and the advantage soybean producers are getting from a weaker currency, does not mention another factor that shapes competition between the U.S. and Brazil: infrastructure. While infrastructure in South America has long lagged the U.S., Brazil is closing the gap with new investment in inland and coastal ports. Meanwhile a report on the centerpiece of the U.S. grain transportation system the Mississippi River basin finds plenty of problems. The report this week from a group called America s Watershed Initiative, rates the river basin on several criteria, including flood control and risk, water quality and recreation, and gives the system an overall grade of D+. The biggest problem, according to the report, is infrastructure. Infrastructure condition got a D grade while infrastructure maintenance got an F. While an estimated 97% of the locks and dams on the river are in good condition, officials say that is way too low, as it only takes one failure to bring the system to a standstill. To be sure, the U.S. water transportation infrastructure is still considered the best in the world, but officials say it is in growing danger of losing that status. The group issuing the report, a collaboration between business, environmental groups and universities, is hoping the report will create a sense of urgency. CLIMATE CHANGE ON THE MENU FOR FOOD COMPANIES Some of the largest food companies in the world are calling on Congress and world leaders to address climate change, and pledging to accelerate business action on climate change in their own companies. The companies include General Mills, Unilever, Kellogg, Nestle, Mars and Danone, along with some other companies you would more typically associate with such an effort, such as Ben and Jerry s and the organic yogurt maker Stonyfield Farm. The companies penned a joint letter earlier this month to U.S. and world leaders ahead of a December United Nations conference on climate change. While the result of that conference is anyone s guess, the companies stated intent to take action on their own could ultimately trickle down to the farm in unforseen ways. Consider that egg producers across the country are now contemplating a switch to cage-free production, prompted by McDonalds and other companies, who in turn were prompted by consumers and activist groups years ago. The aforementioned food companies are ultimately some of the biggest end-users of grain and dairy products. BREPORT@BROCKREPORT.COM To reduce emissions levels, we must work across our collective value chains with growers, suppliers, customers, peer companies, government leaders and industry partners, said General Mills chairman and CEO Ken Powell. Together we will identify new solutions and promote sustainable agriculture practices that drive emissions reductions. Of course there is plenty of skepticism within agriculture about the climate change theory whether there is actual major change ongoing, and whether it is due to man-made causes or natural variation. The American Farm Bureau Federation recognizes there may be an increase in occurrences of extreme weather, but says it is unclear whether this might be due to natural climate cycles or other factors. It opposes unilateral action by the U.S., which it says would be ineffective, and does not support regulations that will increase production costs for farmers. NUTRITION GUIDELINES TO STAY FOCUSED ON... NUTRITION Washington has a tough enough time recommending foods for a healthy diet without trying to incorporate what ideas are sustainable for the planet. A proposal that would have included such considerations in the federal government s dietary advice has been scrapped, amid widespread opposition from agricultural groups and in Congress. The federal government updates its guidelines every five years. The proposal came from the Dietary Guidelines Advisory Committee, which earlier this year concluded that a diet rich in plant-based foods was not only good for the individual s health, but good for the planet. The underlying argument don t eat meat because it is bad for the planet drew the ire of a number of