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The WPI Spotlight showcases the best analysis recently written by our analysts.

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In my near 40 years in the business, no truer words have been spoken that what I've read in Ag Perspectives. WPI Client and Risk Manager

Farewell Bob, We Will Miss You

By Gary Blumenthal

We regret to inform long-time Ag Perspectives readers of the passing of Robert Kohlmeyer. Bob had a long and prolific career, first with Cargill and then with WPI. 

He spent the first 34 years of his professional career doing everything from managing Cargill’s elevator operations to leading the company’s futures trading desk. He was a key trader for the company during the so-called Great Grain Robbery with the Soviet Union in 1973, and later the grain embargo against the same USSR in 1980. He would later testify several times before the U.S. Congress on the machinations of the grain trade and government policies. In a classic phrasing by Bob before a House committee in 1978 he said,

The role of the private exporter in this process is to move commodities from surplus-producing areas to deficit consuming areas in the most efficient and timely manner possible. 

Bob brought his amazing insights and expertise from Cargill to World Perspectives in 1990 where he continued to educate both clients and government officials for another 30 years. Younger analysts would leave a company meeting and talk about the pearls of wisdom that would drop from Bob’s lips. He would cite old market sayings like “the market is bigger than me and thee”; and “he is your friend, but he is mine for an eighth”. While he cited the advantages of directly engaging other human beings in the Chicago trading pits, he fully embraced the digitalization of the industry and talked about the advantages of modern telecommunications.  

Bob was a history major at Princeton and saw the cyclicality of the agricultural commodity markets. Thus, in his later years he wrote a series of articles called Common Thread in which he detailed the commonality of the present with past market events. His last article for WPI was late last year before illness stole his energy. His wife Julie says that it was his hope that he could resume writing for Ag Perspectives that kept him going through his illness. Whether you knew Bob Kohlmeyer or not, the legacy of his work has left a lasting impact on our industry. We will miss him dearly.

 

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Market Commentary 8-Jan-2021: Soybeans Rally on Poor Argentine Conditions; Corn Stabilizes Ahead of WASDE

This article originally appeared in the 8 January 2021 issue of Ag Perspectives

By Matt Herrington

The CBOT opened on a weaker note following yesterday’s selling pressure but quickly found buying support and traded higher. Soybeans were the upside leader on Friday with soymeal trading higher as well. Soyoil struggled as the sell leg of soy complex spread and wheat traded a mostly weaker day as well. While the corn market closed higher, the day was quiet and saw bulls mostly unwilling to commit to prices near $5.00. The corn market seems content to hold a sideways pattern heading into the January WASDE. 

Next week’s WASDE report is expected to feature reductions in the U.S. corn, wheat, and soybean carry out for the U.S. balance sheet. Analysts surveyed by Dow Jones expect USDA to trim the U.S. corn carry out by 103 Mbu and reduce wheat and soybeans by 36 and 3 Mbu, respectively. The reductions are based on a combination of lower production forecasts for the U.S. corn and soybean crops as well as increased exports for all commodities. 

The South American weather remains moderately bullish with last night’s rains across Mato Grosso delivering just 0.15-0.3 inches of precipitation. Moderately heavy rain fell across Sao Paulo, Goias, and Minas Gerias but nearly all of Brazil has seen below-average precipitation over the past two weeks. Temperatures will be moderate, which will help offset some of the effects of below-average rainfall. 

Argentina’s weather has shifted to favor more frequent rains over the past two weeks, but the northeast of the country remains in a drought. Recent rains across the Buenos Aires province have aided crops there but soil conditions in Santa Fe and Cordoba (which account for some 40-45 percent of the country’s corn production) remain dry. The current two-week forecast calls for a return to normal precipitation across Argentina, but WPI notes those forecasts have been too optimistic this year. Consequently, WPI clients should plan on continued dryness for Argentina until realized rainfall proves otherwise. 

China’s Dalian Commodity Exchange launched its new live hog futures contract overnight and the result was a testament to the efficiency of futures-based price discovery. The contract fell 12.6 percent by the closing bell, setting at 28,290 yuan versus its listing price of 30,680 yuan. Trading volume was expectedly thin, and traders blamed the selloff on the high listing price and expectations for growing hog supplies this year. 

