Saturday, July 1, 2017

July 1 blog, drought, bull again, acreage battle for 2018

I sent this out to subscribers back in Feb 12th, 2017

* One data point I am watching as per USA weather for 2017. As per seminars I attended 20-25 years
ago on weather and markets.

One major leading indicator for a midwest drought is a 60 degree temp in Des Moines for the month of
February increases the odds of a drought to 80%.

The forcast for 2/19 for Des Moines is 61 deg.

Last year I was watching for this and it did not happen. Even though there
were a few predicting drought for 2016, I felt the June high was solid and we
would head lower. For the most part that was correct. We never had an August
rally as it was hot and wet every day and record yields were the result.

2017 will be different if this data point holds next Sunday

1980 and 88 are analog years among others....  "

Kory

So far so good.

We do not have a drought per sey in the " Corn Belt", but the High Northern plains
are sure getting it full force.

The comparisons to 1988 are the key words I have been waiting for.

It is funny how bankers and crop insurance interrupt common sense sometimes.

NW MN and ND have switched to corn and soybean country in recent years. Long growing
seasons with great yields have changed the historic cropping rotations away from wheat and
sunflowers. Corn and beans are king. A few good years and most everyone has good APH's to
work with. This gross revenue protection is better than growing wheat for a loss.

At the end of April, when I saw the Kansas blizzard and the northern plains in the deep freeze,
I told myself, this is a wheat year- not a corn and bean year.

We were hearing from many sources that this was the lowest planted area of wheat in
circa 100 years. Other comments from farmers saying this was the lowest percentage of
wheat we have ever planted on our farm were early leading indicators of "What if" there
are some weather problems? Here we are.

I must say the wheat rally strength is suprising. It is funny to see so many get bulled
up so quickly. A rally of some sort seemed likely, but with bins full of wheat from
last year yet, the fortitude of this rally is down right impressive.

Where I am from in NW MN, the wheat crop is perfect. Everyone is applying fungicide and
adding liquid N to bump the proteins. Many have 70 bu wheat on deck and I think some
100 bu wheat will be likely on a few fields. The problem is: only about 20-25% of any farm
is spring wheat. The balance of the farm is corn, soy, and canola and some sugar beets and
edible beans. I wonder how many 4th of July picnic table conversations there will be this
weekend of " I shudda planted the whole farm to wheat!!!"  I could have retired !!!!
One must feel for the central ND farmers that are baling up their wheat in order to save
their cow herds. Many hay buyers have been up to NW MN looking for any hay possible.
For them, it is a crop insruance year. Some of the same guys that sent hay to Oklahoma
a few months ago now need help themselves. Crazy how fast things change.

We all remember the 2008 rally in spring wheat to 23 dollars. Best drug ever created
for my area in NW MN. Everyone thought they were instant super heros.

The problem with the bull run of 2007/2008 and again in 2011/2012 was that no one
had any wheat to sell at the higher levels and cost of production was nuts.
That was hard to write checks for a tanker of diesel at 4 dollars per gallon and
fertilizer was circa 1000 dollars per ton. Wheat needed to be 8 dollars ++++ !!!

Since then, fertilizer and price of N have dropped significantly and diesel is
circa a 1.50/gallon again.

Also, back during the commodity boom, everyone was hedging production
on the way up. Some was sold at 8 bucks and more at 10 and 12 bucks.
So if wheat was 13 bucks, no one had any left. And new crop was priced
back at 8 bucks, so why sell that when spot is still 11 bucks was the mantra.

Produce and hold was the new biz model. Build more bins.
That worked until the recent 3.5 year bear market.
Six months ago, bankers were telling farmers to dump that wheat.
US 4.50/bu is good enough. Clean up your operating and let us get ready
for 2017 with corn and beans.

So a good chunk of last year's crop got sold at Christmas time.

Then boom:  a 3 dollar  rally and probably more to come.

The good thing about this year's crop being grown is that prices were so
low that no one has any sold. Why hedge 4.50 wheat? a guaranteed loss.
It is a produce and hold crop. It is a rotation crop.

So when I hear farmers harvesting early spring wheat and hauling direct
to elevator and getting 9 bucks off the field, it makes my heart sing with joy.
Congratulations dude, you deserve it after the last 3 years+ of being patient
and getting a corn cob rammed up your bottom side.

The net margin of producing a 70 or 80 bushel crop this year and selling
off the combine will be better than the margin back in 2008 in most cases.
Cost of production and lack of crop sold come together to line up the 7's.

So back to beans, are corn and beans next to rally back to decent levels?

I have outlined to clients since back in January of what I expect for the year.

The May low was on target.

The recent drop to 9.07 basis Nov 17 was a surprise and worrisome.

As long as 9.03 holds, we can be a bull.

Now in just 5 days, we are already back to 9.58.
A close above 9.82, I think we can rest assured that the
9.07 low was a significant low and we have better prices to come.

I will send out a special technical update in a week.

With a combination of less than optimal spring conditions,
mid season drought stress now in July, and a likely early end to
the 2017 growing season, I doubt we will produce the 4.2 to 4.3 billion
bushels of soybeans being projected.

SA will have plenty of carryover stocks and that will be a weight over
the market.

But, any hiccups in SA weather and the new acreage war about to start for
2018 between Spring wheat and Soybeans, we now have a story. We now have
something to talk about.

We have reason to be optimistic and bulls with small testicles again.

Happy 4th and enjoy your holiday.

Kory

keywords: spring wheat, drought, soybeans, acreage war






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