groups, particularly within the meat industry. The secretaries of Department of Health and Human Services and Department of Agriculture last week issued a statement saying sustainability would not be a factor in the new nutritional guidelines. This was reported by some as bowing to industry lobbying and Congressional pressure, but in fact USDA Secretary Tom Vilsack has been questioning for months the inclusion of sustainability. More broadly, critics point out that the very concept of federal nutritional guidelines has taken a hit, as consumers get whiplash from changing recommendations on staples such as butter, eggs and grain. I want you to understand, from my constituents, most of them don t believe this stuff anymore, U.S. House Rep. Collin Peterson, D-Minnesota and a ranking member of the House Agriculture Meeting said at a Congressional hearing. They are just flat out ignoring this stuff, and so that s why I say I wonder why we are doing this. 5

6 CORN DECEMBER 2015 High: /19/12 Low: /2 8/12/15 Contract Size: 5,000 bu Daily Limit: 25 cents/bu Key reversal down support 14 DAY RSI CENTRAL ILLINOIS CASH CORN Apr May Jun Jul Aug Sep Oct WEEKLY CONTINUOUS

7 CORN COMMENTARY While we still feel corn futures have already made major seasonal lows, the short-term technical trend has shifted to down amid heavy harvest activity and slow export demand. March futures broke support at $3.90 and could be headed back to major support at $3.69-$3.77 in the near term. Corn harvest should be more than 60% done by the end of this week, but the market faces another week of peak harvest activity. The weather forecast looks a bit wetter, but only minor delays are expected. Producers will remain tight holders of corn, but some may be running out of storage space. Cash-Only Marketers Strategy: 50% of this year s crop was forward contracted a long time ago. 10% of the 16/17 crop was sold on an HTA contract. Sit tight. Hedgers Strategy: Cash sales are at 30%. We sold March futures against 30% of 2015 crop on Wednesday and re-established a 30% hedge on 2016 production in Dec futures on Thursday. We also remain short March $5.20 call options and short December 16 $5.00 calls. U.S. SUPPLY & DEMAND USDA Brock Year begins Sept 1 13/14 Est. 14/15 Proj 15/16 Proj 14/15 15/16 MARCH 2016 High: /28/14 JULY 2016 High: /4 1/30/13 ACREAGE (million) Planted Area Harvested Area Yield SUPPLY (mil bu) Beg. Stocks 821 1,232 1,731 1,232 1,731 Production 13,829 14,216 13,555 14,216 13,574 Imports Total Supply 14,686 15,479 15,316 15,479 15,335 USAGE (mil bu) Feed & Residual 5,030 5,317 5,275 5,317 5,300 Food/Seed/Ind 6,503 6,566 6,630 6,566 6,600 Ethanol & By-Products 5,134 5,207 5,250 5,207 5,250 Domestic Use 11,534 11,883 11,905 11,883 11,900 Exports 1,920 1,864 1,850 1,864 1,850 Total Use 13,454 13,748 13,755 13,748 13,750 Ending Stocks (mil bu, Aug 31) 1,232 1,731 1,561 1,731 1,585 CCC Privately-Owned 1,232 1,731 1,561 1,731 1,585 Stocks/Use 9.2% 12.6% 11.3% 12.6% 11.5% Farm Price ($/bu) $4.46 $3.70 $ $3.70 $ Low: /4 8/12/15 Low: /2 8/12/15 DECEMBER 2016 High: /18/12 Low: /12/15 Price Key reversal down Key reversal down Commitments of Traders Futures and Options Combined, as of October 6, 2015 support support Large Specs Price (dotted line, left scale) 3.50 Commercials Source:CFTC 3.25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec OPEN INTEREST VOLUME Contracts 300, , , , , , , , ,000 BREPORT@BROCKREPORT.COM 7

8 SOYBEANS NOVEMBER 2015 High: /11/12 Low: /4 9/11/15 Contract Size: 5,000 bu Daily Limit: 70 cents/bu 14-DAY RSI Source: USDA AMS CENTRAL ILLINOIS CASH SOYBEANS Apr May Jun Jul Aug Sep Oct WEEKLY CONTINUOUS support