Argentina’s strike saga continues. Yesterday, Argentina’s grain inspections union announced the end to a strike that began on 9 December after reportedly reaching an agreement with exporters. Meanwhile, the country’s corn producers met with the Ag Minister regarding the temporary suspension of corn exports. Argentine farmers are threatening a three-day strike that is scheduled to begin 11 January. The government has said it will “review” the export ban. 

The weekly CFTC report showed funds committed buyers in the grain market but emerging as net sellers in the soy complex, through Tuesday’s data collection period. Funds sold 20,000 contracts of soybeans while liquidating a modest portion of their soymeal and soyoil longs while commercials were eager buyers on any selling pressure. The fact funds were net sellers last week and still hold a smaller-than-expected long position in the soy complex is likely to be bullish next week’s trade. 

As one might expect from Monday’s crash in the cattle markets, funds were net sellers in the cattle markets this week while commercials took the opportunity to lift some hedges. Notably, funds remained net buyers in the hog market, though that position has likely been pared back some since Tuesday. 

Outside markets were higher despite mixed economic data from around the world. U.S. jobless claims increased for the first time in seven months in December while economic data from Europe was mixed this morning. The S&P 500 traded to a fresh high today while the Dow posted gains but could not meet yesterday’s record. The U.S. dollar ticked higher following yesterday’s gains with the euro trading lower. Crude oil jumped 3 percent higher on Friday, marking a roughly 8 percent gain for the week as Saudi Arabia’s commitment to production cuts supported the market.  

Notable Market News

USDA reported 213,350 MT of soybeans sold to unknown destinations for 2020/21 and 130,000 MT of soybeans sold to known destinations for 2021/22. The buyer of the 2021/22 shipment is thought to be China.

The Buenos Aires Grain Exchange increased its forecast of the Argentine 2020/21 wheat crop from 16.8 MMT to 17.0 MMT. 

South Korea declined to purchase wheat after it received offers for its latest tender of 65,000 MT of feed wheat. 

French soft wheat exports to non-EU destinations fell in December from the season-high shipment pace set in November. Soft wheat shipments totaled 797,000 MT. 

Indian sugar mills are booking export contracts as fast as possible after the Indian government approved a subsidy for overseas exports. Global sugar prices are trading near 3½ year highs but Indian prices have been falling due to overproduction and heavy domestic stocks. 

The Indonesia Palm Oil Association is planning to request that the government revise its biofuel blending rates or lower the palm oil export duty with prices at 10-year highs. The group said the sharp rally in palm oil prices is widening the commodity’s premium to crude oil and making it a less viable option for biodiesel feedstock. 

The Philippines is expected to import 1.69 MMT of rice in 2021 to cover its domestic needs as supplies tighten. 

Corn 

FUTURES

March CBOT corn futures traded a mostly quiet day, ending 2¼ cents higher after coming within a half-cent of the psychologically important $5.00 mark. The market has turned sideways from its trend higher this week as traders await the January WASDE. This is allowing momentum indicators to cool off, though the RSI is still extremely overbought at 86.2. 

Looking forward, unless USDA surprises the market with a substantially bullish report, $5.00 futures look overvalued relative to the U.S. balance sheet. WPI is not convinced USDA will make sufficiently large reductions to the Brazilian or Argentine corn production figures to create a serious tightening of the U.S. balance sheet, especially given that exports are already forecast at a record large 2.65 Bbu. WPI expects a modest tightening of 20202/1 U.S. corn stocks based on lower 2020 production and modest increases in exports and feed/residual use. 

WPI also notes that corn and soybean futures are heading into a period of seasonal weakness that tends to occur with the start of the South American harvest. In the past six years, the spot corn contract has increased during January/February in two years, while the remaining four years have seen declines. While six years is hardly a large sample size, it does highlight at least the recent seasonal trends of corn futures.

