Monthly Archives: July 2014

My Thoughts On The Cattle Market

I have been asked several times the past few months about my thoughts pertaining to cattle prices… As I have said repeatedly, I don’t think the “TOP” has been put in.  In fact, many of you have asked or wondered if we are ever going to make another cattle or feed cattle hedge.  I haven’t recommended anything because I still truly believe prices are heading higher longer-term.  The  “do nothing” approach has worked like a charm so far. Lets just say I learned my lessons from the grain markets the past few years. Certainly we could see a few setbacks along the way, but I think we are setting up for an other explosive push higher before yearend. Keep in mind we are possibly looking at the smallest combined June and July placements in history.  We are also seeing for the first time (in my memory) both fed and cattle slaughters well below the previous years pace. I’m also thinking the August “Cattle-on-Feed” report could bring us another round of extremely bullish numbers. With packer competition already fierce, we have to ask ourselves what will be like this winter? I don’t want to get overly bulled up or way ahead of myself, but I’m really starting to think supplies could get even tighter out in the 4th quarter of 2014. In turn prices still have more upside potential. Bottom-line, I still see NO compelling reason to hedge or step in front of this freight train at this time. Risk-mamagement is always our primary concern, hence we should always be paying close attention to the downside possibilities, but in this case I still believe the upside potential is greater than the downside risk. Therefor we are going to continue moving forward “doing nothing.”

Corn & Soybean Conditions

US Corn Conditions Fall by -1%: The USDA lowered their weekly crop-conditon estimate for corn by -1% this week. This shouldn’t be a shocker to the trade as conditions generally start to fall a bit come late-July and early-Aug as the crop start to mature. In any regard the US crop still stands at 75% rated “Good-to-Excellent” vs. 76% last week and 63% last year.  Below are a few specifics:

    • Declining Conditions on the Week: KY down -9%; KS -5%; SD & WI -4%; NE, MO & TN -2%; IN, MI, ND, PA & TX -1% 
    • Unchanged on the Week:  CO
    • Improved Conditions on the Week: MN +4%; NC +3%; IL, IA, OH +1%

 

Soybean Corp-Conditions Fall By -2%: The USDA lowered their weekly crop-conditon estimate for soybeans by -2% this week.  The US crop now stands at 71% rated “Good-to-Excellent” vs. 73% last week and 63% last year. Here are a few of the specifics:

    • Declining Conditions on the Week –  KY down -11% from 77% to 66% GD/EX; KS down -6%; SD & MI down -4%; MO, MS and ND down -2%; MS down -2%; IN, NE and WI -1%
    • Unchanged Conditions on the Week: AR, IA, MN, NC, OH and TN
    • Improved Conditions on the Week: IL +1% to 78% rated GD/EX; LA +1% to 80% rated GD/EX. 

 

Soybean “blooming” were reported at 76% vs. 60% last week and a 5-year average of 72%.  

Soybeans setting “pods” were reported at 38% vs. 19% last week and a 5-year average of 31%.  

Top-4 US Soybean Producing States (IA, IL, MN and NE) “Unchanged” on the week. As evident by the graphic I have included below, we are still however looking at the best overall crop conditions we have seen in a long time.

 

Are We Going To See NEW Record US Corn Production?

As you can see from the graphic we created below, as long as we see adequate finishing weather the table is set for NEW record US corn production. The math is fairly simple: If you assume we harvest close to 83 million acres, all we need is a yield of 167.8 or higher and we have a NEW record crop.  The crazy part is most sources are now projecting a 172-176 type yield, which could put total production over 14.2 billion bushels and ending stocks in excess of 2.2 billion bushels.  This is getting tougher and tougher to dispute, especially when you consider most of the US corn croup pollinated under ZERO stress. 

