New information from the U.S. Energy Information Administration shows OPEC’s spare capacity will decline more than -22% this quarter, pushing it to its lowest levels since 2008 when oil was trading at $147 per barrel. EIA defines spare capacity as the volume of production that can be brought online within 30 days and sustained for at least 90 days. OPEC spare capacity provides an indicator of the world oil market’s ability to respond to potential crises that reduce oil supplies. As a result, oil prices tend to incorporate a rising risk premium when OPEC spare capacity reaches low levels. The lower their spare capacity, the less likely they are able to make up for production disruptions. For instance, we’ve recently witnessed some 3 million barrels per day of supply disruptions due to various outages in Canada, Libya and Nigeria. Saudi Arabia, the country with the most spare capacity, is only able to ramp up production by around 500,000 to 700,000 barrels per day though, according to one Saudi officials, though the Energy Ministry itself says it could boost production by “about” 2 million barrels a day. Still, that’s not a lot of cushion and certainly doesn’t fill the recent gap. (Source: EIA, Wall Street Journal)
A recent 2016 survey shows that “cash rents” for farmland in Iowa fell by -6.5% in 2016, which amounts to a -14.7% decline since 2013. Despite falling for a third consecutive year, the average cash rent in 2016 is still the fifth highest on record. The survey shows that across the state average rents declined $16 to around $230 an acre. The highest average district cash rent for top-quality cropland was around $297 an acre. The lowest cash rent is reported in the south central district and had an average of around $183 an acre. To be more specific, Dubuque County reported the highest average cash rent for any county at $294 an acre. High quality cropland in that county still averages about $374 an acre. On the flip side, Wayne County list the lowest average county-wide cash rent at $150 an acre. Possibly the most interesting finding form the survey is that not all land qualities saw their cash rents decline proportionately. Overall the “high quality” ground experienced a -7.5% decline, form $292 per acre in 2015 to $270 in 2016, accumulating a -17.7% decline since 2013. This is significantly more than “medium quality” ground which saw a -6.9% decline form 2015 to 2016 and an accumulating decline of -14.8% since 2013. Furthermore, “low quality” ground experienced just a -5% decline form 2015 to 2016 with an accumulating decline of -10% since 2013. I encourage everyone to check out the entire “Cash Rents” survey by visiting the Iowa State University Ag Decision Maker site.
Soybeans traders continue to talk about a “short-squeeze” taking place in the meal market and some large bear-spreaders being blown out of their short JUL16 positions. Keep in mind meal has now moved to highs not seen since late-2014 and the traditional fundamentalist are scratching their head as the “cash market” seems somewhat non-responsive. Most of the traditional fundamentalist will tell you a setup like this could end at any moment with the bullish rug being ripped out from under the market in the blink of an eye. I would agree, especially if we are talking about the markets a few years back. Today’s markets however are much more complex and different than in years past. Sector allocations and cross-hedging by the funds have added a new twist. As we can see in today’s market the funds continue to defend their extremely long position in the front-end, just as I had anticipated. Their position is not based on traditional fundamental reasoning or on historical supply and demand data. It is more complex and wide-reaching. They are trying to protect assets in various classes and dark-pools and are using markets we are not accustom to seeing them in… i.e. the soybean market! Unfortunately, as a spec I was looking for a much deeper break in price to be buyer, so I missed this weeks recent move higher. I should also point out that I’m not going to chase the market higher. Like other fundamentalists I’m afraid the music could stop playing at any given moment and I will be the one without the chair. I’m also not going to play the short side, even though I believe we are getting a little toppy. It just makes no sense to try and apply fundamental logic to a market that’s clearly not listening. Therefore my only position is to be a bull, but I simply can’t pull the trigger at these levels. As a producer I’m simply going to sit on the sideline and watch the fireworks. I’m keeping a close eye on both the NOV16 and NOV17 contracts but will need to see another +40 to +50 cents to the upside before I get more aggressive in regard to reducing additional price risk.
In the graphic I included below, I wanted to show where the soybeans were planted last year along with each states final average yield. We also color coded the graphic so you can see states that were projected to add more soybean acres and those states who the USDA thought were going to reduce their soybean acres. Keep in mind our next USDA acreage update will come at the end of June. Bears are pointing to a possible +2.0 million acre jump in planted U.S. soybean acres, in fact perhaps to a new record north of 85 million?
The USDA now estimates 56% of U.S. soybean acres are in the ground and planted vs. 36% last week vs. 56% last year vs. the 5-year average of 52%. States running behind their traditional pace are: Ohio -24% behind their traditional pace; Kansas -20%; Indiana -19%; Michigan -14%; Nebraska -13%; Illinois and Kentucky -4%. It’s worth noting however that several big production states are well ahead of schedule: North Dakota +43% ahead of their traditional pace; Minnesota +31%; Wisconsin +27%; Arkansas +22%; Tennessee +15%; Iowa +10%; South Dakota +9%; Mississippi and Missouri +8%. Depending on how you want to project planted soybean acres, I suspect there’s just under 40 million acres that still need to be planted. States that we are keeping the closest eye on are Illinois, Indiana, Ohio, Kansas and Missouri. Iowa still has about 2.5 million bean acres that need to get planted, but I have to image producer eventually get it in the ground. In comparison Illinois still has close to 4.9 million acres yet to be planted.