Soy Complex 

FUTURES

March soybean futures traded sharply higher and posted a new contract high on a combination of continued fund buying, disappointing weather in South America, and deterioration of the Argentine crop as it heads into the pod-setting stage. The contract settled 19½ cents higher after finding support at $13.48 during the overnight session. That support carried the market higher through the rest of the overnight session and helped stave off selling pressure at the morning’s opening bell. 

At 11:00 AM ET, a massive wave of buying hit the soybean market and pushed March futures above their old contract high of $13.78¼ to a new contract high. Over 6,200 contracts were traded in the span of two minutes, which is certainly enough to move markets higher, but WPI is unaware of any fundamental news that broke at that time. Passing the old contract high likely triggered buy-stops, but that doesn’t explain the start of the rally. More than likely, it was a large buy order from one or more funds that triggered market makers to pull offers higher. Or possibly it was Adam Smith’s “animal spirits”. 

Fundamentally, one supportive new item was the fact the Buenos Aires Grain Exchange said only 27 percent of Argentina’s soybean crop is rated good/excellent, down from 42 percent last week. The share of the crop rated poor increased to 17 percent from 7 percent last week. The Argentine crop is heading into the pod setting stage and is doing so in poor condition with limited soil moisture and only scattered showers in the forecast. 

China’s Dalian soybean futures contract settled slightly lower on Friday but remains priced at an amazing premium to U.S. prices, valued at the equivalent of $17.76/bushel. Chinese prices suggest China has ample opportunity to arbitrage and procure U.S. soybeans profitably, but the U.S. cannot afford more soybean exports in MY 2020/21. Consequently, WPI views the Dalian futures market as a signal of how much demand rationing U.S. markets still need to accomplish. 

Soymeal futures posted another bullish outside day on the charts but were unable to challenge their contract high. The market traded lower and found support at $430 before rallying and discovering selling pressure at $442.80. That yesterday’s selloff found buying support today is a positive sign for bulls, as is continued strength in U.S. and Argentine export offers. 

Soyoil futures turned slightly lower on Friday as profit taking and bull spreading from the soymeal market took their toll. The March contract fell 20 cents/cwt in a relatively quiet day of trading that saw the market trade an inside day on the charts. Yesterday’s high was resistance for today’s trade while the market found support at 43.43. Malaysian palm oil futures were lower yesterday and only managed fractional gains today, and the lack of buying interest in international vegoil markets capped CBOT rally potential today. 

Wheat 

FUTURES

Wheat traded both sides of unchanged on Friday, but the markets had a decidedly weaker tone. News that the Buenos Aires Grain Exchange sees a larger than expected wheat crop for 2020/21 pressured U.S. futures. In the U.S., USDA is expected to increase its forecast of winter wheat seedings in next week’s WASDE, and the prospect of larger supplies helped push futures lower as well. 

March Chicago futures settled 3½ cents lower, briefly trading below the 10-day MA and toward trendline support at $6.32 but finding support between those two points. March Kansas City wheat settled 3¾ cents lower, trading below trendline support to the old resistance level of $5.86-5.87, which is now trading-range support. If Chicago wheat can hold its position above the trendline in next week’s trade, additional gains are likely. However, if the market falls below that level, a deeper correction to $6.07 or lower is likely. 

Fundamentally, the latest U.S. Drought Monitor is showing some improvement in the southern Plains, which is easing concerns for the winter wheat crop. Russia’s winter wheat growing region is slated for rains this week and next, which will further east drought conditions in that area. Except for a few brief cold snaps, temperatures in Russia’s crop-growing regions have been warmer than average, again benefitting winter crops. Western Ukraine and southeast Europe have received favorable precipitation this winter with limited winterkill concerns, which is boosting production ideas for that region this summer. 

Cattle

FUTURES 

Following the extreme volatility on Monday and Tuesday, live cattle futures have been comparatively boring, trading slightly lower or mostly sideways for the rest of the week. The spot February contract settled 50 cents/cwt lower on Friday with disappointing cash trade weighing on the market. April futures fared better, falling just 20 cents while the October and December contracts posted fresh contract highs. Open interest has been growing for the deferred contracts with speculative traders looking for a widespread commodity boom. WPI continues to advise producers to makes sales/hedges with deferred futures posting new highs. 

