December 2, 2016 ** US likely to see record corn harvest (Nov USDA @ 15.23 bil bu). US Corn harvest near complete. ** World corn carryout seen at a record high, but not quite as burdensome when compared to use. ** South American spring corn planting advancing – quickly in Brazil, slowly in Argentina. ** Ethanol margins 30-35 c/gal positive. Hogs flat/red. Dairy slightly profitable, feedlots mixed. ** US Corn should see continued yr/yr gains in exports. Black Sea, Arg, & US competing for biz. ** Funds leaning about 80,000 contracts net short corn. CFTC data Fri will include Dec options expiry.
Overnight corn trade was quiet (two cent range), finishing near unchanged by the AM break. Weekly export sales are unlikely to elicit much passion; 761,600 metric tons of new sales were 55% below last week and missed expectations for 1+ mmt. Not sure why expectations were so high given the holiday timing? New business was booked mostly to Asia (Japan & South Korea), which we would regard as somewhat positive. Sales + Shipped seen 30.1 mmt, which is nearly double the 17.1 on the books this time last year. There doesn’t seem to be a lot of change on the weather front; Brazil looks good, while the Argentine outlook is more mixed. Many areas are turning “hot and dry”, which will help advance fieldwork, but could add some stress should no rain come by mid-Dec? On the livestock front, weekly USDA report pegged egg sets up 1% yr/yr, with broilers placed up 3% yr/yr. Ukraine the latest EU/Asian country to report a bird flu outbreak. The March contract appears to be trying to decide whether it wants to carve out its own range, or “fail to earn the carry” and assume the old Dec range. In any event, we would expect commercial buying in the $3.40-$3.45 area CH, at least initially. Consider buying Jan calls for cheap, short-term coverage.
Corn spent most of the day in the green Wednesday, benefitting from bargain-buying and a sharp rally in the crude oil complex. Markets struggled to hold gains as the day dragged on – friendly reminder to not trade corn off of crude oil – and ended up closing near unchanged. Funds were viewed close to even on the day (buyers early, sellers late), and are estimated to be short about 80,000 corn. The chief beneficiary of the crude oil rally was ethanol (which makes sense); when combined with a supportive EIA report, that market rallied 6 cents in the spot. The 1.012 million bbl/day rate reported would imply a corn ethanol grind at 5.4 billion bushels/yr. Record ethanol production is likely in coming weeks; we would estimate some well-positioned ethanol companies could be earning north of $1/bu processed, though the broader Midwest average is estimated closer to 80-90 c/bu. In the corn options pit, vol remains quite depressed with straddle sellers jumping into the Jan yesterday. ATM straddles trading there for 11 cents?
Below is a weekly chart of the dollar index spanning two year. A strong dollar is not indicative of strong exports. The world is on sale and we are marked up to the world consumer. This is a very strong headwind for the ag sector and effects all facets of the industry including meat and protein prices, grain and feed values and farm machinery prices.
Rick Newman has an article on Yahoo! Finance that exposes some of the flaws in president-elect’s naive views on trade, and explains how Trump’s attempts to “bring jobs back to the US” or “keep jobs from leaving the US” will likely backfire and kill US jobs in the long run:
Donald Trump may very well be able to persuade companies like Carrier to keep jobs in the United States instead of moving them to lower-cost countries such as Mexico. But pressuring companies to accept higher production costs, which Trump is essentially doing, could easily backfire and destroy more jobs than if Trump were to do nothing.
If companies like Carrier only sold their products in the United States and competed only against other US firms, the case for keeping the jobs here would be simpler and stronger. But no country’s economy works like that anymore, and inefficiencies at any one company give competitors a pricing or quality edge. “Carrier must worry about competition from other producers, some of whom may produce all their products in low-cost overseas plants,” says economist Gary Burtless of the Brookings Institution. “If Carrier loses US and overseas business and profits because its manufacturing costs are higher than those of its competitors, the US plants may ultimately shrink or close.”
Carrier’s competitors include Trane and American Standard, both owned by Ingersoll-Rand, which is based in Dublin, Ireland; Rheem, headquartered in Atlanta; and Goodman, owned by Daikin, a Japanese conglomerate. Each has manufacturing operations all over the world. If any one company has higher costs than another—whether labor, components or anything else—its products will be more expensive than the competition and sales will most likely decline. If you can’t cut costs, the only choice often is to skimp on quality, which erodes profits even more. This is true for all appliances and just about every other sort of manufactured good.
If Trump’s corporate arm-twisting were to prevail, a company like Carrier probably would keep more jobs in the United States, at least for a while. But its sales would decline compared with competitors able to undercut it on price. Trump could pursue aggressive tariffs on imports, to force competing prices up as well. But higher prices usually lead to lower sales across the board, while hurting consumers who must purchase those products. Businesses bear those higher costs as well, and they’ll have less money to hire people if other costs go up.
If profitability at any given company were poor enough, some producers would get out of the business altogether. And none of this accounts for the possibility of retaliatory tariffs on US exports to other countries, a likely tit-for-tat outcome that would further cut into American production.
Trump seems to not understand that a private company like Carrier is not in business to maximize US jobs. Carrier’s main responsibility is to produce products for consumers (both domestically and globally) at the lowest possible cost and with the highest possible quality. Carrier also has a responsibility to its shareholders to provide them with the highest possible rate of return. As Newman correctly points out, multi-national firms like Carrier operate now in an intensely competitive global marketplace, where operational efficiency is the key to profitability, market share, and sustained existence. Persuading Carrier to bear the burden of higher labor and production costs in the US, instead of relocating production and jobs to a lower-cost country, may save some US jobs in the short-run. But that strategy is forcing Carrier to operate less efficiently with high labor costs, and will have serious negative long-run consequences for Carrier, its employees, its shareholders and its customers.
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