9 SOYBEANS COMMENTARY Soybean futures staged an upside breakout from sideways trading ranges on Monday. for the move came from USDA s lower crop estimate, continued strong Chinese imports and Brazilian weather worries. However, futures failed to show follow-through to the upside amid continued harvest pressure with reports of strong yields continuing. We are confident soybean prices have made harvest lows, but futures are in danger of slipping back into a choppy sideways pattern. World supplies remain large and expectations for Brazil s crop remain high for now. Nearby futures must close above $9.20 to open more upside. Closes by Nov. and Jan. beans back below $9.00 would weaken the chart picture. Cash-only Marketers Strategy: 50% was contracted long ago. Sit tight. No 16 crop sales advised. Hedgers Strategy: We are 30% cash sold and aside futures with a hedge profit of $1.35 per bu. on the entire 15 crop. Sit tight. For the 16 crop, stay on the sidelines. U.S. SUPPLY & DEMAND USDA MARCH 2016 High: /4 5/21/14 Year Begins Sept 1 13/14 Est. 14/15 Proj 15/16 Proj 14/15 15/16 JANUARY 2016 High: /4 5/19/14 ACREAGE (million) Planted Acres Harvested Acres Yield SUPPLY ( mil bu) Beg. Stocks Production 3,358 3,927 3,888 3,927 3,939 Imports Total Supply 3,570 4,052 4,109 4,052 4,160 USAGE (mil bu) Crush 1,734 1,875 1,880 1,875 1,890 Exports 1,647 1,843 1,675 1,843 1,675 Seed Residual Total Use 3,478 3,861 3,685 3,861 3,689 Low: /2 8/24/15 NOVEMBER 2016 High: /2 12/6/12 Brock Low: /11/15 Low: /11/15 Price resistance resistance Commitments of Traders Futures and Options Combined, as of October 6, 2015 Large Specs Commercials Contracts 150, ,000 50,000-50, , , Price (dotted line,left scale) -200,000 Source:CFTC ,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec OPEN INTEREST 0 Ending Stocks (mil bu, Aug 31) CCC Privately-Owned Stocks/Use 2.6% 4.9% 11.5% 4.9% 12.8% Farm Price ($/Bu) $13.00 $10.10 $ $10.10 $ VOLUME BREPORT@BROCKREPORT.COM 9

10 INSIDE BROCK MANAGEMENT ON TOPIC FUTURES ARE NOT THE ONLY BASIS FOR DECISIONS Kurt Barth Chief Financial Officer & Marketing Consultant When making presentations or discussing marketing plans with clients, one point we drive home regularly is to separate basis and futures components when analyzing and making cash pricing decisions. Futures are an anticipatory market that provides price discovery in the future, while spot basis reflects real time supply, demand and transportation costs between source and end user. They can and do often move in opposite directions for various reasons, so optimizing both is a key to maximizing cash prices, especially in the current price environment. While futures is clearly the main component and gets the lion s share of attention, with corn futures near $4.00 and beans near $9.00, basis makes up a much larger percentage of the cash price than it did when corn was $2.50-$4.00 higher and beans were $5.00-$8.00 higher. Thus its importance is nearly twice as great as when prices peaked a few years back. Furthermore, while those who use futures and options or hybrid cash contracts can change their mind and make adjustments if the futures market rises or falls, generally you only get one shot at setting the basis. Most producers have a price outlook, and by that I mean they have an idea as to where they think futures are headed. Far fewer have a basis outlook. We would encourage you to think about both in equal measure. Separating Basis & Futures Pricing Pricing Decisions Decisions 1. Store and wait 2. Delayed price contract 3. Minimum price contract Strengthen Basis 1. Hedge 2. Non-roll hedge to arrive 3. Buy put option Up Futures price Expected Change Futures price Down 1. Basis contract 2. Sell cash and buy futures or buy call option 3. Minimum price contract Basis 1. Cash sale now 2. Forward contract Source: Adapted from NCR Developing Marketing Strategies and Keeping Records on Corn, Soybeans, and Wheat Weaken Here are a few examples for this crop year. It is no surprise that the Indiana and Ohio corn crop got hurt by relentless rains. We have been encouraging producers in these areas to hold off setting basis, as low futures prices have farmers reluctant to sell and a short crop should result in stronger basis. So far, that is proving to be true as basis has continued to narrow, even during harvest. How long this will last is hard to say, but just like scaling into a futures price rally, think about setting basis on HTA s or booking basis contracts in 10-20% increments as it strengthens. This same short crop in the eastern Corn Belt will affect basis in North Carolina