Cash cattle markets were steady to start the week but turned lower Thursday and Friday. Friday’s trade was light and saw prices trade down to $110/cwt live from $112-113/cwt earlier in the week. Dressed cattle were mostly steady at $175/cwt. Boxed beef prices were higher this afternoon with the Choice cutout rebounding 99 cents/cwt and the Select cutout rising 10 cents. 

Feeder cattle futures continue to work their way sideways with limited follow through buying developing after Tuesday’s reversal. Yesterday’s weaker corn prices helped feeder cattle firm slightly, but those gains were largely undone today with profit taking and position liquidation. WPI notes that expected placement margins (i.e., margins for feeder cattle entering feedlots this week or next) are negative and are the worst for the first week of January in the past five years. That bodes poorly for cash feeder cattle demand and prices. 

Lean Hogs

FUTURES 

February lean hog futures traded lower for the fourth day in a row, falling 42.5 cents/cwt by the day’s close while the April contract settled 22.5 cents lower. February futures look to remain on the defensive with cash hog prices weakening steadily while the April contract is trying to establish support and turn sideways. June, July, and December futures all posted fresh contract highs but settled lower as the same speculative interest driving deferred cattle futures is present in these markets. 

The CME’s new Pork Cutout futures traded lower on Friday, with the February contract falling 20 cents/cwt in light trading volume of 50 contracts. 

Negotiated hog prices were 59 cents lower on the morning National Daily Direct report while the afternoon report was not released due to packer submission problems. The afternoon pork cutout report showed the cutout trading $1.18/cwt higher with support coming from picnic shoulders and hams. 

Closing Futures Prices 

COVID Impact on Ethanol Triggered Thinking on Long Term Ethanol Demand

This article originally appeared in the 8 January 2021 issue of Ag Perspectives

By Dave Juday

The current renewable fuel standard (RFS) went into place in 2008 after the legislation was passed in the 2007 Energy Independence and Security Act (EISA); that bill raised the biofuel obligations from the original 2005 Energy Policy Act’s initial RFS. Of course, COVID in 2020 had a major impact on fuel demand, which also adversely impacted biofuel demand.

So far, the monthly average of vehicle miles traveled in 2020 is 6 percent below 2008, and still hasn’t recovered to the level of any month since 2008. To put it in further context, vehicle miles traveled in 2019 were 10 percent higher than in 2008. The drop is significant as the chart below shows.

What is also at work, as the RFS faces its final two years of statutory volume obligations (starting in 2023, the annual obligations are up to EPA to set without the guidance of the statutory levels prescribed through 2022) is the trend in fuel efficiency. Since 2008, miles per gallon for cars and light duty trucks is up 22.5 percent.  

In other words, extrapolating the trend in miles, retail motor fuel consumption in 2020 is about 33 billion gallons lower than 2008. If it were not for the increased mileage efficiency, consumption would have been down only about 8 billion million gallons. Assuming a blending rate for ethanol of 10.5 percent, the increased miles per gallon have added about 2.5 billion gallons of insult to the COVID disruption economic injury.

Looking long term, this is significant for two reasons. First, from a practical perspective, after 2022, EPA has very wide discretion to set the annual required volume obligations. The agency doesn’t have to go through as rigorous a process to justify waiving certain required volumes and without that process there are fewer ways to challenge EPA through the courts. Think about the 2016 ethanol volume waiver under the inadequate domestic supply mechanism in EISA, or the current controversy about SREs.

Second, is the role that climate issues will play moving ahead. In 2020, EPA and the Department of Transportation issued a regulation on mileage, The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks. In that, EPA projects that by the 2030 model year for cars (almost the same time frame as 2008 to 2020), the mileage efficiency required for new cars will be 40.5 miles per gallon (mpg). The published regulation states that as a rule of thumb, 20 percent lower than the mileage compliance values. If that is right, mileage efficiency in 2030 will be about 32 miles per gallon, or about 24.5 percent higher than 2020’s estimated real world miles per gallon of 25.69 – and a bigger improvement in mileage efficiency than was experienced from 2008 to 2020.

