Howdy market watchers. Well, we’re 10 days in, and it’s already an unprecedented year. Last week’s events at our nation’s Capitol still does not seem possible. There is undoubtedly more to the story for which we may never truly know or long may know of the full details.
Nevertheless, it is troubling as is the rest of our country’s current state of politics. The more we see headlines reporting of events spiraling out of control, the greater disconnect it seems all this has with life on main street, and yet, Wall Street continues to soar. The Dow Jones made another new record this week surging above 31,000 on Thursday. The U.S. dollar is at the weakest levels since April 2018, which continues to support commodity bulls. Agriculture and energy have in particular been on the move. WTI crude oil surged Friday in a late rally that brought the March contract up to $52.74, not seen since the February pre-COVID-19 era.
In a surprising sweep, Democrats won both Senate runoff races in Georgia that resulted in a 50-50 power split in the U.S. Senate with the deciding vote to be that of Vice President Elect Harris. While a Democratic House, Senate and executive branch is cause for concern in terms of increased taxes and regulations, the markets are focused on greater fiscal stimulus as further fuel for the rally amidst daily records of COVID cases, deaths and a spreading variant. Going forward, market volatility is sure to intensify and upward momentum looks likely. However, it is important in this environment that producers keep risk management objectives in perspective. It is easy to get complacent in frothy markets where government programs are less likely to trigger given price levels.
Having said that, there still is an important election upcoming for agriculture producers in choosing either ARC (Agriculture Risk Coverage) or PLC (Price Loss Coverage) for USDA programs. The deadline for making the selection is March 15 for the 2021 crop year. For greater insight on this topic for wheat producers, we turn to Bambi Sidwell of Sidwell Insurance to talk through the considerations. For PLC wheat base, price tracking for wheat does not start until June 1, 2021, tracked until May 31, 2022, the full marketing year. The price is tracked as wheat is sold by producers on all three U.S. wheat exchanges. If the average price on all three U.S. exchanges is below the reference price of $5.50 for the marketing year time period referenced above, PLC will trigger a payment. Since we are so far from June 1, 2021, it is difficult (read impossible) to know where prices will be at that time.
The alternative is ARC. ARC-CO (county) has to do with county level yield losses. If the county triggers a loss, less than 86% of the county benchmark yield, then ARC-CO triggers a payment. Payment will not be more than 10% of the county benchmark. With adequate moisture in much of Oklahoma, we do not expect many areas in the state to have countywide wheat yield losses with the crop looking good in most areas. Wherever you are located, consider the condition of crops and the likelihood of countywide losses for ARC-CO to trigger in selection that option. Of course, conditions can change between now and harvest (including freeze, hail, etc.), but we can only judge the crop at the present time and perhaps long-term weather forecasts in making a decision by March 15.
The price, though upward trending at the current time, also is an unknown as to where it may be between June and December 2021, the time when most wheat is sold and therefore the time when the majority of the PLC marketing year average price is set. With the current information, it is looking like PLC may be a better option for wheat base acres given that it seems we could be more exposed on the price side versus yield for 2021. Furthermore, there also is crop insurance coverage for production yield losses, so producers do not have to be reliant only on ARC for yield protection. We do not know at this time if PLC will trigger a payment for 2021. However, if it does not, it probably means that the price of wheat is favorable and price protection through PLC was not as necessary. If you have base acres in other crops besides wheat, call Sidwell Insurance at (800) 299-2408 to discuss the pros and cons of ARC versus PLC.
This next week will help lend some insight on market direction with USDA’s monthly WASDE, Crop Production, Grain Stocks and Winter Wheat Seedings reports at 11 a.m. Tuesday. This is one of the more important reports of the year, so expect some excitement following the release. While South America’s moisture situation has improved over the last several weeks, this demand-driven market at present is expected to see further tightness in the global balance sheet. Dryness concerns in Argentina and 15%-20% of Brazil continue to ignite markets, as have countless union strikes throughout the supply chain in Argentina. Just as deals were struck with crushers and now port-side inspectors and tugboat operators that ended Thursday, Argentine farmers are not expected to start protesting on Monday. Such events amid strong demand from China for soybeans and corn have added $0.75 to corn futures in one month and $2.20 to soybean futures. Managed funds have continued to add longs in corn and Chicago wheat, while trimming the net long in soybeans and derivatives as well as KC wheat.
Expectations are for slight yield reductions in U.S. corn and beans as well as production, tighter U.S. ending stocks for corn, beans and wheat, and higher planted wheat acres among the classes and overall. Versus USDA’s previous estimates, corn and soybean production estimates are expected to decline in both Brazil and Argentina, while world ending stocks also are expected to slim for corn, beans and wheat. We will only know how much of these expectations are priced into the markets after seeing the market’s reaction to Tuesday’s numbers, depending on where they come in. Be ready for heightened volatility and protect futures positions with options if need be to stay in the game. Where the USDA pegs China imports of soybeans and perhaps corn, more importantly, will be central to the move. I am working on explosion positions for clients, so give me a call if you’re interested to position for major short-term moves on the release.
March soybeans closed the week near $13.75, corn $4.96 and July new crop KC wheat at $6.02½.
Higher grain prices have weighed on the cattle market in recent weeks. After Monday’s big selloff to start the new year trading, March feeders finished the week at $136.825, while May settled at $140.625. Live cattle have held up better, with April fats finishing the week at $119.20 versus October at $118.425. Boxed beef remains steady, although surging COVID cases continue to overshadow and stymie recovering restaurant demand. Cattle producers should consider upside protection on corn ahead of Tuesday’s report as feed grains could become an even more meaningful headwind to the cattle market in the months ahead.
If you’re ready to explore the markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss strategies to trade these markets. Self-trading accounts are also available. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place. Remember, I am on-site at the Enid Livestock Market on Thursday, sale day. Wishing everyone a successful trading week.