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Expected Plantings, Price Premium, Ethanol, Markets & Rain Days Update 03/31/2022

Highlights


Yesterday afternoon's Pig Crop Report showed a 2% decline of All hogs, Breeding Stock, and Market hogs; less corn and meal needed this spring and summer.


At 11 AM Central time today the USDA will release its Intended Plantings and the Grain Inventory as of March first. This is the second most important set of USDA numbers of any year.

Below are all the expected numbers courtesy of Benson-Quinn Commodities.

What makes this report especially interesting is the high prices we already have, the war in Eastern Europe, inflation at a rate not seen in 40 years, and people in charge of our government that truly only care about staying in power, getting rich as quickly as they can, and trying to cover their crimes to keep from losing their pension and perhaps going to prison. Now we see the results first hand of the problems most government officials around the world have caused for centuries.


Russia’s currency is called a “ruble or rouble”. When the sanctions started piling on the Russians, the ruble declined in value to as low as 132 rubles to buy one US dollar on March 21st. It has strengthened since then to 84.5 rubles per US dollar today. The exchange rate before the war started was in the 79 ruble per US dollar range. If the economic sanctions that we were told would cripple the Russia economy worked, why is the ruble firming up so much the past ten days? Somebody is buying a lot of Russian natural gas and crude oil. Really, no surprise there.


The US fourth quarter of 2021 GDP growth was adjusted down 0.1% to 6.9% yesterday. With inflation at 7 to 8%, the US economy is not growing at all.

 

People Down Under are talking about North America’s Crop Outlook. Thomas Elder Markets is an Australian grain market consulting firm. This is what they sent their clients yesterday:

The Snapshot The US is in worse drought conditions than in 2012. 2012 was one of five (including present) peak pricing years, due to drought in the US, along with lower export volumes from Russia. Even if a ceasefire is called, prices are likely to remain above average. A crop failure in the USA (or Europe/Canada) will lead to further increases in price. We need to ensure that we don’t remain too fixated on Russia, as the normal northern hemisphere weather market remains in the background. It is still too early to write the US off, but their year is not starting off well. We are still in a La Nina phase, which can make the US dry.

We agree with everything they listed. However, just to put things in perspective about drought years in the Corn Belt, the three other drought years of peak prices they are referring to were 1988, 1983 and 1980. There were two more Corn Belt wide drought years in the Twentieth Century, namely 1936 and 1934. So for the last 122 years, we have had seven Corn Belt wide drought years.


Yesterday, a client sent the new crop corn pricing information below and asked what we thought about it?


This chart shows 50 cents can be added to your old crop corn price at no cost to you. That 50 cent premium is reflected in the column in the middle labeled “Premium.” What can possibly be bad about an extra 50 cents for old crop corn? There are a few things and you need to understand how this market tool works so you can weigh the risk/reward ratio for your operation.

 

Where does that 50 cents come from?


Poet is writing (selling an option before buying the option) to collect the premium on that option. Poet says the key number is $7.00 and the key date is August 26th.


Poet is writing what appears to be a December $7.00 call option. However, it might be a September $7.00 call option. Both options are worth about 55 to 56 cents. A writer, rather it be Poet or you, will receive 55 or 56 cents into their option trading account the day the option is written.


We say it appears to be a December call option Poet is writing because they say if December corn is above $7 on the expiration day, your delivery obligation is doubled.


However, the expiration date of this marketing tool is August 26th. December options expire on November 25th this year. However, September options expire on August 26th. It really does not matter to a corn grower which option Poet writes because the terms of this contract are if December corn is above $7.00 on the close August 26th, the delivery obligation will double the bushels.

If you enter into this contract, typically called a premium contract, you will be paid 50 cents more than the cash price for corn delivered this spring. You may or may not be obligated to deliver the same number of bushels of 2022 corn and receive a HTA price of $7.00. Not so bad. 50 cents now, $7.00 next fall.


What can go wrong?


You enter into this contract for 40,000 bushels of old crop corn and collect the extra 50 cents next month. Sweet!