Even if miles traveled continues to increase – which is questionable given demographics of retired baby boomers no longer commuting and more “distance” working among a smaller workforce (commuting is one of the key drivers of miles traveled), that mileage efficiency change presents a headwind for ethanol demand with fewer statutory protections under the RFS. 

Remembering Carole Brookins

This tribute was originally published 24 March 2020.

It is with a heavy heart that we share with you that World Perspectives founder Carole Brookins died last night after succumbing to the COVID-19 virus. She was 75 years old. She fell ill after returning to Palm Beach from Paris two weeks ago. She had a storied life, breaking barriers and making things happen.

To no one’s surprise, Carole graduated cum laude from college and began her career as a municipal bond underwriter in Chicago. She then became a market reporter at the Chicago Board of Trade where she came to the attention of the second largest stock brokerage firm, E.F. Hutton. In the 1970’s she rose to become their Vice President of the Commodity Department. A little-known fact - Carole created, developed and presented the firm’s two-record album on investing called, “Learn a New Language: Money.”

Carole left Wall Street to create World Perspectives in 1980, saying she was motivated by the grain embargo against the Soviet Union since it revealed the information gap between policymakers and the trade. Because of her intellect and spunk, she was in high demand throughout her life giving public speeches and providing valuable insight. And, she attracted Washington’s most powerful as headliners at the annual conferences she would orchestrate. 

One woman who met Carole back at that time responded to her passing yesterday by saying, “Carole was a powerful role model for me and many other young staffers on the Hill, in trade, business and agriculture.”

Presidents appointed her to various advisory committees and, perhaps hearkening back to her municipal bond days, she led a multinational effort in Asia in the 1990’s to build out secondary cities and create rural linkages. She was on corporate boards both before and after her appointment and U.S. Senate confirmation as U.S. Executive Director at the International Bank for Reconstruction and Development (the World Bank).   

She did not slow down after her stint as a top government executive. She continued giving speeches and working through various partnerships to make economic linkages where she knew they should be but did not exist. 

Carole derived her mojo from engaging with her hundreds of friends and acquaintances located around the world. It is unknown how many different countries she visited during her lifetime, but she likely missed very few. In her final years, she split time between her two favorites, the U.S. and France. Reflecting her love of both countries, two years ago Carole invested her time, her energy and her personal wealth to create the First Alliance Foundation, which memorializes the historical Franco-American relationship.

Carole was smart, she was industrious, she was always a whirlwind of ideas. She was a dear friend and close advisor. This virus took down someone very special and the world will be worse off for it. We at World Perspectives will miss her very much. 

 

Updated Analysis: Exporting Corn through U.S. Beef and Pork

On behalf of the U.S. Meat Export Federation (USMEF), in 2018 WPI delivered the results of an updated study aimed at quantifying the value red meat exports deliver to U.S. corn producers. The original 2016 study, as well as the 2018 follow-up, also quantified the impact that red meat exports have on select corn co-products such as distiller’s dried grains with solubles (DDGS). The updated 2018 study concluded that 2018 beef and pork exports will use a combined total of 14.9 million tons of corn and DDGS, which equates to an additional 459.7 million bushels of corn produced – an increase of 29 percent over the 2015 projections.

 

 

Study Updates Value of Red Meat Exports to Corn Growers, Provides More Details on Soybean Industry Impact

Beef and pork exports added 85 cents per bushel to the price of soybeans and 39 cents per bushel to the price of corn in 2018, according to the latest report by World Perspectives Inc. (WPI). Over the past three years, WPI has analyzed the impact of U.S. red meat exports on the value of domestic feedgrains and oilseeds.

Among new information included in the latest report are statistics that point to the value of red meat exports to U.S. soybean producers. According to WPI, the market value of pork exports to the soybean industry in 2018 was $783 million. WPI’s updated study shows that without red meat exports, U.S. soybean farmers would have lost $3.9 billion last year and U.S. corn growers would have lost $5.7 billion.

