Posted by: usset001 | April 23, 2015

How much corn does a turkey eat?

turkeyMinnesota is the top turkey producing state in the country. Turkeys have been affected by the bird flu, with outbreaks making the news on almost a daily basis. It has myself and many others thinking about the impact on corn demand.

At University of Minnesota Extension, Sally Noll is the program leader for our Poultry Production and Health group. These notes are a summary of my conversation with her last week.

The turkey market is ½ hens and ½ toms. About 1/2 the hens are raised for 8-10 weeks, reaching weights of 12-14 pounds. The other half are raised to to 18-20 pounds. The toms are raised for 20-22 weeks, reaching weights of 40+ pounds. Hens and toms are raised in separate barns and, from what I have read so far, reports have not identified the sex of lost birds. At this point I would assume a 50-50 loss of hens and toms, and we will assume an average size of 28 pounds per turkey.

A 2:1 ratio of the amount of feed eaten to body weight gain appears to be a valid assumption. The feed ration is 55-60% corn, with the balance soybean meal, minerals and vitamins, animal protein byproducts, canola meal, sunflower meal. As of last week, Minnesota had lost about 1.4 million turkeys.

Let’s do the math. How much corn would 1.4 million turkeys consume in an entire production cycle?

1.4 mil. turkeys * 28 lbs./turkey * 1.2 lbs. corn/lb. turkey)/56 lbs./bu. corn = 840,000 bushels of corn

That looks like a pretty big number, but the math is not quite that simple. The loss to feed demand involves more than the loss of the current birds. How long will a shuttered facility not produce? One cycle (10-22 weeks)? Two cycles (20-44 weeks)? A year? I don’t know the answer, but we must consider how many production cycles have been lost.

I can put a little perspective on 840,000 bushels by contracting the amount of corn used in turkey production to the amount of corn used in ethanol production. Minnesota has 21 ethanol plants, and the average plant produces a little more than 1 million gallons each week (about 60 million gallons of ethanol each year). Assuming 2.8 gallons of ethanol from each bushel of corn, the average Minnesota ethanol plant processes nearly 400,000 bushels of corn each week.

In other words, the average ethanol plant in Minnesota will process 840,000 bushels of corn in a little more than two weeks.

wheatfieldYesterday I read an article from The Globe and Mail titled, “Kraft, Mondelez accused of manipulating prices of wheat used in Oreos.The article was written by Michael Babad and you can find it here. You can find the CFTC press release here.

As a former futures trader and hedger who worked for a large food company, I take a particular interest in this topic. To have the CFTC (the Commodity Futures Trading Commission) accuse you of price manipulation is pretty serious stuff. Allow me put a little perspective around the numbers and the allegations.

The Toledo flour mill, owned by Mondelez Global LLC, is one of the largest flour mills in the world, with a daily milling capacity of 31,000 cwts of flour per day. My Sosland Grain & Milling Annual indicates that all of that capacity was dedicated to milling soft red winter wheat – the type of wheat used to produce low protein flour favored in the production of cookies like Oreo, Chips Ahoy, etc. Assuming 2.3 bushels of wheat per cwt of flour, and a mill running 310 days per year (normal industry standards), the Toledo mill processes over 22 million bushels of SRW wheat each year. The article I’m reading says “It [Kraft] uses about 30 million bushels of wheat a year for products like Orea, Chips Ahoy, Ritz, Triscuit and Wheat Thins. And the bulk of that wheat, generally sourced in Ohio, Indiana, Michigan and Ontario, is milled in Toledo.” Twenty-two million bushels is the bulk of 30 million bushels, so my math is in agreement with the facts put forth in the article.

Here’s where I am confused and need clarification. To quote the article (which appears to be quoting from the CFTC report), “The CFTC alleges the companies bought six months’ worth of wheat futures amid a rise in costs in 2011, but never planned to take delivery, the goal being a drop in prices on the cash market.” Call me confused with the statement that the company “never planned to take delivery.” I don’t know of any commodity buyer – buying futures contracts to hedge against higher input costs – who would actually want to take delivery on the futures contract. When a buyer of commodities buys futures contracts, they do so to hedge against higher prices, not to take delivery. General Mills (another large food company) for example, may choose to buy wheat, sugar, or soybean oil futures to hedge against higher food input costs. I can assure you that when they buy these contracts, they have absolutely no intention of “taking delivery.” The same can be said of a large airline buying crude oil contracts to hedge against higher fuel costs. Hedging is, by definition, taking a position in the futures market as a temporary substitute for a later transaction in the cash market. Like any other hedger of flour costs, once the long hedge is in place, they would later buy cash wheat to mill, and offset their long futures position as the wheat is purchased.