and Pennsylvania. North Carolina is a huge corn deficit state to begin with, and with a smaller supply to it s West, local basis is likely to be very strong. Pennsylvania in general has a very good crop, so combined with strong basis, it could prove to be a decent if not exceptional year for corn farmers. On the other hand farmers in western Minnesota and the Dakotas, where there is still old crop in the bin and a huge crop in the field, may experience a wider than normal basis. In this case, if you can capture what is a historically decent basis for your area, don t think twice book it. Soybean basis has been a mixed bag. Expected carryout for the 2014/15 year has gone from 360 million to 191 million in the past few months the difference between plenty ample and borderline tight. Many locations in the central and eastern corn belt have strong basis as the market is calling for beans, also evidenced by the near lack of carry in the futures market. Western corn belt basis has been weaker than the past few years, particularly in the Dakotas. The 2015/16 carryout is expected to be north of 400 million bushels, so once the pipeline is full, the basis is likely to weaken. As harvest has progressed, we have already seen a slight softening, on the order of 5-10 cents. With carry in the corn market but not in the beans, storing beans likely won t pay off. End users understand this and will be patient once their short term needs are filled. The chart at left illustrates a few examples of how to utilize your futures and basis outlook. Once a decision has been made to sell for whatever reason, take a look at futures and basis, decide where you think each is headed and choose your weapon accordingly. Even if you need to generate cash at this time, elevators and other end users often advance a significant percent of the current price, even if you just set the basis. Bottom line: Be aware of and utilize any and all tools available to you to separate the futures and basis components when it makes sense to do so to maximize the cash price. Kurt at kbarth@brockreport.com

11 BIOFUELS ETHANOL OUTPUT DIPS WHILE STOCKPILES BUILD Weekly ethanol production was down slightly on the week, slipping to 949,000 barrels per day, according to EIA. That is down 1,000 bpd from the prior week, but was still up 64,000 bpd, or 7.2% from a year earlier. The production data implies weekly corn-for-ethanol use of about 98.9 million bushels at a conversion rate of 2.82 gallons to the bushel. That s below the million bushels per week needed to reach USDA s corn-for-ethanol use forecast. Stockpiles were up 144,000 barrels, to million. That is up 3.3% from a year ago. Gasoline product supplied (demand) rose to million barrels per day, up 2.0% from the prior week. Gasoline demand has been running at its highest levels since before the financial crisis, but the latest weekly total was actually down slightly from a year ago. However, the four-week average, a more reliable indicator of the trend, remains up from last year. Gasoline demand is drifting lower seasonally. BIODIESEL PUSH Biodiesel supporters are making their case in Washington that the Renewable Weekly (mil bu) needed per week to meet USDA target BREPORT@BROCKREPORT.COM Fuel Standard needs to raise its biodiesel mandate more aggressively. The American Soybean Association noted an Oct. 8 meeting between a group of U.S. senators and White House Chief of Staff Denis McDonough to discuss the issue. EPA earlier this year proposed to lower required volumes of ethanol and advanced biofuels (including biodiesel) from where they were in the original 2007 RFS law. EPA plans to issue a final rule by the end of November. Its current proposal calls for annual growth of 100 million gallons in biodiesel. The biodiesel industry and the ASA are calling for annual increases of million gallons each year, to reach 2.3 billion in BURNING WOOD TO MAKE ETHANOL While growth in cellulosic ethanol production remains slow as companies struggle to find an economic way to make fuel out of biomass such as trees, ethanol producer POET is turning to dead trees to power the