Is It Time To Buy That Dream Home? …Prices Climbing & Sales Increasing

Existing US home sales climbed to their fastest pace since last October. Prices are still moving higher, but seem to be increasing at a slower pace than last year. Some of our readers might find this hard to believe, but the “median” existing-home price for single-family homes, condos, and townhouses last month was $223,300, which is +4.3% above a year ago. Mortgage rates remain attractive and have been fairly steady for the past several weeks. The latest reports show the average U.S. rate for a 30-year mortgage was 4.13% last week, down from 4.37% a year ago and half ​that ​of the 30-year loan’s historical average. I continue to believe this is the time to leverage-up. If you have ever though ​t​ ​of​ buying that “Dream Home” or have been kicking around the idea of buying that “final” home…I think this is clearly your opportunity. Mortgage rates are still near historical lows and the US housing market, in my opinion, still has a ton more upside potential. As you can see from the historical chart below, the risk associated with the 30-year mortgage is clearly to the upside. Once again, risk-man a​gement is the key to building long-term wealth.

Painting The Soybean Picture

I though it might help if I painted a more visual picture of the wave of soybeans that appear to soon be heading our direction.  As you can see from the graph we created in the office, the “green” planted acreage number is already +7.4 million acres higher than any previous year and more than likely moving higher.  There is also talk the “blue” yield number could end up +2.0 bushels higher than our previous record yield.  The last time we had record planted acreage and record yield in the same equation was in 2009, by October of that year prices had fallen to $8.78^6…Make sure you are preparing yourself!   

Comparing Current Conditions To Years Past:

The USDA recently released their rendition of “crop-condition” art. As you can see the 2014 corn crop conditions are running well ahead of the conditions seen during the record setting 2009 crop year, but slightly below the conditions from the record setting 2004 crop year. Bottom-line, this years corn crop conditions are some of the highest we have seen in the past 20-years. Yes, we are still a long ways from the finish line, but we are certainly past the halfway point and running at a potential record setting pace. Sorry for pointing out the obvious, I just wanted to give you another way to view the data.      

Corn & Soybean Conditions, Wheat Harvest Progress

Corn Crop-Condition Estimates: The USDA kept the US corn crop rated at 76% “Good-to-Excellent.”  Here are the details:  MO 86%; IL, MI & PA 81%; ND 79%; SD & TN 78%; IA 77%; IN, NE & WI 76%; KY & OH 75%; AR 69%; CO 68%; KS & MN 64%; TX 62%; NC 59%.

Soybean Crop-Condition Estimates: The USDA raised the US soybean crop from 72% to 73% now rated “Good-to-Excellent.”  Here are the details:  LA & TN 79%; MO & ND 78%; IL & KY 77%; IA 74%; WI 75%; NE 73%; IN & MS 72%; MI, NC & OH 69%; KS 67%; MN 64%; AR 60%.  The USDA also reported 60% of soybeans are “blooming,” up from 41% last week and ahead of the 5-year 56% average.  Soybeans setting pods were actually reported at 19% vs. the 5-year average of 17%.  The states that appear to be the furthest behind are MN, MS and ND.  

Winter Wheat Harvest & Spring Wheat Crop Conditions: The USDA announced that 75% of the US winter wheat corp has now been harvested, which is right on track with our 5-year average.  Michigan and South Dakota seem to be the furthest behind their more traditional harvest pace. The spring wheat crop remained with 70% rated “Good-to-Excellent.”  The worse conditions appear to be in Washington were just 20% of the crop is rated GD/EX. Spring wheat “heading” was reported at 84%, just a hair behind the 5-year average of 85%. 

Could A Late-Summer Rally Be In The Cards?

Many of the bulls like to reference and point to the 2010 corn crop for the possibility of a late-summer rally. For the sake of those who still have new-croup bushels to price (like myself) lets hope the market gives it some consideration. If you remember it was back in August of 2010 that the USDA estimated the crop at a NEW record high 165.0 bushels per acre.  Weather conditions in some key areas started to shift and the national yield eventually fell to 152.8 bushels per acre by year end. To proved some detail I went back and did a bit of research. I found the USDA raised their yield estimate in Aug 2010 to 165.0 bushels. In their Sept 2010 report they lowered it down to 162.5.  By Oct 2010 they lowered it down to 155.8. In Nov it was lowered again to 154.3. The Dec 2010 report they left the yield unchanged at 154.3. And by the final Jan 2011 report they reduced the yield down to 152.8.  Below is a graphic we created to shows you the current USDA crop-condition estimate of 76% rated “Good-to-Excellent” compared to previous years at this juncture.  Keep in mind, back in 2010 the USDA was still showing 70% of the crop rated “Good-to-Excellent” at the end of August, and 17% of the of the US corn crop was categorized as “Mature.”  In fact the last crop-condition report released that year by the USD was given the week ending October 10, 2010. At that point in time the crop was still rated at 68% “Good-to-Excellent” and we had already harvested 51% (to see details Click Here).  In other words, even though conditions are better than we have seen in a long time, there is still a chance the overall US corn yield could end up sub-170 bushels per acre and below what the market currently has penciled in. I’m not saying this is actually going to happen, but I am letting you know just a few years back the overall yield fell by over -7% for the USDA’s August estimate while the “crop-conditions” only setback a touch from 72 to 68% “Good-to-Excellent.”  I’m going to continue keeping our hedges in place and keep my “wait-and-see” approach towards additional cash marketing.   

