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Kicking off the new marketing year

By Jon Scheve, Superior Feed Ingredients, LLC

College football just began and every team still has the chance to win their conference or, more importantly, find their way into one of the playoff spots. Some fans believe this is the year they will have a perfect record at the end of the season, while others are worried that their team will not even make it to a bowl game. For many, Saturday’s first game answered some questions about their team’s prospects for the season but undoubtedly some questions will linger and won’t really be known until the season has progressed.

Last weekend also marked the beginning of a new marketing year in the USDA balance sheets for the corn about to be harvested. Just like not knowing how your football teams will do this season, the corn market has a lot of time to still have a great season or maybe still disappoint the farmer.

December corn continues to hover around $3.70 as the new season starts. Like the die-hard fans of several college teams in the country, I’ll hear these fans suggest why their team should win it all. These same die-hard market participants think corn has to rally back to $4.50 or higher. On the other side of the spectrum there are those who are very pessimistic about their team’s chances this year and are offering rationale why their team isn’t going to be able to even make a bowl game or why corn could still drift to $3.40.

There are so many variables affecting any football team’s chances this season to win the national championship, just as there are many variables the corn market will have to work through this season. It’s important to understand, and put into context, many of those variables so I can make the most informed decisions possible for my marketing plan.

 

Historical patterns?

The general trend of the corn market is to move lower until harvest starts, then trade sideways through the winter, until the next summer weather scare happens when the market moves higher.

In the previous 6 years, there’s been no clear price pattern between the end of August and Thanksgiving. In ’15 and ’16 the market hit its bottom in late August. In ’14 there was a nice bounce at the end of September. In ’13 and ’17 the market trended lower now through Thanksgiving and then like last year went sideways for several months.

 

Prevent plant dates and frost concerns

Insurance sets prevent plant dates based upon historical data showing when “normal” frost dates should happen. This year has been far from normal, so the first frost will be more critical than usual to final yields and ultimately prices.

Farmers in the east who planted corn around June 10 need the first frost to come after Oct. 15 to avoid significant yield loss. Typical first frosts in the east occur around Oct. 15, so they are cutting it close. Still, farmers there seem optimistic, especially since they’ve had reasonably good growing conditions the past month. One farmer in west central Ohio told me he planted corn last year on June 10 and his final yield was only 5 bushels below his farm’s trend line yield. He indicated that with the right weather in September he could still produce those kinds of yields this year.

 

September weather will be critical

Weather predictions this past week suggest frost dates might now be normal or later, which is a change from a month ago when early frost chances were higher. Frost is hard to predict though, because unlike droughts that damage a crop over 3 to 4 weeks, frosts will damage a crop in 3 to 4 hours. Plus, it also matters how widespread the frost will be. There’s a big difference between isolated pockets and multiple states being affected.

Also, widespread cool September weather could impact yields too. With so many weather variables that can still impact prices, we may not know the extent of the weather’s full impact until harvest is nearly over.

 

It will likely be a long harvest

The western states look to start on time or maybe a week late, while the eastern states could be 3 to 4 weeks behind. The crop in the east will be harvested very wet. This will mean long elevator lines and limited dumping space while everyone waits for the grain to dry. A longer than normal harvest isn’t likely to negatively impact prices as much as fast harvests can. When crops are harvested fast, there isn’t as much time to find space for the crop, which means cash prices tend to weaken. A slow drawn out harvest allows for end users to grind more of the crop while the farmer is forced to use their fields as temporary storage.

 

Still a lot of longs in the market

Average speculators went long (bought futures) between $4 and $4.50 before the August report, with most averaging around $4.20. Largely these speculators have held onto those positions hoping for a rally down the road. This could mean it will take a major shift in the current USDA production estimates to see prices exceed the levels where these speculators bought their corn futures.

 

Too much old crop still stored?

End users and elevator managers claim there is a limited supply throughout the U.S. and suggest the high basis prices mean a futures rally is needed. However, given the negative sentiment and frustrations among farmers after the late June acreage report and especially the mid-August report, it seems likely the USDA estimates of significant old crop still in storage could be supported.

Elevator managers in the western Midwest states say there were hardly any new crop sales made when the market rallied. Because farmers missed their opportunity before the report, they may be looking for any rally to sell their remaining ’18 crop and get a start on the ’19. This could limit any big rally potential without an unseen production problem.

 

Funds could handle either direction

Last spring funds were short nearly 300,000 corn contracts. When the market rallied, they ended up long nearly 50,000 contracts in June. Currently, they are short around 100,000 contracts. This suggests they aren’t expecting a huge futures market rally, but aren’t sure they should push the market lower yet. It seems the funds are listening to the USDA numbers, but haven’t totally discounted the fact that weather could still play a major roll in the final yield potential of this crop.

 

End users may not need to buy more corn until 2020

Many end users prepared for higher prices before the August report by having strategies in place to cover corn needs through the end of the year with $4 type levels targeted. Then like everyone else, they were caught off guard as their buy orders quickly filled shortly after the August report. Now end users aren’t in as big of a hurry to buy more, even at these lower futures values.

If end users aren’t buying and funds aren’t interested in going long, who’s left to buy this crop in the next few months? This could be a challenge facing farmers going forward.

 

Basis is giving mixed signals

Basis levels at end users across the country are at levels not seen since 2014. This normally would indicate a possible upcoming futures rally. However, lack of exports has pushed export basis prices down to levels not seen since 2017. Current US corn prices aren’t competitive globally, which doesn’t help farmers or necessarily warrant a futures rally.

 

Ethanol has problems

POET (one of the largest ethanol producers in the U.S.) announced they are slowing grind. They blame margins and the EPA who has been helping the oil industry. If POET is having problems, it’s likely a large percentage of the ethanol community is having problems. This week another ethanol plant in Minnesota discussed shutting down.

The president said there will be something “giant” for farmers announced soon. If so, hopefully it will take effect in the next few months to help corn prices, because increasing mandates in 2021 won’t be beneficial in the short term.

 

Corn has a wheat problem

There is an overabundance of hard red winter wheat that is putting downward price pressure on prices. In the southern plains the price of cash wheat and cash corn is nearly the same. This is making wheat more attractive to end users to feeding wheat over corn this season. If the wheat situation isn’t corrected, it could hold back corn prices longer than many expect.

 

Market corrections

Just like when the board runs hard up, it runs down hard too. It needs to find a correction at some point. Lack of farmer selling and strong basis could indicate an upcoming correction, and spreads between contract months have been running unusually tight for such a large expected carryout. If farmers remain convinced the USDA has overvalued yield and/or acres planted, they may hold out until after the January report hoping for a rally, which could keep spreads tighter than normal. This may also mean post-harvest basis values could stay at current elevated levels, helping to propel futures up.

 

Hoping for another 2010

In 2010 the USDA and most analysts were surprised by the final yield compared to the August and September reports. Farmers are hoping this happens again. It seems farmers are waiting until harvest to see if the yield is really there before taking much action. This lack of action could help keep futures prices from dropping even further.

There’s still a lot of uncertainty until harvest results become available. If the USDA’s numbers would prove to be correct, then corn could trade even lower. However, an early frost or cool September could reduce final yields and propel prices upward. The bigger the problem the higher the prices can go. Anyone who guesses the final harvested acres and yield correctly will be rewarded the most.

 

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.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.

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