The corn crop is big and looks to be getting bigger. We never have a year of “perfect” and this year we did not get off to a stellar start. We have caught stride and are entering pollination with ample moisture and moderating temperatures. The technical targets are sub-4.00, we saw a swift 60ish cent drop in the month of June and have been sagging ever since. I believe we are trading in a reasonably narrow range (low option volatility would suggest the same) and are approaching value. Basis will likely be more active than futures as we transition from old to new crop, farmer holdings of inventory (table attached) are much larger than normal and the need to create space prior to harvest is not working in the farmer’s favor. The current stout basis – driven in part by positive ethanol margins – should transition as a reluctant seller is forced to let go of ownership. We work with one elevator system that has less than 10% of normal farmer sales on the books for new crop. Big crop, wealthy and stubborn grain farmer, space constraints, and limited sales are not working in the agronomic sector’s favor.  The transition from high basis to lower values could be volatile.

Strangely, the “good news” of moderating feed pricing is encouraging pork producers to add more weight to each carcass. It was recently noted that the last six weeks of pork production has been up roughly 5% year-over-year; the physical supplies are about 1.5% higher, weight accounts for the rest. This may help explain why the cutout value is unable to get off the ground. I do not see a significant shift in the price of corn that would change this motivation between now and the August expiration. 

As a business unit, pork producers are in tough economic shape – that is my “duh” statement for the day. As represented by the financial presentations in the Dells or the forward curve on futures, we are not on the path to nirvana quite yet. I would contend that it will be nearly impossible for the current forecast to play out – we will run out of money before then. There are two kinds of aberrations in the market. The first is the fun variety where the forward curve looks to be more optimistic than our fundamental analysis. If the market is willing to pay us more than we think reality will represent when we get there, fine. This avails the potential for better margins and we participate with hedges and coverage. The second kind is not so fun and is represented by our current scenario. A pessimistic outlook that offers no forward profits, it forces us to wait for the anticipated reality of the future to carry our decisions. This one is not as pleasant and requires patience (squirming?) and consistent evaluation of the market conditions.   

Do not yet fall asleep on China. That may elicit disbelief for many, stay with me on this one.  Regardless of your political affiliation, the momentum of Mr. Trump is being reflected in the equity markets and the polls. His stated position of a 60% tariff on all goods imported to the United States from China is likely a negotiating gambit rather than a hard line. The compromise could be the elimination of tariffs on U.S. goods and a moderating of this stance, all good gamesmanship and political positioning. The price of pork in China has been appreciating but is not yet near the 25 RMB/Ki necessary to consider imports. Throw in the lack of European production and if – I readily admit that is a big IF – China would initiate imports, the U.S. could be in good shape. This is, appropriately, not incorporated into market sentiment right now, a shift in behavior could be good news for pork exports. 

Lastly, the Dells trip allowed an opportunity to pay tribute to our colleague and friend, Dr. Steve Meyer. Steve will be stepping back from his current role at the end of the month and will settle into a more moderate pace. I have shared the stage with Dr. Meyer on countless occasions and always appreciate his candor, intellect and dedication to the facts. His fingerprints are all over our industry and his significant contributions will mark his legacy. The line of folks offering accolades and best wishes after Steve left the stage was notable. Steve, congratulations on a well-executed career and for using your gifts to benefit others.