ethanol plants themselves. The company will take 1,500 tons of groundup wood debris from a nearby landfill to use for its Chancellor, S.D. plant. Corn Used for Ethanol Production 2015/ /15 Annualized 5,500 5,392 5,292 5,250 5,192 5,092 4,992 5, Source: EIA, Brock Associates 4,750 4,692 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 4,892 4,792 That amounts to about six months worth of waste, or as many as 100 truckloads, according to the Sioux City Journal. POET is taking the debris from the Spencer, Iowa landfill, and will use it to produce steam to power the plant. It typically uses natural gas. The Spencer government, meanwhile, has typically burned this waste a couple times a year. POET has also in the past burned old wood shipping pallets as well as methane gas from a nearby landfill to produce the steam needed for its plant. INDIA STRUGGLES ON ETHANOL GOAL India is having trouble getting its ethanol industry up and running. The national government is convening a meeting of top state officials in sugar producing states to discuss how to boost the ethanol supply and reach the government s 10% blending target, the Business Standard newspaper reported. Sugar mills there have offered only a limited amount of ethanol, and head of a trade group said the government s target will only happen step-by-step. Although the government has raised ethanol procurement prices, the newspaper reported that sugar mills still get a higher price from liquor and chemical manufacturers, which consume about 3/4 of the country s ethanol output. BRAZIL BOOM Another major sugarcane producer, Brazil, is not having the same problems with ethanol. A consulting group, Datagro, says that exports in will rise to 475 million gallons from 343 million in , due mainly to increased exports to California. Domestic demand is strong due to the government raising the blend rate to 27%, from 25% previously. 11

12 WHEAT CHICAGO DECEMBER 2015 High: 7.72 Low: /9/14 9/4/15 Contract Size: 5,000 bu Daily Limit: 35 cents/bu CHI #1 resistance MARCH 2016 High: /7/14 Low: /4/15 CHI #2 resistance High: /6/14 JULY 2016 Low: /2 9/4/15 CHI #3 resistance CHICAGO WEEKLY

13 WHEAT COMMENTARY It was a rough week for wheat futures, which came under the renewed influence of ample U.S./world supplies and weak U.S. export prospects as forecasts for needed rainfall in U.S. winter wheat areas eased new-crop concerns. Futures accelerated lower on Friday on technical selling after taking out chart support from their 40-day moving averages. We don t see a huge downside for wheat from current price levels, but the upside is not great either. Greater threats to world production will likely be needed to spur any sustained up move, and prospects for such threats are limited before next spring. The only clear support between nearby Dec. SRW wheat futures and their contract low is at $4.80. Cash-only Marketers Strategy: We moved to 80% sold on the old-crop this week. No crop is priced. Hedgers Strategy: We moved to 80% on old-crop this week. We remain on the sidelines for new crop. Daily Limit: 40 cents/bu Contract size: 5,000 bu Source: USDA AMS Apr May Jun Jul Aug Sep Oct High: 7.99 Low: /4 5/9/14 9/3/15 Daily Limit: 60 cents Contract size: 5,000 bu KANSAS CITY CASH KANSAS CITY December 2015 High: /4 5/9/14 Low: /4 9/4/15 MINNEAPOLIS December U.S. SUPPLY & DEMAND USDA Brock Year Begins June 1 13/14 14/15 Proj 15/16 Proj 14/15 15/16 ACREAGE (million) Planted Area Harvested Area Yield SUPPLY (mil bu) Beg. Stocks Production 2,135 2,026 2,052 2,026 2,054 Imports Total Supply 3,021 2,766 2,930 2,766 2,936 USAGE (mil bu) Food/Seed 1,029 1,039 1,039 1,039 1,037 Feed & Residual Domestic Use 1,255 1,159 1,219 1,159 1,232 Exports 1, Total Use 2,431 2,013 2,069 2,013 2,082 Ending Stocks (mil bu, May 31) CCC Privately-Owned Stocks/Use 24.3% 37.4% 41.6% 37.4% 41.0% Farm Price ($/Bu) $6.87 $5.99 $ $5.99 $ MINNEAPOLIS CASH (U.S. #1, 14% PROTEIN) Source: USDA AMS Apr May Jun Jul Aug Sep Oct Source: USDA AMS ST. LOUIS CASH Apr May Jun Jul Aug Sep Oct BREPORT@BROCKREPORT.COM 13