The updated report includes a projection of domestic feed use impacts based on both the long-term 10-year baseline projections for meat exports and a special analysis of the critical importance of the proposed U.S.-Japan trade agreement. USMEF has also prepared state-specific statistics on the value of red meat exports to the top 15 soybean states and top 10 corn states.

The World Perspectives study has been a very useful tool in quantifying the importance of red meat exports to our corn and soybean member organizations,” said USMEF President and CEO Dan Halstrom. “Results of the study and the subsequent updates demonstrate that maintaining global market access for U.S. beef and pork is critical to continued growth and to the continued value that meat exports bring to corn and soybeans.”

The updated study also looks forward, projecting that U.S. pork exports are expected to generate $8.68 billion in market value to soybeans from 2019 to 2028. Red meat exports are expected to generate $19.1 billion in market value to corn and $3.1 billion in market value to distiller’s dried grains with solubles (DDGS) in that same period.

“When the original study came out a few years ago, it gave us a good look at the value of U.S. beef, pork and lamb exports to corn and soybean farmers,” said Dean Meyer, a corn, soybean and livestock producer from Rock Rapids, Iowa. Meyer, a member of the USMEF Executive Committee, noted that the WPI study continues to support the fact that exporting red meat drives demand for livestock, in turn driving demand for livestock feed.

“The updated study offers a fresh look at corn and goes a little deeper into soybean meal and what red meat exports mean for soybean growers. As grain farmers, we are aware that meat exports add value by increasing the volume of soybean meal and corn used to feed cattle and hogs, but the numbers in this study provide a clear picture of just how important those exports really are,” said Meyer.

USMEF and the National Corn Growers Association initially commissioned WPI to quantify the impact of U.S. beef and pork exports on corn use and value in 2016, using 2015 data. Record-setting growth in red meat exports since 2016 – along with an uncertain global trade climate that has developed since the original study – led USMEF to request updates. Using final 2018 data and new 2019 to 2028 USDA baseline projections, WPI updated its analysis of red meat exports’ impact on corn in 2018 and expanded the analysis of the value of pork exports to soybeans.

Highlights from the updated WPI study include:

  • Since 2015, meat exports represent the fastest growing category of corn and soybean meal use.
  • In 2018, exports accounted for:
    • 14.6 percent of total U.S. beef production;
    • 25.7 percent of U.S. total pork production;
    • 459.7 million bushels of corn utilization – with a market value of $1.62 billion at the year-average market price;
    • 2 million tons of soybean meal disappearance — the equivalent of 84.2 million bushels of soybeans with a market value of $783 million.
  • In 2018 beef and pork exports added an estimated $0.39 to the average 2018 corn price of $3.53/bushel, and pork exports added $0.85 per bushel to the average 2018 soybean price of $9.30/bushel.
  • Since 2015, one in every four bushels of added feed demand for corn was due to beef and pork exports, and one in every 10 tons of added feed demand for soybean meal use was due to pork exports.
  • Over the next 10 years, meat exports are forecast to generate a projected $30.8 billion in cumulative annual market value to corn and soybeans based on USDA’s long-term forecast for crop prices.
Comprehensive Feasibility Study: U.S. Beef Cattle Identification and Traceability Systems

In response to the 2016-2020 Beef Industry Long Range Plan’s key strategic objective, “Secure the broad adoption of individual animal ID traceability system(s) across the beef community to equip the industry to effectively manage a disease outbreak while enhancing both domestic and global trust in U.S. beef and ensuring greater access to export markets,” WPI researched and wrote the industry’s most foundational analytical document on animal identification and traceability. The report offers a series of conclusions based on, among other methodologies, a 600-plus respondent quantitative survey, 90-plus interviews with industry participants from all sectors), and a deep-dive review of 9 global systems supported by direct interviews with foreign industry association and government officials.

Since the report’s initial rollout at the 2018 NCBA Convention in Phoenix, AZ, WPI has presented findings to and led constructive discussion with over 30 audiences of stakeholders from across the industry and beyond.

 

 

 

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