The article also says, “Kraft also held futures positions above the speculative limits, according to the complaint.” In my mind, Kraft sounds like a hedger, buying wheat futures to hedge against higher input costs. They are said to have bought $90 million of wheat futures. $7 futures ruled in 2011, so $90 million in futures equates to about 13 million bushels – less than half of the 30 million bushels used each year. Clearly, I may be lacking some important details here, but an ownership position of about 40% of your annual usage is, at best, modestly aggressive. I am aware of examples of food companies using futures markets to secure costs on inputs for as much as a full year out. Whether or not that exceeds speculative limits gets into the CFTC definition of hedging. This may be a tricky question. A large merchandiser of SRW wheat, with millions of bushels in storage (and physical proof of the holdings), can legitimately sell an equal amount in the futures to hedge their ownership. A food company buying futures is hedging anticipated sales in the future, and I simply don’t know how the CFTC approaches such anticipatory hedges. All I can say is that food companies regularly buy futures contracts (or a variation with options) to control input costs.

One more quote from the article and the CFTC document. “In developing the strategy, Kraft, acting through certain of its procurement staff and certain senior management, intended that the futures market would react to its enormous long position by increasing the price of the December 2011 futures contract while reducing the differential between the December futures price and the price of the cash market wheat.” This comment speaks to a basis play on the part of Kraft (and, actually, the desire may be to increase – not reduce – the differential between futures and cash, but it depends on whether the basis is positive or negative). By owning futures, Kraft is, in essence, short the basis. The quote seems to indicate that Kraft was manipulating the basis. To be clear, they would benefit from a widening basis – lower cash prices relative to the futures price. Here I can only say that I traded the spring wheat basis for a number of years, and I have no idea how anyone could think they would manipulate the basis. Anticipate a lower basis? Yes. Put yourself in a position to benefit from a lower basis? Yes. Manipulate? Please tell me how – what I’ve read so far leaves me in a fog.

One final thought. I don’t know how Kraft is structured. I once worked for a large miller, which was itself a small part of a large food company. I worked for the milling division which had its own P&L. The procurement function was a completely different part of the company. We used futures contracts every day to hedge our risks in the milling division. The procurement group also regularly used futures contracts to hedge flour costs. There was remarkably little coordination and communication re futures positions between the groups. Was the Toledo mill operating separately from a procurement function in Kraft? I don’t know the answer, and I’m not sure if it makes a difference.

My readings so far have left me with many more questions than answers. Stay tuned.

Posted by: usset001 | April 1, 2015

Finished marketing the 2014 spring wheat crop

wheaticonThe basis for HRS wheat has been surprisingly strong, and that’s good news for someone who decided to sell the carry in the spring wheat market. In late August, I made the decision to store wheat and sell the Jul’15 Minneapolis wheat contract, which was trading at a 34 cent premium to the (then) nearby Sep’14 contract. You can see my 2014 post harvest marketing plan for wheat here.

The basis at harvest was 30 cents under the Sep’14 contract, or 64 cents under the Jul’15 contract. I sold the carry with the hope that 64 under the July could narrow to option price the July by spring of 2015. I got my target basis plus some – the wheat basis is currently 15 cents over the nearby May’15 contract, and about 11 cents over the July contract – that’s a 75 cent narrowing of the basis from late August to late March. Wow!

The good news is that 2014 is history. The bad news is that I have yet to start on 2015. All I’m asking for is one good rally from current levels.

corniconLast fall I posted my 2014 post harvest marketing plans. My approach was conservative and, with spring approaching, I thought it would be a good time to share an update on my progress.

Corn: Carrying charges were large at harvest and I like selling large carries. In late October, cash corn prices were 55 cents under the nearby December corn futures contract. The carry to the Jul’15 contract was nearly 30 cents. In other words, the harvest basis for corn was 85 cents under the July contract – I sold the carry with expectations of the basis narrowing to 30 cents under by May or June of this year. Recently, the basis for corn has been quite strong, despite ample stocks in the country. Today, the basis for corn is trading at 30 cents under the May contract, or 36 cents under the July – just 6 cents from my target. I am reasonably confident of reaching my target in the next several months.

Soybeans: Carrying charges in the soybean market were also modestly large, and I chose to sell the carry (store soybeans and sell the May futures contract). At harvest, the cash price of soybeans in Southern Minnesota was 98 cents under the May contract. Like corn, I thought an expectation of 30 cents under the May was a reasonable objective. Currently, the soybean price is at 60 cents under the May contract, and the prospects for 30 cents under by the end of April are slim.

