Prepare for the great acreage race

Editor's note: Catch Randy Martinson every Friday after markets close on the Agweek Market Wrap at agweek.com.

The grains put in a solid performance the second week of February. Most were expecting the grains to fade due to the flip-flopping weather forecasts for both the U.S. southern Plains and South America. But that was not the case as weather conditions continue to deteriorate in the southern Plains and South America, both putting potential production estimates in limbo.

The grains started the week on the defense and added to the selling pressure on Tuesday ahead of the report. But the day of the report the grains were able to find support and rally. Thursday’s session had traders rethinking that move as report hangover pulled some profits back out of the grains. But Friday’s stronger session pushed the grains back into the black resulting in a higher weekly close.

Early week performance was influenced by position squaring ahead of USDA’s reports as well as from weather forecasts that are calling for moisture for the southern Plains and Argentina. Weekend rains were disappointing in Argentina so that is putting more attention on the potential of the next system.

Three of the major agencies that put out estimates are showing massive cuts this month. USDA cut their estimate of Argentina’s soybean production 3.5 million metric tons to 41 million metric tons. Rosario’s estimate came in at 34.5 million metric tons, down 2.5 million metric tons, and BAGE’s estimate came in at 38 million metric tons, down 3 million metric tons.

Rosario also released their corn production estimates for Argentina. They put corn production at 42 million metric tons versus USDA’s estimate of 47 million metric tons.

Rosario put soybean production at 34 million metric tons, a decline of 2.4 million metric tons and the lowest production in 14 years. This compares to USDA’s new estimate of 41 million metric tons, which was cut 4.5 million metric tons from last month.
On Wednesday, Feb. 15, the National Supply Company (CONAB) released their estimates for Brazil. They are estimating corn production at 123.7 million metric tons versus USDA’s 125 million metric tons. Soybean production is estimated at 152.9 million metric tons versus USDA’s estimate of 153 million metric tons. At this point, Brazil’s increase in production is just making up for the decrease in Argentina and if the crop in Argentina continues to deteriorate, it might be tough for Brazil to make up the difference.

Corn is not seeing as much of a swing on a daily basis as soybeans, but the same issues in soybeans are playing out in corn. The rains in the northern regions of Brazil have slowed soybean harvest, which in turn is slowing down the planting progress of the second corn crop. And the slowdown in corn planting has been enough for CONAB to lower Brazil’s corn production estimate. It is also starting to show up in the U.S. as increased exports, which has been evident the last two weeks. This might be why USDA did not lower corn exports in the February report.

Wheat has been able to post a higher weekly close the past three weeks in a row. And wheat has seen open interest increase during the same time frame. And with the rains missing some of the driest regions of the winter wheat regions (so far), wheat has been able to post decent gains. As of Thursday, 58% of the winter wheat region was in some stage of drought versus 78% at the beginning of December. Support also came from an escalation in missile attacks on Ukraine as well as from reports that Russia is once again complaining about the Black Sea Export Initiative and is again threatening to not renew the agreement, which expires March 18.

Texas released their weekly Crop Progress report Monday, Feb. 13. As of Feb 12, the crop is rated at 11% good, 36% fair, and 53% poor/very poor. About 13% of the crop is headed versus 7% last week and 7% average.

The market is looking for direction and for clarification. At this point no new news has filtered into the grains to give traders direction. South American weather has been the dominating force the past few weeks, but at this point it feels like the weather forecasters are just playing with us as rain keeps jumping in and out of the forecast daily. At some point it will be too late for the rain and that day is fast approaching.

Current estimates for Argentina continue to decline as crop advisor Dr. Michael Cordonnier lowered his production estimates once again. His current estimate for Argentina’s soybeans is 36 million metric tons (down 2 million metric tons) versus USDA’s 41 million metric tons. His corn production estimate dropped 1 million metric tons to 43 million metric tons versus USDA’s 47 million metric tons.

As for what we are starting to see in this region, soybean basis levels are starting to widen, with some cash bids dropping to 60 to 70 cents under the May futures. The annual pilgrimage has begun as China switches from buying U.S. soybeans to Brazil soybeans. It appears that the Pacific Northwest export bids have dried up and with limited offers from them, local elevators are not willing to be too aggressive buying soybeans at this point. And with interest rates climbing, most are not willing to fill up the house anticipating when Brazil sells out and China returns to the U.S. for product (likely May to June).

Corn is playing a follower role. The news for corn has potential to take the market in either direction. That sounds wishy-washy, but corn really is waiting for direction. U.S. demand has been poor, there is no question to that. Exports are sluggish, ethanol demand weak, and feed demand lackluster due to decreasing livestock numbers. But corn does have one item going for it. Rains in northern Brazil are slowing soybean harvest and slowing the planting of the second corn crop. The later this gets the lower the planted acreage will be. Also, southern Brazil remains drier, which means lower yield potential. All this could result in an uptick in corn exports, but we won’t know that for another two to four weeks. Which is why corn is not seeing much trading activity. Everyone is sitting on the sidelines waiting.

NOAA’s Climate Prediction Center is expecting climate to return to neutral conditions in the next few months and it could last into mid-summer. Not sure what neutral weather means, but I guess it means closer to normal weather, which means we should have a decent chance at getting crops planted timely.

The projected prices for crop insurance are being set this month. As of February 15, the projected base prices are at:

• Spring wheat: $8.93 versus $9.44 last year,
• Durum: $10.18 versus $9.44 last year,
• Corn: $5.95 versus $5.90 last year, and
• Soybeans: $13.72 versus $14.33 last year.

At first look, it would appear that durum acres will see an increase in North Dakota at the expense of spring wheat.

Cattle have closed out the second week of February with small gains, but this market has turned to trade sideways. After USDA released a friendly Cattle on Feed report and Cattle Inventory report, cattle have gone quiet. Although supplies remain tight and will only get tighter, the trade is concerned about the economy and whether beef demand can maintain. Two items are holding cattle back from testing 2014 highs. First, U.S. unemployment remains extremely low and until unemployment starts to tick higher, the Federal Reserve will continue to increase interest rates. The market is worried the middle of March increase could be ugly. Secondly, pork prices are cheap and will capture the attention of the cash strapped consumer. Producers should consider putting a floor under cattle that will be marketed this fall.

“The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.”