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Cash Players vs. Paper Players

TAGS: Marketing
Cash Players vs. Paper Players

I have had a lot of calls as of late from producers who are telling me they are apprehensive to make any new crop sales. Basically because the elevators are saying they are having a hard time finding any available bushels, and everyone is talking to someone who has a cousin or uncle  saying their current soil moisture levels are absolute the worst they have ever seen. That is what I call the "cash" side of the argument. Tight supplies, strong cash basis, and dry conditions out your back door. Understandably a bullish argument. 

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On what I call the "paper" side of the equation, the funds, indexes, swaps, etc., they seem to be looking at an entirely different picture. They are looking out past the upcoming USDA report, and recognizing that the next major focal point in the trade will be the USDA Outlook at the end of February. Since the USDA traditionally uses trend-line type yields. It wouldn't surprise them to see something like a 160-163bpa corn yield and a 42-44bpa type soybean yield. If the USDA makes similar estimates to other analysts who are predicting the US could plant close to 100 million corn acres and close to 80 million soybean acres next year, then we could be starting off the season with huge supply side numbers in the balance sheets. Some analysts are already throwing around numbers like a 15 billion bushel corn crop and a 3.0 billion plus carry. There is also talk starting to circulate of a soybean carry in excess of 500 million. 

What you have to understand is that the "paper side" of the trade is deeply concerned that without another major weather complication supply could quickly overwhelm demand. Just take a look at a couple of simple corn numbers. Start with domestic ethanol demand. For the past several years we have been increasing our domestic demand for corn by 500,000,000 bushels or more each year because of surging ethanol demand. Sorry, no longer the case. Many actually believe ethanol demand has peaked, therefore we will no longer be able to pencil in and an additional 500 million bushels in demand each year. In fact as you can see from the numbers below we are now forced to reduce overall demand. 

Annual Corn Bushels Used for Ethanol Production  

  • 2006 = 1.575 billion bushels 
  • 2007 = 2.15 billion bushels 
  • 2008 = 3.2 billion bushels 
  • 2009 = 3.6 billion bushels 
  • 2010 = 4.2 billion bushels 
  • 2011 = 4.9 billion bushels
  • 2012 = 5.0 billion bushels
  • 2013 = 4.5 billion bushels (current USDA estimate). 

As you can see we had been comfortably adding close to 500 million plus bushels per year to our total corn demand equation. Now all of a sudden demand for ethanol has leveled-off and we are in fact actually reducing our corn used for ethanol by 500 million bushels. 

Corn exports are not exactly setting any new records either. In fact they are no longer increasing like they once were. Instead traditional US buyers are now sourcing grain and soy from other sources. Below are the recent corn export numbers: 

Annual US Corn Export Demand  

  • 2007 = 2.25 billion bushels 
  • 2008 = 2.45 billion bushels  
  • 2009 = 1.75 billion bushels 
  • 2010 = 2.050 billion bushels 
  • 2011 = 1.950 billion bushels  
  • 2012 = 1.650 billion bushels 
  • 2013 = 1.15 billion bushels (Current USDA estimate, maybe even lower). 

To put into real simple terms, the "paper" side of the market, who controls the lions share of money-flow, believes if the "supply" side of the equation moves aggressively higher on record acreage, and the "demand" side of the equation doesn't grow as quickly (or perhaps even shrinks), then we are simply going to end up with more available bushels and cheaper prices. Understandably a very-bearish argument.

Call it the "Hatfields vs. the McCoys," the "Have's vs. the Have Not's," or the "Producer's vs the Trader's." Whatever you want to call it, it doesn't matter, but you need to understand it. Who is going to be right and who is going to be wrong...I couldn't tell you! From where I sit the "smart" money looks to be betting on the downside break. Let's just keep in mind however the "smart" money was betting on the same break last year, and the Producers who didn't flinch or sell on the winter/spring break walked away the big winners. This is essentially the same type of setup we are looking at this year. The managed money could pressure the trade well into and through the "Feb USDA Outlook" on thoughts of massively increasing supplies. The question is will adverse "weather" once again bail us out. Remember the MAR13 contract traded down to $5.11 per bushel on May 11th of last year before finally being saved and running to new all-time contract highs at $8.45 on August 10th. The question is if we wouldn't have logged the hottest year in US history, where would prices have ended up? and will that be what happens this year?

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