I also chose to hold some bushels unpriced and I met my price objectives in the late fall price rally, making two small sales at $9.74 and $9.82/bu.

HRS Wheat: At harvest in August, carrying charges were also large in the wheat market (Do you sense a common theme in all three markets? Large crops lead to low prices and large carrying charges.) Late last summer, wheat prices were 30 cents under the nearby September contract and 64 cents under the Jul’15 wheat contract. I sold the July contract and set ambitious sights on a 0 basis (option price the July contract) by spring. We are almost there – wheat in the Red River Valley is trading at option price the May contract, or 6 cents under the July. I am confident of reaching my original objective in the next 2-3 months.

In summary, the basis gains in corn and wheat have been quite impressive. Soybeans, on the other hand, are lagging behind. This should not be too surprising, as we are dealing with the largest soybean stocks in a decade.

Corn 2015 Pre-Harvest PlanThe bad blogger returns.

My pre-harvest marketing plans were written over two months ago, but I have yet to post them (check here soon). Why the lack of urgency? New crop pricing opportunities for corn, soybeans and HRS wheat remain quite a bit lower than my minimum price objectives for getting started. Hence, no action.

This is the first time in 14 years that I have written pre-harvest marketing plans with minimum prices less than production costs (and they are just modestly below costs). Why now? The production and sale of grain should be about maximizing profits, but commodity markets can be cruel. When markets are down, it may help to focus on minimizing losses.

As February comes to a close, my attention is shifting towards spring, and the onset of the “too-too” season. I am banking on a spring or early summer rally in prices to give me (and you) the chance to get started on pricing 2015 crops at prices better than what we have seen over the past 3 months.

HRS Wheat 2015 Pre Harvest PlanCan I guarantee better opportunities? Of course not. But I am hoping for the best.


Soybeans 2015 Pre Harvest Plan




Posted by: usset001 | December 26, 2014

Five Common Mistakes in Grain Marketing

Ed in NEOn December 18, I has the opportunity to speak at the Nebraska Soybean Day in Wahoo. My topic was Five Common Mistakes in Grain Marketing and over 200 good Nebraska soybean producers crowded into the Ag Pavilion at the Saunders County Fairgrounds to hear me speak (equipment displays and lunch provided by The Pancake Man may have drawn a few people too). Here a link to a television interview I did with Jeff Wilkerson of Market Journal, a production of the University of Nebraska.

The winter season of travel and speaking has just begun!

Posted by: usset001 | October 17, 2014

Ten open games added to Commodity Challenge

Commodity-ChallengeEarlier today I created 10 new games on Commodity Challenge ( Commodity Challenge is an online trading game that features real-time cash, futures and options quotes for grain markets. With harvest in full swing, I thought it was time to create a number of new games – spread throughout the Corn Belt – and give more people the chance to test their skills as a grain seller, or as a grain buyer. Four of the 10 games are buying games, where the player tries to minimize their cost of feed (corn).

It is quite common for our CC open games to attract 100-300 players from every corner of the U.S. Give it a try and see if you can compete!

Here are the six new sellers games…

Illinois 2014 soybean open, Ohio 2014 soybean open, North Dakota 2014 soybean open, Iowa 2014 corn open, Indiana 2014 corn open, Kansas 2014 corn open

Here are the four new buyers games…

Oklahoma 2014 feed buyer game, Texas 2014 feed buyer game, Colorado 2014 feed buyer game, Missouri 2014 feed buyer game

Posted by: usset001 | August 27, 2014

Is the slump in grain prices here for the long term?

Demand DriversI received an interesting question this morning that asked for my longer-term opinion of the grain markets.

Question: I enjoy your articles. Do you think the slump in grain prices is a long term thing or more a temporary thing? I have finally made some money these years of the good prices and don’t want to risk losing what I gained with several years of low prices and these high expenses. I realize nobody knows the future but I would appreciate any thoughts or help you could give me.

My response: I am happy to share my opinion but keep in mind that my opinion and $5 will buy you a latte just about anywhere in the Twin Cities.

I think the last seven years (2007-2013) were extraordinary years for grain production and profitability, and it is unrealistic to assume that “extraordinary” would continue indefinitely. The grain complex was headed for a downturn in 2012, but the drought postponed the fall. In corn, ethanol demand has been the biggest story in the past two decades but look close and you will see that ethanol demand for corn has flattened out in the past four years. In soybeans, growing Chinese imports have mirrored the ethanol/corn story and have yet to flatten out. That said, take a look at today’s WSJ, with a large story on growing Chinese grain stocks.

