Grain and Cotton Economics Mark Welch Extension Economist Grain Marketing JMWelch@tamu.edu (979)845-8011
Marketing
2012, here we come! Tight supplies Grain Strong demand Yoked to outside markets
2012, here we come! Large supplies Cotton Weak demand Yoked to outside markets
Top 5 US Trading Partners, $ billions 525 397 559 457 181
World Per Capita Grain Use kg 400 390 380 370 369 360 350 340 340 330 320 310 300 1970/1971 1971/1972 1972/1973 1973/1974 1974/1975 1975/1976 1976/1977 1977/1978 1978/1979 1979/1980 1980/1981 1981/1982 1982/1983 1983/1984 1984/1985 1985/1986 1986/1987 1987/1988 1988/1989 1989/1990 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 barley, corn, millet, mixed grains, oats, rice, rye, sorghum, soybeans, and wheat PSD, 6/12/2012
World Per Capita Cotton Use 10.00 Shaded bars represent periods of economic recession. Cotton consumption tends to drop during those periods due to fewer purchases of clothes, home furnishings, etc. Lbs./Population 9.00 8.00 7.00 6.00 1970/1971 1971/1972 1972/1973 1973/1974 1974/1975 1975/1976 1976/1977 1977/1978 1978/1979 1979/1980 1980/1981 1981/1982 1982/1983 1983/1984 1984/1985 1985/1986 1986/1987 1987/1988 1988/1989 1989/1990 1990/1991 1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Source: USDA/ERS/WASDE
Cotton Market Outlook John Robinson Professor and Extension Economist-Cotton Marketing Department of Agricultural Economics Texas AgriLife Extension Service Texas A&M University College Station, Texas Cotton futures price forecast: Dec 12 between $0.65 to $0.85
Cotton Ending Stocks Increasing U.S. new crop cotton ending stocks are forecasted higher than previous year. World old crop cotton ending stocks are already at record high levels. USDA also sees a year-on-year increase for 2012/13 -- BEARISH!!
New York Cotton Futures High, Low, and Close Settlement Prices, December Contracts, 1980-2013 Cents/Lb. 180 160 140 120 100 80 60 40 20 0 S:U 63% 58% 63% 68% 97.0 86.1 80.9 83.1 78.4 73.0 66.0 59.9 61.2 65.5 63.8 57.5 59.3 30.2 34.4 79.8 70.0 77.0 76.5 76.1 68.9 64.1 84.3 93.4 84.1 80.0 77.8 73.9 68.5 67.6 65.5 82.7 70.7 69.5 62.8 68.4 95.5 98.5 48.8 50.9 62.9 56.2 51.1 54.6 59.5 67.8 70.3 66.4 60.2 48.1 53.9 28.5 35.0 43.8 43.4 46.3 46.8 51.7 39.1 45.9 53.5 151.2 142.0 106.2 96.0 71.1 65.4 70.7 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 High Low Close
And Lower Prices as a Result Bearish May WASDE Numbers European Contagion
World Days of Use on Hand, 6/12/2012 140 120 100 80 60 40 20 0 Corn 83 62 140 120 100 80 60 40 20 0 Soybeans 81 73 Days of Use Average Days of Use Average 140 120 100 80 Wheat 106 99 140 120 100 80 Sorghum 60 60 40 20 0 40 20 0 31 28 Days of Use Average Days of Use Average
2012 U.S. Corn Crop Condition Ratings 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% t +7.1% 164.7 bu/ac t +1.4% 153.9 bu/ac t +1.5% 148.0 bu/ac 500 450 400 350 300 250 200 150 100 Very Poor Poor Fair Good Excellent 2012 2008 2009 2005 Source: Crop Progress, USDA
Oceanic Nino Index (ONI) ENSO-neutral conditions continue. Sea surface temperatures are near average across much of the equatorial Pacific Ocean and are above average in the eastern Pacific. There is a 50% chance that El Nino conditions will develop in the second half of 2012. C 2.0 1.5 1.0 Actual Measurements Latest Weekly SST Departure Predicted El Nino 0.5 Neutral 0.0 La Nina -0.5-1.0-1.5-2.0 El Niño/Southern Oscillation (ENSO) Diagnostic Discussion, June 18, 2012 http://www.cpc.ncep.noaa.gov/products/analysis_monitoring/enso_advisory/
