Farm Futures - Weekly Market Recap

Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
February 27, 2015

It was little more than a year ago that the long-awaited 2014 Farm Bill was finally signed into law. Conventional wisdom at the time said the new program favored corn over soybeans in general. Most growers were expected to sign up for Agriculture Risk Coverage at the county level, which looked like it had better odds of paying off than the other main alternative, Price Loss Coverage.

But those early estimates looked at average yields, first at the national level, then statewide. USDA didn't release county-level results for 2014 until Feb. 19, and the new data stood conventional wisdom on its head.

Average yields were misleading, because they masked huge variations, especially in Illinois and parts of Iowa and Indiana. Some growers saw huge yields in 2014. Others in the same state not so much. Northern areas of the three-I states suffered yields that were only modestly above the Olympic averages used to calculate ARC benefits. And in some areas, actual yields were less than the Olympic yield, which looks at the average for the five previous years, tossing out the high and low yields.

As a result, some growers who penciled in an 2014 ARC payment into their calculations will get nothing, or much less than they expected. Others will get huge payments, $100 an acre or more, benefiting from both lower prices and lower yields.

Growers with better yields may wind up with higher overall revenues for 2014, but their county results for 2014 could affect which program, ARC or PLC, works best on a farm unit. Of course, program selection is a complicated choice. Assumptions about the projection of prices over the course of the program through 2018 are one factor. Another is whether a farm needs protection against catastrophically lower prices, or more modest reductions in revenues. PLC pays more if prices are extremely low, while ARC works better when revenues are between 76% and 86% of the guarantee.

The new county data might even affect farmers' decisions about whether to retain or reallocated program acreage bases. Corn is still expected to pay more than soybeans in most areas, depending on the assumptions made about prices and risk preferences.

Ag Secretary Tom Vilsack extended the deadline for decisions on updating program yields and bases until March 31, when program choices are also due. Decisions that looked straightforward not long ago, suddenly look more complex.

Corn prices made several attempts the break higher in January and February. But March futures instead stayed in a trading range, with decent demand offset by large amounts of old crop inventory. Deliveries against March futures topped 1,400 contracts on first notice day because basis from Chicago along the Illinois River was weak. Cash bids elsewhere were much better in some cases, as buyers had to press bids to attract bushels.

The best justification for a rally now comes from ideas farmers will plant less corn in 2015 than USDA projected at its February outlook conference. With losses of $65 to $95 an acre ahead, corn was a drain on cash flow in the short run, and likely equity in the long term.

Base prices for Revenue Protection crop insurance also won't be much to write home about. But history suggests good chances for December futures to rally above $4.55 this spring, providing opportunities to lock in a profit with smart basis marketing.

Soybeans surged higher to end February, with the seasonal rally triggered by the same reason it normally is: problems moving new crop production out of Brazil.

This year the complication came from a strike by truckers, who threatened to derail not only movement of soybeans, but deliveries of fuel needed to harvest the crop. Rains also slowed combines, adding to previous delays getting the crop in the ground last fall.

This provided farmers with an opportunity to get rid of remaining 2014 inventory, at a price that may not last. Brazil still looks on track for a huge crop, and conditions are good in Argentina. The result will be record world supplies that should eventually punish prices if growing season weather is good in the U.S.

But as with corn, soybeans also have a history of rallies, which give hopes for a bounce to $10.85 by November futures at some time from June through October. Patience looks like it may be needed to wait for that chance.

Wheat prices slumped to new contract lows ahead of March delivery. Demand remains tepid in the face of record world production for 2014. But the market's attention is turning toward 2015 as the winter wheat crop starts to emerge from dormancy after a tough winter in many areas.

Sub-zero temperatures repeatedly dipped into the northern part of the hard red winter wheat belt on the Plains, while the deep freeze extended through the Ohio River Valley, threatening soft red winter wheat. Updated crop ratings in key states for February could set the stage for at least some type of weather rally into spring, with some of the longer term forecasts remaining dry.

Nonetheless, if U.S. growers don't grow a good crop but others do, rallying prices may be difficult. The best hope for rallies in the short term comes from prospects big speculators will take profits on their bearish bets in wheat, buying back their contracts and moving to the sidelines. This short covering can produce some quick short-term rallies, but changes in fundamentals likely are needed to turn around the long-term bear market.

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