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BRIAN HOOPS

By Staff | Mar 27, 2015

U.S. farmers will likely use less nitrogen fertilizer this season with the cost skyhigh even though the price of natural gas, the key ingredient to make it, is down 40 percent from last year.

The reduction in usage should hit corn plantings more than other crops, since nitrogen is the key booster of corn yields.

“What we’re seeing this season is a reduction in rates,” said Ray Carpenter, senior vice president of agronomy for Farmers Cooperative in Ames, referring to nitrogen bookings. “Reduced rates mean reduced yield.”

The disparity between the steep cost of fertilizer and the lower cost of natural gas is because fertilizer inventories remain thin due to 2014 shipping backlogs and because the industry is controlled by a few big players.

“The reality is input costs don’t come down as fast as the break-even price,” said analyst Sterling Liddell, of Rabobank. Crops require nitrogen, potassium and phosphorus, with corn the single biggest user of nutrients. It takes roughly one pound of nitrogen per acre to yield one 56-pound bushel of corn. Crop specialization has made corn acres, planted year-after-year, increasingly dependent on nitrogen.

CORN ANALYSIS

Corn closed the week 4.75 cents higher. Last week, private exporters did not report any private sales.

Weekly export sales showed corn sales at 19.8 million bushels. Annual corn sales now have reached 1.439 billion bushels and are now 92 mb below a year ago.

The last USDA report forecast record demand for corn of 13.695 bb. Currently, trade is using the USDA’s February Outlook Forum forecast of 166.8 bpa for yield estimates.

Using these figures along with projected planting acres of 88.3 million, which would be below a year ago levels, actually reduces ending stocks from the current 1.777 bb to 1.6 bb.

But what happens if yields are reduced by 10 bpa? The projected ending stocks drops all the way to 732 mb. A 20-bpa decline in yield to 150 bpa reduces ending stocks to an extremely tight 265 mb.

Think a yield of 150 bpa can’t happen? The U.S. has only produced six crop years in history that are as large or larger than 150 bpa nationwide average.

And only once has it produced an average yield that the USDA is using as trendline (2014).

In fact, as recently as 2012, the national yield was a paltry 123.1 bpa. This makes this upcoming growing season explosive if a drought develops.

In the meantime, corn should find strength into the acreage report as the slow planting pace and if corn will need to buy acres into the planting timeframe.

Strategy and outlook: Producers are 100 percent sold of the 2014/15 crop. They sold 10 percent of 2015 production. They should consider selling another 15 percent at $4.65 December.

They bought calls to re-own 50 percent of previous sales.

SOYBEANS ANALYSIS

Soybeans closed the week 2.5 cents lower. Last week, private exporters did not report any private sales.

Weekly export sales of soybeans were 12.6 mb. Annual sales are record large at 1.766 bb, up 134 mb from a year ago.

Trade attention has turned to the quarterly stocks and acreage report at the end of the month. Record soybean demand should provide a bullish stocks figure while most in the trade will be anticipating a small increase in soybean acres this spring.

This could change if producers get in the fields in a timely fashion and plant more corn than previously thought. If corn tries to rally to buy acres this spring, then the market is anticipating farmers will shift to corn acres away from soybeans. If so, look for soybeans to rally as well.

Last week, NOPA reported soybeans for the month of February at 147 mb, slightly below market expectations of 148.5 mb, but above last year’s February crush of 141.6 mb.

This was the largest February crush since 2010. This growing season promises to be exciting with weather the key driving factor in price direction.

Strategy and outlook: Producers are sold 100 percent of 2014/15 production. They sold 10 percent of 2015/16 production. They should consider selling another 15 percent at $10.95 November.

They bought calls on 50 percent of 2014/15 production to re-own previous sales.

This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solution’s Research Department. 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. Trading advice is based on information taken from trades and statistical services and other sources that Midwest Market Solutions believes are reliable.

Brian Hoops can be reached at (605) 660-1155.

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