U.S. Corn: Disappearance, 6/12/2012 Million Bushels 7,000 6,000 5,000 4,000 3,000 2,000 Ending Stocks Feed & Residual Food Seed Industrial Exports Fuel 1,000 0 80/81 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Source: Feed Yearbook, USDA/ERS, December WASDE, USDA 2010/11 preliminary; 2011/12 projected
Area and Yield Needed to Produce 13.775 billion bushel crop (use estimate from June 2012 WASDE) Bushels per acre 180 175 170 165 160 155 150 145 Add to Ending Stocks Reduce Ending Stocks +5% of trend 851-5% of trend 140 88 89 90 91 92 93 94 95 96 97 98 Percent planted harvested for grain: 92.9 Planted acres, millions
Area and Yield Needed to Produce 13.775 billion bushel crop (use estimate from June 2012 WASDE) Bushels per acre 180 175 170 165 160 155 150 145 Add to Ending Stocks Reduce Ending Stocks $4.60 +5% of trend 1,881 (95.9, 166) 851-5% of trend 140 88 89 90 91 92 93 94 95 96 97 98 Percent planted harvested for grain: 92.9 Planted acres, millions
Area and Yield Needed to Produce 13.775 billion bushel crop (use estimate from June 2012 WASDE) Bushels per acre 180 175 170 165 160 155 150 145 Add to Ending Stocks Reduce Ending Stocks +5% of trend $4.60 1,881 (95.9, 166) $4.81 1,203 (94.9, 160) 851-5% of trend 140 88 89 90 91 92 93 94 95 96 97 98 Percent planted harvested for grain: 92.9 Planted acres, millions
Area and Yield Needed to Produce 12.775 billion bushel crop (use estimate based on lower feed numbers) Bushels per acre 180 175 170 165 Add to Ending Stocks +5% of trend 160 155 $4.12 2,203 (94.9, 160) 150 145 140-5% of trend Reduce Ending Stocks 851 88 89 90 91 92 93 94 95 96 97 98 Percent planted harvested for grain: 92.9 Planted acres, millions
December Corn Futures and 2012 Marketing Plan /bu 750 700 20% 20% 20% 20% 20% South American crop conditions Battle for Acres Planting Intentions Early season crop condition and weather outlook Acreage Report/ Grain Stocks Tassel and August Crop Report Cash sales at harvest 650 600 550 500 450 Sold 20% at $5.63¾ Sold 20% at $5.00 floor, $5.70 ceiling 11/1/2011 11/10/2011 11/21/2011 12/1/2011 12/12/2011 12/21/2011 1/3/2012 1/12/2012 1/24/2012 2/2/2012 2/13/2012 2/23/2012 3/5/2012 3/14/2012 3/23/2012 4/3/2012 4/13/2012 4/24/2012 5/3/2012 5/14/2012 5/23/2012 6/4/2012 6/13/2012 6/22/2012 7/3/2012 7/10/2012 7/17/2012 7/24/2012 7/31/2012 8/7/2012 8/14/2012 8/21/2012 8/28/2012 9/4/2012 9/11/2012 9/18/2012 9/25/2012 10/2/2012 10/9/2012 10/16/2012 10/23/2012 10/30/2012 11/6/2012 11/13/2012 11/20/2012 11/27/2012 12/4/2012 12/11/2012 12/18/2012
Crop Insurance Price Floor with 65% Revenue Protection, 70 bu APH $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 56 70 84 (80%) (120%) Yield Crop Insurance Calculator February Sales Closing Date Price: December Corn Futures Discovery Periods: Projected Price 1/1-1/31 $5.69 Harvest Price 9/1-9/30 Price floor Current Futures Price
Hedging Example: what if you re right? Corn Do Nothing Hedge Acres 500 Spring Futures Price $5.84 $4.80 $5.27 Yield, bu 70 Harvest Futures Price $5.00 $168,000 $184,600 est. production, bu 35,000 Basis at harvest ($0.20) pre-harvest mkt 0.5 pre harvest, bushels 17,500 contract spec, bu 5,000 contracts to hedge 4 Hedging with Futures Contracts Spring Sell 4 Dec C $5.84 Harvest Buy 4 Dec C $5.00 Profit(loss) $0.84 $16,800.00 Commission ($50/contract) ($200.00) Net profit (loss) from hedge $16,600.00 Basis at harvest ($0.20) Sell 35,000 bushels $4.80 $168,000.00 Net sales $184,600.00 Average price per bushel $5.27