14 RICE NEARBY NOVEMBER CONTRACT 2015 DEFERRED CONTRACT RSI High: /5/15 Contract Size: 2,000 cwt Daily Limit: $1.10/cwt JANUARY 2016 High: /5/15 Low: /13/15 Low: /26/15 14-DAY RSI WEEKLY CONTINUOUS resistance COMMENTARY The strong rally in the rice market lost momentum in early October, and this past week, profit-taking emerged to help send prices sharply lower. The market was down sharply both Tuesday and Wednesday before stabilizing after hitting its lowest level since early September. November futures found support at the $12 level. A fall below that could open up downside to the $11.50 area. Recent news on the global front remains friendly for rice, mostly related to the El Nino weather pattern. The Philippines cut its production and stockpiles estimates modestly, due to a production shortfall. This follows recent news that the country may be looking to buy another 1 MMT of rice to ensure domestic supplies. Prices in Vietnam and Thailand have been strengthening. Domestically, U.S. yields have been disappointing, but that has largely been priced into the market at this stage. Strategy: We made another 10% cash sale on the 2015 crop this week and are now 50% sold. Year WORLD SUPPLY & DEMAND Beginning Stocks Production Consumption Ending Stocks Stocks/Use Ratio 2008/ % 2009/ % 2010/ % 2011/ % 2012/ % 2013/ % 2014/ % Change from September % 2015/ % Change from September % * Values in million metric tons; bold numbers are USDA projections. U.S. SUPPLY & DEMAND USDA Brock Year begins Aug 1 13/14 14/15 Proj. 15/16 Proj. 14/15 15/16 ACREAGE (Mil. Acres) Planted Area Harvested Area Yield (Pounds) 7,694 7,572 7,307 7,572 7,296 SUPPLY (Mil. cwt) Beg. Stocks Production Imports Total Supply USAGE (Mil cwt) Domestic & Residual Exports Rough Milled (Rough Eq.) Total Use Ending Stocks Farm Price ($/cwt)

15 COMMENTARY Cotton was higher on the week, thanks mainly to a huge rally of more than 200 points on Tuesday. That rally was driven by a USDA attache report that revised India s crop lower due to dryness, as well as concern over the crop in the Carolinas and Virginia following overwhelming recent rainfall totals. However the December contract could not take out its Sept. 11 high of cents and drifted lower for most of the rest of the week, as traders realized damage in the coastal states would not be dramatic enough to affect the overall crop. The other bearish factor, both shortterm and long-term, is the continued absence of China from the export market. China customs data this week showed imports down 42% through the first nine months. The decline was especially sharp in September, as imports were down 60% from the same month a year ago. Unless and until that changes, the market s upside will likely be limited. However the market has also found support previously around the 60-cent level. Strategy: The 2014 crop is 100% sold for cash-only marketers and hedgers. For 2015, all producers should have 20% sold in the cash market. We currently have no hedge positions in new crop futures. U.S. SUPPLY & DEMAND USDA DECEMBER 2015 High: /5/14 Brock Marketing year begins August 1 13/14 Est. 14/15 Proj 15/16 Proj 14/15 15/16 ACREAGE (million acres) Planted Area Harvested Area Yield SUPPLY (million 480-lb. bales) Beginning Stocks (August 1) Production Imports Total Supply USAGE (million 480-lb. bales) Mill Use Exports Total Use Unaccounted STOCKS (million 480-lb. bales) Ending Stocks (July 31) Farm Price ( /lb) Low: /24/15 MARCH 2016 High: /25/14 Daily Limit: 4 /lb. Contract Size: 50,000 lbs. Low: /24/15 14-DAY RSI Year COTTON Beginning Stocks WEEKLY CONTINUOUS Production Consumption Ending Stocks Stocks/Use Ratio 2008/ % 2009/ % 2010/ % 2011/ % 2012/ % 2013/ % 2014/ % Change from September % 2015/ % Change from September % * Values in million 480-pound bales; bold numbers are USDA projections. WORLD SUPPLY & DEMAND BREPORT@BROCKREPORT.COM 15

