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The case for corn price rally potential

By Jon Scheve, Superior Feed Ingredients, LLC

The March corn futures have been range bound for the last 150 days, usually staying within a tight trading range of $3.70 to $3.90. March corn was only above $3.90 for 3 days during that time, and over the last 100 days, March corn has traded below $3.70 for only 3 days.

This lack of movement is clearly illustrated in only a 10-cent range for the closing prices of March corn on the last 8 Fridays:

1/18 – $3.81

1/11 – $3.78

1/4 – $3.83

12/28 – $3.75

12/21 – $3.78

12/14 – $3.84

12/7 – $3.85

11/30 – $3.78.

Current corn fundamentals paint a picture from a macro level that suggests realistic expectations for higher corn price potential.

 

Global position: U.S. corn is the lowest priced corn globally based on prices today. U.S. corn is about 5 cents lower than Argentina and 15 cents below the Ukraine.

 

Upcoming planting acre estimates: Corn needs nearly 3 to 4 million additional acres planted in 2019. Currently the new crop corn/bean ratio is 2.36 : 1. While this should encourage farmers to switch a small number of bean acres to corn, it might not be as much as was assumed was possible two months ago. The wet fall could have prevented some acres from getting the necessary fertilizer or fall field work done when prices were much more favorable to plant corn.

 

Carryout: March corn is trading 30 cents higher today versus a year ago. Last year saw March corn rally 30 cents from this date forward when the carryout was reduced from 2.3 billion at harvest time to 2 billion as the year continued on. Currently the carryout is projected at 1.78 billion and may be reduced to 1.7 billion pending the final yield number from the USDA. Even if the carryout isn’t lowered further this will still be the lowest carryout in 4 years.

 

Demand: Corn demand has been steady the past couple of months. Exports continue to be strong, feed demand has been steady, and the ethanol grind has maybe only slowed a little. There is a good chance all three will offset each other to keep demand the same or maybe even generate a slight increase. Still, until the government can reopen to provide production and usage information, everyone is in the dark.

Overall corn has several positive fundamentals going into spring, which could mean good news down the road for farmers. If China would start buying a little corn to offset the trade imbalance, which has been discussed in the trade, the news for farmers could be even better.

 

Does fertilizer buying correlate with corn selling?

Several farmers throughout the Midwest asked for my thoughts on selling corn when making fertilizer purchases for their 2019 crop. Evidently these farmers had been approached by fertilizer sales teams trying to show a correlation between corn and fertilizer prices and how they should sell some of their corn when they buy their fertilizer.

I don’t have the details of the sales pitch the farmers were given to give any advice there. However, I can look at the effects of purchasing fertilizer on farm operation budgets as well as the correlation between corn and fertilizer prices.

 

Comparing fertilizer and corn prices the same way

In most years fertilizer prices don’t change more than $100 per ton year over year. While $100 per ton may sound like a lot, the price per acre is low and usually only amounts to about 11 cents per bushel at most on the budget. I calculate all farm operation budgets on a cost per bushel, so prices are comparable to each other (i.e. apples to apples). That small of an effect on the cost of production doesn’t compare to the more than 85-cent range that corn futures had during the last growing year.

There are many things that can affect fertilizer prices, here are just a few:

  • Fertilizer production inputs are a major factor. For example, natural gas is the main ingredient in many fertilizers, so big shifts in natural gas prices can change the demand structure. But, there are also substitute fertilizers not containing natural gas that could increase or decrease production to offset big price adjustments.
  • Acre shifts could have an impact, but a change bigger than 5% in either direction is rare. While a 5% shift could send an initial price spike or dip in the short-term, the impact long-term should be minimal.
  • Seasonally fertilizer prices have highs and lows pending demand. Just as there are seasonal trends for corn that would suggest that prices will be the lowest at harvest there seems to be a season pattern to fertilizer that happens when farmers aren’t usually applying the product.

 

Usage correlation between fertilizer and corn

The total tonnage of fertilizer used per acre is 20 to 70 times less than the total tonnage of grain harvested from the same acre, depending on the type of fertilizer applied. So, I don’t see how this would be a relationship between the price of either commodity. The sheer size difference is just too big to be relatable. Plus, in reviewing historical data, I couldn’t find any type of trend to support a price correlation between the two commodities.

So no, I wouldn’t adjust my corn marketing strategy to align with my fertilizer purchasing. They are different commodities with separate and independent price fluctuations. Instead, I would just buy fertilizer when it looks like the right price at the time of year it makes sense for my operation. And I don’t see any reason to sell some corn, just because I bought fertilizer on the same day.

 

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

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