Hedging Example: what if you re wrong? Corn Do Nothing Hedge Acres 500 Spring Futures Price $5.84 $6.80 $6.13 Yield, bu 70 Harvest Futures Price $7.00 $238,000 $214,600 est. production, bu 35,000 Basis at harvest ($0.20) pre-harvest mkt 0.5 pre harvest, bushels 17,500 contract spec, bu 5,000 contracts to hedge 4 Hedging with Futures Contracts Spring Sell 4 Dec C $5.84 Harvest Buy 4 Dec C $7.00 Profit(loss) ($1.16) ($23,200.00) Commission ($50/contract) ($200.00) Net profit (loss) from hedge ($23,400.00) Basis at harvest ($0.20) Sell 35,000 bushels $6.80 $238,000.00 Net sales $214,600.00 Average price per bushel $6.13
John R.C. Robinson Extension Economist-Cotton Marketing jrcr@tamu.edu (979) 845-8011 Mark Welch Extension Economist Grain Marketing JMWelch@tamu.edu (979)845-8011 Facebook, search Master Marketer
U.S. Export Share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Corn Wheat Soybeans Sorghum PSD, 5/13/2012
Domestic Ethanol Consumption Million gallons 1,400 1,200 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 Source: Renewable Fuels Association
Total Ethanol Consumption Million gallons 1,400 1,200 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 Source: Renewable Fuels Association
Feed Use GCAU mil 100 90 80 70 60 50 40 30 20 10 0 mt/gcau 2.5 2.0 1.5 1.0 0.5 0.0 Dairy Cattle on Feed Other Cattle Hogs Poultry Other Livestock Feed per GCAU Plus DDGs USDA Feed Grain Database and Agricultural Marketing Resource Center, June 12, 2012
5 Simple Rules 1. Change is always good. 2. The day you say you have to do something, you re in trouble. 3. Know your breakeven price. 4. Know what you want and go after it. 5. Ignore coffee shop talk.
Spec Influence Millions Average Nearby Futures Price, January 6, 2006 June 8, 2012 8 6 4 2 0-2 -4 Spec role in 2010/11 was that of an early catalyst before backing down 2/10/06 3/24/06 5/5/06 6/16/06 7/28/06 9/8/06 10/20/06 12/1/06 1/12/07 2/23/07 4/6/07 5/18/07 6/29/07 8/10/07 9/21/07 11/2/07 12/14/07 2/1/08 3/14/08 4/25/08 6/6/08 7/18/08 8/29/08 10/10/08 11/21/08 1/2/09 2/13/09 3/27/09 5/8/09 6/19/09 7/31/09 9/11/09 10/23/09 12/4/09 1/15/10 2/26/10 4/9/10 5/21/10 7/2/10 8/13/10 9/24/10 11/5/10 12/17/10 1/28/11 3/11/11 4/22/11 6/3/11 7/15/11 8/26/11 10/7/11 11/18/11 12/30/11 2/10/12 3/23/12 5/4/12 220 200 180 160 140 120 100 80 60 40 20 0 Cents/Lb. Long Less Short Nearby Futures Price
Wheat, Corn, and Soybeans Speculative Investment Net long contracts 1,000,000 /bu 1000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0-100,000 950 900 850 800 750 700 Index Funds Hedge Funds Price Source: CFTC, positions as of June 5, 2012 reported June 8, 2012
Bushels per acre U.S. Corn Yields 180 166.0 160 140 120 100 80 60 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2013 Yield Trend WASDE, 5/10/2012
Corn Yield, % Deviation From Trend 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2013
2012 U.S. Corn Crop Condition Ratings 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% t +7.1% 164.7 bu/ac t +1.4% 153.9 bu/ac 500 450 400 350 300 250 200 150 100 Very Poor Poor Fair Good Excellent 2012 2008 2009 Source: Crop Progress, USDA
