Corn market thoughts & perspective

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Corn Sellers:  Do you remember that sinking feeling you had on March 28 when USDA released its quarterly Grain Stocks Report that showed larger-than-expected stocks and corn futures closed limit lower?  Before the reports’ release that day, July CME Group corn futures were trading around $7.15/bu (Figure 1).  They closed the day locked limit lower at $6.76/bu.  The next week, July futures had worked down to lows around $6.17/bu and, after a brief short covering rally, found new lows at $6.14/bu in the third week of April.  So, in about a one week time period, corn price dropped about $1/bu, leaving many with unpriced old crop bushels and few sales made for the 2013 new crop.

Despite the market’s extreme volatility, perhaps it is a bit forgiving in way.  Last week, spurred by late planting concerns, July corn futures rose by $0.415/bu.  The majority of the weekly change was attributed to the limit up increase (+$0.40/bu) on Monday, April 29 due to weather forecasts calling for precipitation across much of the Corn Belt.  While eastern areas of the Corn Belt were already too wet, western portions of the Corn Belt that needed the moisture received much of it in a late April/early May snow storm.  Regardless, corn planting progress was significantly slowed this last week, and will continue to be in many areas this week as well.  USDA reported only 5% of the nation’s corn crop planted as of April 28, well behind the previous 5-year average of 31% and last year’s rapid planting pace of 49% by April 28.

I find a several things interesting about last week’s corn market trade.  First, the market’s attitude seemed to be that not having a large majority of the crop planted by May 1 would be a disaster.  While early planting typically provides the opportunity for exceptional yields, the statistical correlation between planting progress at this time of year (late April and early May) and final national yield is relatively low.  Generally, it takes getting into late May before the statistical odds of a lower national yield by late planting increase.  Additionally, the moisture (even snow) is welcomed in most areas of the western Corn Belt which is still suffering from drought.  At some point in the near future, the market might remember another catch-phrase it likes to trade: “Rain makes grain.”

Second, even though traders are coming to understand how quickly corn can be planted in the U.S., the huge technological changes in planting equipment and tillage systems allows for planting to occur quicker than ever, if weather and field conditions are right.  Planting progress data from last year suggests that nationally at least 25% of the corn crop can be planted in a seven day period.  In key corn growing states, a much larger percentage of the crop can be planted in a week.  Thus, it would seem that there is still the opportunity plant the nation’s corn crop by mid-May and not greatly impact national yield.

A third thing that I found interesting last week is the amount of market chatter about switching acres from corn to soybeans.  Talk of 1 to 2.5 million acres of corn being switched into soybeans or other crops abounded, which put some pressure on the soybean market.  However, it isn’t likely that many farmers are making that decision at this point, and wouldn’t until late May because corn production would be more profitable and they likely have already contracted and/or purchased seed to grow corn.   Further, the late planting date for crop insurance isn’t until late May for many key Corn Belt states.

Finally, despite the market’s willingness to trade the weather risk on Monday last week, growing world-wide economic concerns from Asia and Europe were easily able to suppress gains for the remainder of the week.  For Tuesday through Friday last week, July corn futures only gained $0.015/bu.  So, it appears like traders aren’t willing to make big bets about the slow planting pace yet.

A modest decrease in yield and even acres doesn’t necessarily have to have a large impact on prices for the 2013/14 marketing year.  In February, USDA projected next marketing year’s ending stocks at 2.177 billion bushels using a 96.5 million acre figure for planted acres and trendline yield of 163.6 bu/acre.  Since then, USDA’s Prospective Plantings report increased acres to 97.3 million acres.  While we won’t see USDA’s updated 2013 yield forecast until Friday, May 10 in the monthly WASDE report, many in the trade expect national yields in the 150-155 bu/a range.  This would still provide for a comfortable stocks-to-use ratio for the 2013/14 marketing year.  Interestingly, even if planted acres were decreased by 2 million acres due to late planting and switching to soybeans and national yield declined by 5 bu/acre, total production would drop by only 10 million bushels.  Even with no adjustment to use estimates, ending stocks could easily absorb this decrease without much of a price increase.  Seemingly reflecting that, December new crop corn futures increased only $0.295/bu compared to $0.415/bu for old crop July futures.

The outlook for corn production this last week was mostly negative, and therefore bullish to price, which opens the possibility for increased production problems into the growing season and still higher prices.  However, the production conditions and market events that would be needed to drive prices significantly higher are not a certainty and wouldn’t occur until well into the growing season even if they do happen (e.g., late planting impacts in late May, pollination problems in July, etc.).  For those reasons, I think the current rally in corn prices is one to use to advance sales of old crop corn.  Stronger basis bids further the incentive to price additional bushels of stored corn.  From a technical perspective, the current price rally has retraced almost 50% of its loss since the March 28 Grain Stocks report and needed to only increase another $0.15/bu to close the gap created on the chart on April 1 (Figure 1).  For the market to increase further at this time, it will require continued slow planting progress and poor weather forecasts for the next couple of weeks.  If you believe those possibilities may materialize, use a flexible pricing strategy like put options or minimum price contracts to lock in a floor price.  At this point, the only old crop bushels that should remain unpriced should be those that you are willing to risk for a summer weather market scare.

It is also important to consider some new crop corn sales as well.  December 2013 corn futures dropped from $5.75/bu before the Grain Stocks and Prospective Plantings reports on March 28 to $5.20/bu on April 23.  Since then, December corn has retraced almost two-thirds of that loss and closed last week at $5.545/bu.  That puts new crop cash bids in eastern South Dakota just over $5.00/bu.  While that is well below what most producers sold the previous years’ corn crop for, the market fundamentals for the new crop marketing year (starting September 1, 2013) are completely different than the last couple of years in that the stocks-to-use ratio could grow to over 15%.  Also different this year is that the corn price is likely to be much closer to breakeven cost of production than in the past couple of years.  In fact, some producers likely have a breakeven corn selling price over $5.00/bu, especially those that have bid aggressively on land rent the last couple of years.  So, making some sales, even 5%, 10%, or 20% of insured bushels at levels above breakeven now could eventually lower the breakeven sales price on remaining bushels to be marketed later.

As mentioned above, USDA will release its monthly WASDE report on Friday, May 10 at 11:00 am (Central Time).  This May update to USDA’s forecasts will include its first balance sheets for the 2013/14 marketing year.  While much is already known about the starting place USDA will use for those supply and use estimates, changes can and do occur that could change the market trend.  We saw that as recently as March 28.

Figure 1 July 2013 CME Group Corn Futures

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.

Source: Darrell Mark



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