Yesterday morning the USDA announced export sales of:
66,000 mts of old crop soybeans to China
66,000 mts of new crop soybeans to China
337,000 mts of old crop corn to unknown
An Estonian-owned cargo ship Helt was sunk yesterday off the coast of Ukraine following an explosion. The Helt is believed to have hit a mine. Four crew members are still missing.
The Russians and Ukrainians met yesterday. They agreed to create a “corridor” for safe passage of refugees out of the country and agreed to meet again, but no appointment. Russian news reports Ukraine’s president is ready “to talk to Putin about the rebel Oblast of Donbass” in Eastern Ukraine on the Russian border.
Yesterday, the corn basis weakened (“crashed” would be a better description) apparently clear across the Corn Belt from what you folks are telling us.
Why?
With the increasing prices of the past three weeks, cash grain movement has been heavy. All the users of corn have their bins full, so they really do not need corn to meet immediate needs. However, that was the case two days ago, six days ago, so why did basis crash yesterday?
Merchandisers and their bankers who loan the money to make margin calls see the possibility and are afraid the hedge line of credit is or soon will be nearly maxed out. There is hardly a wheat farmer who has not contracted a lot of wheat. July red winter wheat futures price is up $4 since February 23rd! That means every bushel of new crop winter wheat contracted has required the merchandisers to deposit $4 a bushel into their hedge account the past two weeks. The USA grows about 1,800 million bushels of wheat each year. I would not be surprised if 50% of it is contracted. At $4 per bushel on just 30% of annual production would be $2.4 BILLION margin call in just two weeks. Add in the $1 a bushel gain of December corn and the $2 gain in November beans since the first of the year and those of you who have made some ugly margin calls know exactly how quickly money can disappear.
In 2012, we had very minor money problems because the big rally in corn and beans started in late June before farmers had contracted many new crop bushels and, even with sharply higher prices in July and August, farmers did not contract many bushels because they did not think they would have a crop.
After $1.60 cash corn in the fall of 1994, the spring of 1995 was wet. Corn and bean futures firmed from below breakeven to profitable levels. Farmers were quick to contract two and even three years’ of production because they did not want to be selling 1995 crops below breakeven. The low prices in 1994 into 1995 increased demand. By the end of harvest in 1995, December corn was $3.40. All those multi-year HTA contracts were rolled to July 1996 because the market was inverted. The spring of ’96 was another wet one and by mid-May, July corn was over $5. Then the big spec funds smelled blood and they bought July corn every day for the express purpose to force the short positions to buy back their corn hedges due to a lack of money to meet margin calls. You older duffers remember 1996 as the year of the “HTA Crises”.
A three state coop in the Eastern Corn Belt sent letters in early May to all farmers with corn contracts stating all the contracted corn had to be delivered by the end of May or the hedge losses had to be covered by farmers with cash. If no corn and no cash was received, the coop would sue each farmer individually.
Since all the delivery dates on the contract were scheduled after the harvest of 1996 or 1997, it was an obvious breach of contract, but the coop decided they would take their chances on a farmers paying to avoid court battles. Failing that, they figured their lawyers could destroy in court any lawyer a farmer could afford to hire.
The fear of running out of money to meet margin calls is what caused merchandisers to kill the basis yesterday and the refusal to buy old or new crop corn. You cannot do anything except buy puts if you want downside protection. If you sell futures, you may very well run out of money also.
When the fear of running out of money dissipates, corn basis will firm very sharply to replace depleted supplies. We need the wheat to decline $3 a bushel and all will be well again. In the meantime, you need to hope (pray might be more appropriate) you do not get a letter from your merchandiser requiring you to deliver 2022 crop corn or wheat or beans this spring. I am sure many of you will get a letter saying your merchandiser is going to do you a “big favor” and let you buy out of your delivery contracts. Do not do it. The result will make you suicidal.
There is a day coming very soon when these futures prices will crash and burn. I doubt that wheat will come back, but corn and beans will.
There is plenty of wheat to make all the bread the world needs. The world wheat carryover is a 129 day supply. That means there is enough 2021 wheat to meet the needs of the world 129 days into the new crop marketing year, which begins June 1. That would take us to the 5th of October before we would need to use any 2022 wheat. The world corn and bean carryovers are both a 92 day supply with the USDA using February South American production numbers way, way too high. Big production reductions are coming from USDA on Wednesday for the South American corn and bean crops.
Corn basis dropping 75 cents yesterday is not the end of the world; it just feels like it.
Heads up: If you search the very fine print of your grain delivery contract, someplace it states your merchandiser can require you to meet margin calls.
To understand why merchandisers can run out of margin money, go to:
The Weekly Export Sales Reportyesterday morning was disappointing for corn and soybean meal. Take a look at the tracker below. The important numbers are the percent of the USDA expected sales for the marketing year compared to the percent of actual sales for the marketing year. Those percentages tell us what changes in exports we can expect USDA to make in the coming Supply & Demand (S&D) Reports.
Market Data
This morning:
Crude oil is at $109.43, up $1.76
The dollar index is at 98.07, up 0.28
July palm oil is at 5,911 MYR, down 278. The contract high was made yesterday at 6,337 MYR. Palm oil owns 36% and soybean oil owns 28% world market share.
December cotton is at $101.57, down 1 cent per cwt. The contract high was made February, 10th at $106.36 per cwt. Cotton competes with soybeans and corn for acres.
July natural gas is at $4.874, up 0.060. The contract high was made February, 2nd at $5.121. Natural gas is the primary cost to manufacture nitrogen fertilizer.
July ULSD is at $3.0178 per gallon, down 0.0054. The contract high was made yesterday at $3.2147. ULSD stands for Ultra Low Sulfur Diesel.
Rain Days Update
Yesterday, in the dry areas of South America:
Santa Maria high temperature 100°F with 0 inches rain. Cordoba high temperature 95°F with 0 inches rain. Salto high temperature 94°F with 0 inches rain. Total rainfall and temperatures expected in the next ten days: Santa Maria 3.28 inches, 75 to 96°F. Cordoba 1.43 inches, 73 to 85°F. Salto 1.30 inches, 76 to 82°F.
The Western Corn Belt has 8 more rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 1 more rain days than yesterday.
Explanation of Rain Days
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