My view of the last seven years is that disruptively fast growing demand has been the spark that created these extraordinary years. That spark has flattened in corn and may be in question in the soybean market. I think producers should make plans based on more “normal” returns to grain production and prepare for the possibility of several years of below normal returns.

My opinion is a bit of a downer but you can take heart in the fact that I have been wrong (many times!) before. Good luck harvesting your grain – I hope you have a great crop.

Posted by: usset001 | August 20, 2014

Soybean conditions are very good

soybean conditions August 17 2014I’ve been sharing the attached chart with Minnesota producers. They say that a picture is worth a thousand words, but many people are taking the wrong message from this chart. Minnesota producers look at the graph and conclude that soybeans conditions in Minnesota are not good. Wrong conclusion. Soybean conditions in Minnesota – 64% rated good to excellent – are remarkably average. If you look at soybean conditions in the third week of August over the past 10 years, you will find five years better, and 5 years worse, with 64% on average rated good to excellent.

The story in this picture is just how good soybean conditions are in many other key producing states. 78% good to excellent in Illinois and Missouri! Most other top-producing states are at 70% G-E or better.

The crop conditions index for the U.S. soybean crop is at 381 – that is the highest it has ever been at this time of the year since USDA started regularly tracking crop conditions in 1986. (The crop condition index is based on weekly USDA crop ratings. An index of 500 reflects a crop in excellent condition, 400 is good, 300 is fair, 200 is poor and 100 is very poor.)

If we can avoid an early frost or any other unforeseen calamity, we are headed towards a record setting yield.

soybeanfieldIt’s no secret that corn and soybean prices are sharply lower in the past 12 weeks. Corn and soybeans have lost nearly a third of its value since early May. In southern Minnesota, corn that was worth $4.50/bu. in early May is closer to $3.10/bu. today. Soybeans that were worth $14.40/bu. in late May are now worth $10.50/bu. Weather has been favorable and, assuming we don’t have an early frost, the chances are good that prices will stay low through harvest.

I suspect that the favorite marketing ploy at harvest will be to store the grain (as much as possible) and wait for better prices after harvest and into the spring of 2015. So, what are the prospects for higher prices next spring?

My analysis looked at years since 1990, when Minnesota monthly corn prices (as reported by NASS) fell significantly from spring to harvest. By significant, I mean tears when prices fell at least twice as much, on a percentage basis, as a “normal” decline from spring to harvest.

For Minnesota corn, I found 9 years when the price at harvest was at least 17% lower than they were in the previous May (planting season): 1990 (-17%), 1992 (-19%), 1994 (-18%), 1996 (-25%), 1998 (-25%), 1999 (-20%), 2000 (-18%), 2004 (-21%), and 2013 (-24%). For the record, if Minnesota corn prices are at $3.00/bu. at harvest, that will represent a 32% decline from the average price of $4.43/bu. in May – a larger decline than all of the years considered here. What do all of these years have in common (beyond the price decrease)? In each of these years – like 2014 – the corn market was building larger ending stocks.

How did prices behave after harvest in each of these years? Keep in mind that there is a strong seasonal tendency for cash corn prices to rise from October (harvest) to the following May (spring). In Minnesota, the price in May is higher than the previous harvest price in 3 out of 4 years (75%), with an average price increase of 12%. In the nine years cited here – years similar to the current year in terms of building stocks and sharply lower prices – prices increased in 2 of 3 years (67%), but the average increase in price was only 4%. A 4% increase, applied to a $3/bu. price at harvest, has us looking forward to $3.12/bu. corn next spring. Ouch.

For Minnesota soybeans, I found 7 years when the price at harvest was at least 14% lower than they were in the previous May: 1994 (-22%), 1997 (-23%), 1998 (-17%), 2000 (-14%), 2004 (-42%), 2008 (-18%), and 2013 (-16%). If Minnesota soybean prices are at $10.00/bu. at harvest, that will represent a 31% decline from the average price of $14.40/bu. in May – a decline larger than all years except 2004. Again, like corn, in each of these years the soybean market was building larger ending stocks.

How did prices behave after harvest in each of these years? Like corn, there is a strong seasonal tendency for cash soybean prices to rise from October (harvest) to the following May (spring). In Minnesota, the soybean price in May is higher than the previous harvest price in almost 4 out of 5 years (79%), with an average price increase of 13%. In the seven years noted here, prices increased in 4 years (57%), and the average price increase was a mere 3%. A 3% increase, applied to a $10/bu. price at harvest, has us looking forward to $10.30/bu. soybeans next spring. Another ouch.

What are the prospects for higher corn and soybean prices next spring? Not very good.

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