Notes From The KC Fed Ag Symposium

I was invited to attend the 2014 Agricultural Symposium put on by the Kansas City Federal Reserve this week. During the two-day event (which ended yesterday) I was able to network and speak in great detail with several leaders in agriculture.  After attending events like this, I like to go back to the office and immediately get my thoughts and notes transferred into a more sensible format (I find it helps with retention and overall understanding). I thought it would be interesting and helpful to pass along MY thoughts and notes from the event via The Van Trump Report… Please keep in mind while reading my notes that attendees included players from many of the largest banks (Rabo, Wells Fargo, FCS, FDIC, US Bank, Farmer Mac, etc), global food suppliers (Smithfield, Hormel, Land O’Lakes, etc.) and others like Bunge, CGB, Gavilon, Koch, Ceres, etc…

Crop Prices? There was an electronic poll taken taken right of the gates in regard to what was most on attendees minds, as you can imagine the number one response was overall “RISK” associated with plummeting prices.  In other words the extreme swings are making it very difficult for everyone in the industry to mitigate risk. One great line I heard this week came from a large lending institution who’s clients are primarily in the row-crop business… He said, “well we’ve had our shot at trying to manage the insane swings and huge profit margins, now lets see how the livestock boys handle it.” 

Crop Prices? There was an electronic poll taken taken right of the gates in regard to what was most on attendees minds, as you can imagine the number one response was overall “RISK” associated with plummeting prices.  In other words the extreme swings are making it very difficult for everyone in the industry to mitigate risk. One great line I heard this week came from a large lending institution who’s clients are primarily in the row-crop business… He said, “well we’ve had our shot at trying to manage the insane swings and huge profit margins, now lets see how the livestock boys handle it.” 

  • Last year at this event there was talk of $3.00 corn…same thing this year, more talk of $3.00 corn.  Soybeans still seem to remain a bit of mystery to everyone simply because there is no real substitute for the higher protein. Wheat concerns stem primarily around logistical issues and geopolitical tail-risk i.e problems in the Middle East, Ukraine, etc… Chinese demand clearly remains the #1 focus for most ALL global lenders and risk managers.  Will the demand and rate of growth stay strong and for how long?     

Transportation? There was a big buzz in the crowd about “transportation” or should I say lack there of.  There is already talk circulating that US rail rates are going to be more than DOUBLE in many locations this year.  There is some fear there will be little to any rail available to support both a record US corn AND record soybean crop.  What happens if we throw in another rough winter like some forecaster are calling for in their early predictions?  To say US logistics could be a nightmare during and immediately following harvest might be an understatement.  Keep in mind this rarely ends up being a good thing for us the producer. Most generally the higher freight costs are passed along in the form of a lower “basis.”  Just look what the rail problems up in the Dakota’s have done to the price of cash-corn…some producers are now receiving less than $2.00 per bushel.  There is also fear that this could spill over into other areas delaying or raising the costs associated with other various inputs.  Looking for ways to lock in prices early might be a very smart play.  I’m telling you now many of the brightest minds and biggest players in Ag are increasingly becoming more concerned with the movement and logistics of grain in this country now that we have gotten deeper into the US energy boom!  Start trying to get ahead of the curve on this one… try to envision any way your operation could get put into a real pinch by lack of available transpiration, then come up with solutions and plans to avoid such a dilemma this winter.  

