Corn futures were again solidly higher on Thursday. Follow-through strength from the gains on Wednesday after the bullish Acreage and Stocks numbers were released supported the market, according to Doane.com.
The market rallied despite lower-than-expected weekly export sales and favorable crop weather and forecasts for crop development in the Corn Belt. July ended 11 1/4 cents higher at $3.65 1/2 and December closed 11 cents higher at $3.84 1/2.
“This week’s acreage reports leave livestock producers with less certainty regarding feed input prices and the prospects of paying higher prices,” says Darrell Mark, agricultural economist, University of Nebraska. So, is it too late for livestock producers to lock in feed needs, or will there still be some opportunities?
Mark says there are both bullish and bearish factors to consider. Among the bullish factors Mark cites are the lower-than-expected acres and higher usage rates. “The acreage report effectively drops both the old crop and new crop carryover from 1.6 and 1.573 billion bushels, respectively,” says Mark. “While new estimates will not be available until USDA's July WASDE report on July 9th it is possible that the stocks-to-use ratio will tighten to the 10 percent to 11 percent range, which would signal higher prices.
Another bullish factor Mark cites is the slight downturn in crop condition ratings in the past week. While the overall condition rating has been well above average in 2010, the amount of the crop rated good to excellent saw its first decline (of two percentage points) this past week.
A third bullish factor for producers to consider is the potential for EPA to increase the ethanol blend rate. “While delayed for several months, it appears an announcement of a move to E12 or E15 could occur this fall,” says Mark. Another factor to watch through the remainder of the summer is a potential shift in weather pattern from El Nino to La Nina. Elwynn Taylor, Iowa State University climatologist, has indicated that the last 30 days has seen a dramatic shift towards La Nina, which brings hot, dry weather conditions to the Midwest grain belt. “Should that occur during key pollination and kernel filling stages in July and August, corn prices will likely increase,” Mark adds.
There are several bearish corn market factors that could work in livestock producers' favor as well. First, the corn acreage, though smaller than expected, is still the second largest corn planted acreage in decades (surpassed only by 2007). Additionally, USDA's current trendline yield forecast of 163.5 bushels per acre is viewed as conservative by many crop analysts given the early planting date and excellent crop condition. “Thus, it is quite possible to harvest the largest corn crop in history in 2010,” says Mark.
Even though overall corn demand has been growing, both cattle and hog industries continue to see contraction, thereby reducing their feed usage. Additionally, tighter margins in recent weeks for ethanol producers and the prospect of an expansion to only E12 instead of the expected E15 will limit corn demand in that industry. “Finally, outside market influences (e.g., energy prices, stock market, and currencies) have not been particularly supportive to corn prices,” Mark adds.
This all suggests that livestock producers still have opportunities to lock in corn needs; however, the market environment is dramatically different than it was prior to the reports on Wednesday morning.
“Now, buying cash corn on price dips and a weak basis to hedge a portion of third and fourth quarter feed needs seems appropriate,” suggests Mark. “Additionally, purchasing call options to establish a ceiling price is a strategy to consider. A less expensive option strategy would be to purchase call options and simultaneously sell put options with a higher strike price to create a "purchase" window, or fence.”
Source: University of Nebraska Newsletter, Doane