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Will prevented planting play into markets?

By Jon Scheve, Superior Feed Ingredients, LLC

Friday’s USDA report confirmed what the market already knew. Near perfect growing conditions last year in the highest producing areas around the world has generated too much corn and soybean supply in the U.S and globally. Unfortunately, due to problems with the African Swine Fever in Asia and the China trade war, demand has decreased. And, it’s unlikely either will be resolved before the end of the year.

Right now, the new crop market is likely overvalued, especially if most areas are planted on time and trend line yields are produced. But the big variable now is weather. Forecasts for the Dakotas and the eastern Corn Belt show a possible break in rain this week, but more rain is expected next weekend. This may mean farmers in those areas will wait for better planting conditions or take prevent plant. The Dakotas only have until May 25, and the eastern Corn Belt until June 5, before they have to declare if they are taking prevent plant on corn.

Will farmers in these areas still plant? That is the billion-dollar question, and I don’t think the market has fully addressed this. Right now, economics suggest that farmers should NOT push to plant their crop, IF they haven’t applied nitrogen to fields yet, which many haven’t been able to do.

Obviously, this goes against the long-held belief that a farmer needs to plant crops to make money. But essentially farmers right now are incentivized to NOT plant crops this year. The futures values for both corn and bean are certainly under the cost of production.

What if a farmer doesn’t plant? Based upon conversations with crop insurance agents and farmers, depending on the average yield and insurance coverage purchased earlier this year, farmers could expect to receive around $300 to $400 per acre. In areas still dealing with excessive rain, these types of payments could cover a farmer’s cash rent payments and weed control costs for the rest of the year. A farmer also receives this money right away as to waiting until after harvest. This could help with cash flow issues and allow the unpriced farmer to store their grain until or even after harvest waiting for better prices.

If a farmer does try to plant corn, it’s possible they could end up losing money for both any remaining unpriced corn in the bin and any unpriced new crop corn they are about to plant, if prices don’t go back up.

Will farmers really not plant corn or will they just switch to beans? I think some farmers will minimize their farm operation’s risk and not plant corn this year. I don’t think many will switch crops. Bean prices need to increase at least $1 per bushel for farmers to just breakeven.

Will farmers take prevent plant for beans? It’s hard to say yet. Bean prevent plant decision dates are about two weeks after the corn dates, so there is still too much time to know.

If farmers are incentivized to NOT plant, will more be considering prevent plant? From what I understand, there doesn’t seem to be any hard rules for how the claims process works. Basically, the insurance companies determine if farmers could have planted in their area, so prevent plant isn’t necessarily a guaranteed payment to farmers. Still, there are a lot of areas that could be covered. Farmers should work with their crop insurance agents to determine if their area might be covered.

So, how many corn acres will ultimately get planted? It’s hard to say at this point. While no two years are ever the same, 1995 had some historical similarities to current conditions. In 1995, the U.S. loss about 4 million corn acres from March planting intentions to the final acres planted. If we use the same type of acres at today’s yields it equals about 700 million bushels (4 million acres x 175 yield).

A 700-million-bushel reduction to the 2.4-billion-bushel projected carryout (May USDA report) would leave 1.7 billion bushels, the tightest carryout since 2013.

On the surface this sounds very bullish, but it really isn’t. If this happened and futures rallied more than 30 cents, export demand and ethanol grind would likely slow, ultimately increasing carryout. Plus, the wheat supply is also high with Kansas City futures below $4. Wheat could easily replace corn for feed in parts of the southern plains.

Is there an upside? Yes, the national average yield in 1995 was 5 bushels per acre lower than trend-line, due to poor summer weather. In other words, the variability and unpredictability of weather can still be a big factor. If the summer weather is too wet, too much nitrogen could be leached from the soil. If the summer is too dry, corn root systems may be too shallow, which could compromise yield. Both of these scenarios could be the match that lights a fire under the markets.

What’s next?

The market will be waiting until May 25 to see how much of the Dakotas will take prevent plant and what the 10-day weather forecast for the eastern Corn Belt will be. It would be hard for me to plant corn unless there is optimal conditions in those areas if I had not yet applied nitrogen as there is a high potential for losing money at this point planting corn. If I thought a market rally was likely due to wet conditions, there are risk management tools available that would allow me to participate in a rally without actually putting seed in the ground.

What about your farm? Our farm in southeast Nebraska missed much of the recent rains. We finished planting our corn and beans last week. Still, it’s been cool recently, so it’s uncertain if some areas will need to be replanted.

 

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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