Farm Land Bubble? Similar to what I believe…this is NOT a Bubble. Sure we might see a -15% to -20% pullback in price, but the dynamics of the current run is so much different than that of the 1980’s Farm Crisis that it doesn’t appear to be a “bubble.” Below are a couple of interesting perspectives:

  • Generally you can conclude a -2% pullback in “farm income” will soon prompt a -1% decrease in farmland values. If you figure we’re currently in the midst of a -30% drop in farm income then we could see a -15% setback in farmland prices. Another -10% to -20% drop in farm income then land values might pull back another -5% to -10%.
  • Loan-to-Market-Adjusted Collateral Value is remarkably strong. Meaning many of the recent purchases were made by producers putting down a large portion in cash. About 77% of farm ground that FCS has loaned on was for 50% or less of the selling price. Meaning most purchasers were putting a large chunk down and have only been financing a relative small portion of the sale price. In many instances farms have actually been purchased using NO financing at all…100% cash purchases.
  • Fixed Interest Rates – Close to 75% of ALL loans made by FCS on farm ground has locked in a fixed interest rate at one of the more historically low levels in our modern history.
  • Debt-to-Asset ratio is still relatively low at just 11% compared to the 20% ratio that is often viewed as a danger threshold. In 1985 the ratio was at 22% and was typical been above 15% for there last third of the 20th Century. In other words no real major balance sheet concerns as of yet when viewing the entire group of buyers.

*Special thanks to Doug Stark, President & CEO Farm Credit Services of America; Mark Partridge, Ohio State University and Chad Hart, Iowa State University for the great insight on farm land prices and values. 

Cash Rents? Most sources I spoke with believe “cash-rents” are currently way too high and will need to correct in some capacity. The big question however is how do we move from Point A (over-priced rents) to Point B (more fairly valued rents)??? Below are a couple of interesting thoughts:

  • Cash rents won’t break until farmers can no longer collateralize debt and paper by using some type of crop-insurance. The past few years it was easy for banks to approve operating capital and loans with crop-insurance guarantees at such extreme levels. Once this changes cash rents break.
  • Might take at least two-years from that point since most landowners won’t buy into the farmers first request for a reduction in rents. In other words the farmer is going to go to the landowner this next year and ask them to lower rents, many land owners will baulk. The farmer will more than likely leave with his tail between his legs and agree to give it one more shot. If price stay low the farmer will be requesting a MAJOR reduction in rent the following year and the landowner will have a tough decision to make, either agree to a big reduction in rents or run the risk of losing your tenant… hence this is when cash rents might really first start to tumble.
  • Remember about 55-60% of all crop ground is currently held by NON-operators, so this is a major concern moving forward for the balance sheet.

Ethanol? There was a great presentation by Todd Becker, President and CEO of Green Plains Inc. In a nutshell Todd and several others I spoke with seem to believe that US ethanol production may continue to increase on the heels of greater export demand. Several believe we will continue to see strong global demand for “clean energy.” If you combine the strong demand for clean energy with inexpensive corn and keep crude oil prices up near $100 per gallon you have an equation for explosive US export growth. Remember, US ethanol is essentially the cheapest fuel molecule in the World. As Todd pointed out “exporting” produces a Rin-less gallon and therefore makes a lot of sense for plants. He also pointed out that it’s much cheaper to add “capacity” than it is to bring NEW plants online. In other words the profit margins for existing plants might continue to escalate.  There is some talk eventually China’s push for “cleaner energy” might eventually be a huge US export market.  Most were doubting China would allow their own personal corn supplies to be used for fuel, simply not wanting to fight the protests, but will probably not have a problem eventually importing corn based ethanol in large doses.  Bottom-line, most everyone I spoke with was on the bullish side of the fence for ethanol and longer-term growth within the industry.   


Livestock Markets? There was a lot of small talk amongst the crowd during the various networking session in regard to the livestock markets.  The main question seemed to be how long can we stay at these lofty levels?  Many top industry executives said they never imagined they would see prices or profit margins like this during their lifetime. Somewhat surprisingly, many said their data, research, analysis and numbers conclude that we might simply be heading around the first turn of an extremely long bull run.  Dhamu Thamodaran, Chief Commodity Hedging Officer at Smithfield Foods and Joe Swedberg, Vice President of Legislative Affairs at Hormel Foods reiterated the worlds growing demand for “protein.” Derrell Peel, Professor of Agribusiness and Livestock Marketing Specialist at Oklahoma State University provide several slides regarding livestock, but I thought the two I included down below where fairly fitting for the cattle market.  The first simply shows the change in cattle inventory here in the US and the one below the change in beef demand that is taking place in China.  The overall consensus is that the world is continuing to march forward demanding a higher protein diet, finding ways provide the needed supplies will continue to be the challenge.    