16 HOGS Daily Limit: 3 /lb. Contract Size: 40,000 lbs. APRIL 2016 High: /25/14 JUNE 2016 High: /08/15 Low: /19/15 Low: /16/15 DECEMBER 2015 High: /25/14 9-DAY RSI FEBRUARY 2016 High: /25/14 CME LEAN HOG INDEX Low: /13/15 Low: /13/15 resistance Key reversals down Key reversal down COMMENTARY This week s hog market action was choppy, but more negative than positive, amid softening cash fundamentals. Larger hog supplies and expectations for further supply increases pressured both cash hog and wholesale pork prices. Dec. lean hog futures failed on a breakout to a nearly 4-month high, while April and June futures are set to post bearish weekly reversals off 3-month-plus highs. Technically, a close by Dec. futures below $65.80 opens another $2-$3 of downside risk for that contract, though selling interest may be limited by the market s more than $9 discount to the CME cash index, which was at $74.98 on Friday. June hogs appear headed back to at least $78.50-$79.00 in the near term and there is risk the August low near $76.50 will be tested. Cash hog prices have held up well so far in October, due largely to good demand amid National Pork Month featuring by retailers. A wide farmto-retail price spread for pork should continue to support pork features. However, hog slaughter will continue to rise into December. This week s kill should top 2.3 million head and run about 5.8% above last year, with pork output up about 5%. Hog weights are on the rise as new crop corn enters the feed mix. Actual slaughter data for the week ended Oct. 2 put the average dressed carcass weight at 211 pounds, 2 pounds above the original estimate and only 2 pounds below last year. Hedgers Strategy: Hedgers are long 1 Dec. $60 put option/short 2 Dec. $68 calls on 25% of Q4 marketings. We bought Dec. futures to cover the call options on Tuesday, but exited that futures position on Thursday. We are short Feb. futures on 25% of Q1 marketings; June futures on 25% of Q2 and Aug. futures on 25% of Q

17 CATTLE COMMENTARY Live cattle futures spent much of the week chopping up and down in a sideways pattern as profit taking on long positions offset support from a recovery in wholesale beef prices and expectations for stronger cash cattle trade. Cash markets remained quiet on Friday morning, however, futures surged with the front three contracts finishing limit up as feedlots asking prices remained sharply higher than last week s cash trade. Front-end live cattle futures strong premium to last week s cash markets made feedlots strong holders of cattle this week, asking $135 for live cattle, up $8-$9 from last week s market. With futures surging even further on Friday, packers will likely pay up for supplies, especially since operating margins remain strong. However, caution over beef demand may limit purchases as the beef market rally lost some steam Thursday and Friday. The choice beef cutout surged $7.61 or 3.7% during the week ended Thursday, but was a tad lower on Friday morning. The U.S. average retail beef price has declined 4 months in a row and was actually below a year earlier in September, making beef more attractive for consumers. Next Friday s monthly USDA Cattle-on-Feed report should show September feedlot placements down from a year earlier with the mid-september plunge in live cattle prices killing feedlot margins. Technically, Dec live cattle futures still look like they could have near-term upside back to $140-$142, possibly $143. The market is already nearing $140, so we will be on the alert for sell signals. Hedgers Strategy: Both live cattle and feeder cattle sellers remain aside futures. Be ready to re-hedge on a clear sell signal. Feeder cattle buyers this week took profits on long January futures against 25% of Q4 purchase needs and are also aside futures. LIVE CATTLE DECEMBER 2016 High: /21/14 APRIL 2015 Low: /1/15 Daily Limit: 3 /lb Contract Size: 40,000 lbs. FEBRUARY 2016 High: /2/14 High: /2/14 Low: /1/15 Low: /2/15 FEEDER CATTLE NOVEMBER 2015 High: /2/14 9-DAY RSI Daily Limit: 4.5 /lb Contract Size: 50,000 lbs. JANUARY 2016 High: /82/14 Low: /1/15 Low: /1/15 support support support WEEKLY CONTINUOUS BREPORT@BROCKREPORT.COM 17