In May, June or July, December corn goes to $7.70. Grain market people are saying $10 corn next week. Every day, somebody reminds you Sue Martin predicted $18 corn... or was it $24 corn? Do you think December corn will be above $7.00 on August 26th?


Yes, so you do not price 40,000 bushels of corn because you expect to be required to deliver it for $7.00. Yet, if that 40,000 bushels was not in limbo at $7.00, you would certainly price it at $7.70. Two weeks later, December is at $6.76. You still don't know if it will be priced on August 26th. Two weeks later, December corn is at $6.04 and you know (and hope) December still might be back to $7.00 by August 26th. Instead, two weeks later, December corn is closer to $5 than $6 and you end up putting the corn in the bin when the price is $4.65. Sooner or later, you will realize that extra 50 cents a bushel you got in April cost you more than $2.50 a bushel in the fall.


It happens every year. How could this problem be avoided?


Plan A: Tell your merchandiser if that option delivery requirement kicks-in, you want to have the opportunity to roll the delivery period to 2023 crop. That way you can price all your 2022 corn at $7.70 or $8.70 or $14 this summer with no stress. However, we know of only two merchandisers who have done that and they were not happy about it. They want corn and the sooner the better.


Plan B: You write that call option in your own options account. If it gets exercised, there is no delivery obligation. Furthermore, you can buy the option back any day you want if the weather turns nasty. There is no buying back at Poet. They want that corn.


Plan C: Have Poet write a premium contract with an expiration of June of 24th. The third week of June is the seasonal high for corn. If the option gets exercised, you will have the opportunity to buy put options before the price falls out of bed in July and you will know if your bushels are doubled up before the market has tanked this summer.


Plan D: Forget the $7 call; write an $8 call for 33 cents or write a $9 call for 20 cents or write $10 call 12 cents either with Poet or in your own options account.


A couple more things: the December and September $7 calls are both trading at 55 to 56 cents tonight. If your merchandiser gives you 50 cents, he is making a service fee of 5 or 6 cents. Not a terrible thing because if corn futures go to $20, he will have $13 a bushel margin call.


We gained many new clients because their merchandiser talked them into writing $3.30 calls when corn was $3.10 in the spring of 2020.


We gained even more clients in 2021 after their merchandiser talked them into writing $3.90, $4.40, and even $5.00 calls.


Your margin for error on these "premium" contracts is much more survivable with $7.00 calls than with $3.30 calls, but writing $7.00 calls can be very expensive.


Bottom Line: if you can handle and manage stress created by your market plan, go for it. If stress executing your market plan is a problem for you, stay away from all these premium market plans as well as the "accumulator programs."


 

Ethanol Update


Average daily ethanol production:

1,036,000 barrels last week.

1,042,000 barrels the previous week.

965,000 barrels the same week a year ago.

840,000 barrels the same week two years ago.

Ethanol inventory was 26.529 million barrels compared to 26.148 million barrels the previous week.

 

Market Data


This morning: Crude oil is at $102.54, down $5.28 The dollar index is at 97.83, up 0.04 July palm oil is at 5,657 MYR, down 82. The contract high was made March, 9th at 6,531 MYR. Palm oil owns 36% and soybean oil owns 28% world market share. December cotton is at $112.26, down $0.18 per cwt. The contract high was made March, 28th at $114.15 per cwt. Cotton competes with soybeans and corn for acres. July natural gas is at $5.653, down 0.061 The contract high was made March, 28th at $5.796. Natural gas is the primary cost to manufacture nitrogen fertilizer. July ULSD is at $3.1530 per gallon, down 0.0772. The contract high was made March, 9th at $3.7675. ULSD stands for Ultra Low Sulfur Diesel.


 

Rain Days Update


Yesterday, in the dry areas of South America: Santa Maria high temperature 68°F with 0.9 inches rain. Cordoba high temperature 71°F with 0 inches rain. Salto high temperature 64°F with 0 inches rain. Total rainfall and temperatures expected in the next ten days: Santa Maria 2.80 inches, 67 to 81°F. Cordoba 0.38 inches, 69 to 84°F. Salto 0.21 inches, 66 to 81°F. The Western Corn Belt has 5 more rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 more rain days than yesterday.


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