June Corn Acreage Report versus March Planting Intentions Deviation from normal corn planted mid-may: even -15% -23% +9% -12% +21% April average soybean:corn price ratio: 2.0 2.0 2.2 2.5 2.2 2.5 3% 2% 1% 0% -1% -2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Hedging Example: what if you re right? Corn Do Nothing Hedge Acres 500 Spring Futures Price $5.16 $4.55 $4.84 Yield, bu 70 Harvest Futures Price $4.75 $159,250 $169,250 est. production, bu 35,000 Basis at harvest ($0.20) pre-harvest mkt 0.5 pre harvest, bushels 17,500 contract spec, bu 5,000 contracts to hedge 4 Hedging with Futures Contracts Spring Sell 5 Dec C $5.16 Harvest Buy 5 Dec C $4.75 Profit(loss) $0.41 $10,250.00 Commission ($50/contract) ($250.00) Net profit (loss) from hedge $10,000.00 Basis at harvest ($0.20) Sell 35,000 bushels $4.55 $159,250.00 Net sales $169,250.00 Average price per bushel $4.84
Hedging Example: what if you re wrong? Corn Do Nothing Hedge Acres 500 Spring Futures Price $5.16 $5.55 $5.12 Yield, bu 70 Harvest Futures Price $5.75 $194,250 $179,250 est. production, bu 35,000 Basis at harvest ($0.20) pre-harvest mkt 0.5 pre harvest, bushels 17,500 contract spec, bu 5,000 contracts to hedge 4 Hedging with Futures Contracts Spring Sell 5 Dec C $5.16 Harvest Buy 5 Dec C $5.75 Profit(loss) ($0.59) ($14,750.00) Commission ($50/contract) ($250.00) Net profit (loss) from hedge ($15,000.00) Basis at harvest ($0.20) Sell 35,000 bushels $5.55 $194,250.00 Net sales $179,250.00 Average price per bushel $5.12
Collar or 3-way Window Strategy Current Price Dec 12: 506.00, (assume basis = $0.00) Sell 460 put (+18), Buy 500 put (-35), Sell 570 call (+18), net premium rec d = 1 cents Cash price, cents per bu 700 Do Nothing 650 600 Collar 550 500 Hedge 450 400 400 410 420 430 440 450 460 470 480 490 500 510 520 530 540 550 560 570 580 590 600 610 620 630 640 650 660 670 680 690 700 5/11/2011 December futures at option expiration, cents per bu
CATTLE ON FEED US Total, Monthly Mil. Head 12.5 12.0 11.5 11.0 10.5 10.0 Avg. 2006/10 2011 2012 9.5 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Livestock Marketing Information Center Data Source: USDA-NASS C-N-10 05/18/12
U.S. All Hogs and Pigs Inventory 000 head 68,000 67,000 66,000 65,000 64,000 63,000 62,000 61,000 March June September December 5-year Average 2011 2012
MARCH 1 ALL HOGS AND PIGS U.S. Inventory (Prior to 1988 Estimated) Mil. Head 70 65 60 55 50 45 1987 1990 1993 1996 1999 2002 2005 2008 2011 Livestock Marketing Information Center Data Source: USDA-NASS H-N-01 03/30/12
MARCH 1 MARKET HOGS U.S. Inventory (Prior to 1988 Estimated) Mil. Head 65 60 55 50 45 40 35 1987 1990 1993 1996 1999 2002 2005 2008 2011 Livestock Marketing Information Center Data Source: USDA-NASS H-N-03 03/30/12
BROILER CHICKS PLACED Weekly Mil. Birds 180 175 170 165 160 Avg. 2006-10 2011 155 150 145 JAN APR JUL OCT 2012 Livestock Marketing Information Center Data Source: USDA-NASS P-S-11 05/24/12
Major Corn Importers, 2012/2013 16% 45% 7% 9% 8% Japan Mexico South Korea China EU-27 Egypt Taiwan ROW 4% 5% 6% World Total = 3.990 billion bushels
Where Do Prices Go From Here? 1. Be the low cost producer 2. Lock in profitable prices Prices will fall back to the cost of production --Principles of Economics, Sir Alfred Marshall (1890)