18 FEED/INPUTS Source: USDA AMS SOYBEAN MEAL DECEMBER 2015 High: Low: /23/14 6/1/15 Contract Size: 100 tons Daily Limit: $30/ton Contract Size: 60,000 lbs. Daily Limit: 3.5 cents/lb SOYBEAN OIL DECEMBER 2015 High: /6/13 Low: /24/15 DRY DISTILLERS GRAINS NEBRASKA Apr May Jun Jul Aug Sep Oct HEATING OIL NOVEMBER 2015 $/ton COMMENTARY Feeds: Nearby December soymeal futures tested and failed at the $318- $319 level three times this week, before retreating $5-$6 Thursday and Friday. This level has proven to be very stiff resistance since mid August. As bean harvest is on the downhill, basis for beans is softening and end users are filling their needs in the near term, we are in no hurry to make purchases at this level. By the same token, $300 looks like solid support and if we trundle down to near that level, our interest as a buyer would perk up. Dried distillers grain prices were nearly unchanged for the week, potentially ending a multi-month slide,brought on by declining overall demand in the export market. With the relative value of DDGS running 10% or more below corn, this could be a good place to extend coverage on a portion of needs through year end. Fuels: Crude oil continues to trade like a squirrel in the middle of the road, thrashing about in about a six dollar range between $44 and $50 -which probably means it is fairly priced for the time being. Heating oil futures look weaker than crude, but with harvest winding down and diesel fuel needs with it, our attention will turn more towards natural gas and its potential impact on fertilizer prices. With a big outside day down Thursday and an outside week down, natural gas looks ready to test its contract low and then some. Hold off on natural gas and fertilizer purchases for now

19 COMMENTARY A number of trend changes and technical observations in key markets warrant our attention. For equities, Dec. S&P 500 futures are poised to close above 2000 on a weekly basis for the first time in 9 weeks However, prior support at the 2020 area is now serving as resistance. December crude oil is testing support at this week s low of $45.79 after EIA reported a huge 7.5 million barrel build in crude oil inventories. The inventory build is due to seasonal maintenance at refineries where capacity percent utilization fell to 86.0% from 96.1% in August. The U.S. Dollar index fell below trend line support last Friday and was down fractionally again this week on weak economic reports including the Empire State Manufacturing and Philadelphia Fed Business Outlook Surveys, both of which showed further contraction in October. Finally, December gold was up $25 in a clean break above resistance as the U.S. dollar and interest rates fell, increasing the relative attractiveness of the yellow metal. U.S. Industrial Production declined 0.2% in September, the 4th decline in 5 months. Manufacturing production, which comprises 75% of all production, fell 0.1%, owing to a strong dollar and weak growth overseas. Mining production fell 2%, with the oil and gas drilling component falling 4%. Oil & gas rig counts fell to their lowest number since 2002 this month, down 58% from the drilling boom that peaked last year. Capacity utilization at the nation s manufacturers, mines, and utilities slipped 0.3% to 77.5%, the 8th decline in 9 months. The situation in the Eurozone is no better where the latest figures show Industrial production fell 0.5% in August. SPECULATIVE POSITIONS Current Positions Open P/L Closed P/L Corn $3.90 $525 $188 Soybeans None $0 $6,544 Live Cattle None $0 ($1,160) Feeder Cattle None $0 $6,125 Wheat L2KWH6 and S2WH6 $225 $0 Lean Hogs None $0 $3,390 Cotton None $0 ($430) E-Mini S&P ($1,638) $675 Crude Oil None $0 ($1,130) 2015 Total Profit (Loss) as of 10/15/15 ($888) $14, Total Profit: $17,316 Recommendations since last Brock Report through 10/15/15 10/15/15: Sold 1 Jan 16 Feeder to exit 10/15/15: Sold 3 March 16 $3.90 to open 10/15/15: Sold 1 March 16 E-mini S&P to open There is a risk of losses as well as profits when trading futures and options. Position size is based on account size of $60,000. Profit/(loss) does not include brokerage commissions. BREPORT@BROCKREPORT.COM FINANCIALS/ENERGY Five wave sell signal U.S. DOLLAR INDEX This page updated at 1 p.m., before the market close. E-MINI S&P 500 DECEMBER 2015 GOLD DECEMBER 2015 CRUDE OIL (WTI) DECEMBER 2015 resistance 19