Foreign Growth? There was a bit of discussion and questions being asked in regard to global growth and what effect falling crop prices will have on overall acreage.  Many in the crowd, including myself seem to believe corn acres in South America as well as here in the US will suffer further setbacks in the wake of sub-$4 corn. Mary Shelman, Director, Agribusiness Program at Harvard University & Chad Hart from Iowa State University provided us with some fantastic insight regarding growth in Africa, India and the Black Sea region.  We also heard some interesting global risk and portfolio management strategies presented by Brian Newcomer, the Executive Vice President of Business Development at Rabo AgriFinance and Elizabeth Hund, the Senior Vice President and Division Manager of U.S. Bank Food Industries. It was interesting to hear that most ALL global Ag lending institutions have a risk-management team that exclusively focuses on geopolitical tail-risk associated with the various landscapes and surrounding countries.  These team’s assign global risk valuations to each specific area then the banks cap the amount of money they will allow to be in play or at risk in each of these areas based on the various equations.  There are just so many moving pieces and dynamic that are in play these days regarding global agricultural…    

Big Data? We have all obviously heard the “buzz” around Big Data…but no one seems to really have their hand around what it all means.  Chick Studer, the Director of Industry Relations at Deere & Company did a great job of explaining how far we have come in the past few years regarding “technology”.  He explained how the “adoption speed” in regard to farmers being more receptive to technology is dramatically increasing. This could ultimately lead to much more rapid gains in technology then we have originally estimated. Also lots of talk in the crowd about ways to better improve yields via various technological tools, ways to see how your farms production is staking up against farms with similar soil types, etc. This field is rapidly advancing and I am excited to see what eventual comes form it all…Stay tuned! 

Bank Loans? Several in the banking sector believe they are going to start seeing a major increase in producers looking to carry their crop as long as possible…cash flow will obviously start to become tight, but banks seem willing to accommodate, at least at this juncture. There is also some talk about more loans in regard to producers seeking even more storage.  The banks seem to be in good shape and comfortable with the overall balance sheets of most.  An extended bear market could obviously change this mindset. 

Visit the KC Fed website: Thanks again to KC Fed President Esther George and her staff for continuing their efforts to provide great agricultural insight. They help provide many of us in the industry with tons of great information and research. You can go directly to their website and see ALL of the presentations by CLICKING HERE

 

Why Risk-Premium Keeps Coming Out Of The Corn Market

As each day passes with little or no signs of a major weather problem or hiccup on the horizon, many of the bulls who wanted to wait to see a few more cards are starting to fold their hands.  This can best be explained by the various “stages” of corn starting to be checked off. As each hurdle is cleared the variables that ultimately determine yield become fewer and fewer. This might be a bit “technical,” but many inside the corn trade will tell you “yield” in corn is comprised of the components: ears per unit area, kernel number per ear consisting of kernel rows and kernels per row, and kernel weight. Each of these yield components is determined at different “stages” in the lifecycle of the plant.  Many sources will tell you by the R1 stage many factors are already set… no new ears can be formed, the kernel number is at its greatest potential actually being set by pollination and fertilization of the kernel ovule. In other words no new kernels form after the pollination phase is completed.  Essentially the only major yield component remaining with some flexibility becomes kernel weight. For the first 7 to 10 days after pollination of an individual kernel, cell division occurs in the endosperm. The potential number of cells that can accumulate starch is determined. At black layer formation, stage R6, no more material can be transported into the kernel and yield is basically determined. (Source: Joe Lauer, University of Wisconsin-Madison)

Iowa State University explains it as… “The final vegetative stage is reached when the entire tassel is visible. This is denoted as VT…” To read in detail CLICK HERE

Click on the Corn Growth Stages chart below for a larger view.