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Day 17 of social distancing

By Jon Scheve, Superior Feed Ingredients, LLC

Navigating the extended homestays has been challenging for many. Teaching, entertaining and keeping kids occupied at home, while parents continue to work the best they can is taking a toll on everyone.

It’s still uncertain how long the restricted movements will last. I was hoping by Memorial Day people would be able to leave their homes again. Unfortunately, I may be having to wait a little longer if other states follow Virginia which issued an order for shelter in place until June 10. Regardless of when the restrictions end it’s still unclear how fast things will get back to normal. One possible scenario is that increased movement will be gradual, with large gatherings in the hundreds or even thousands not allowed for a much longer time period.

And in terms of the economy, it will likely take a while for it to get back to “normal.” It seems as though more aid packages will be needed from the federal government to get us through this difficult ordeal.

 

Ethanol impact

Because much of the U.S. population is stuck at home, gas demand has been reduced, and a 50% ethanol production reduction is expected over the next few months. This has contributed to reduced corn basis levels and will act like an anchor to the market going forward.

With less corn being used for ethanol, there will be a push for more corn use in animal feed and exports to offset the lack of DDGs consumed globally. However, feed and exports alone won’t be able to overcome the entire loss of the ethanol grind.

 

Global considerations

As prices approached $3.25 the other week, China bought some U.S. corn. This indicates there is likely a price at which other countries will stockpile inexpensive feed for future use. However, corn and soybean buyers are also concerned South American ports will be shut down due to the virus. This could mean buyers have no choice but to buy U.S. grain, regardless of cost, to keep their animals and people fed.

U.S. dollar strength in relation to Brazil and Argentina currency is also hurting our commodity prices. If that could turn around, there would be more upside price potential here in this country, as the U.S. may become the exporter of choice.

On a positive note for U.S. farmers, South American weather hasn’t been perfect as of late, and some are beginning to suspect reduced yields in the southern hemisphere going forward this season.

 

The soybean market is holding up well

Bean basis bids remain strong, while futures prices are up 60 cents from last week’s lows. This is due in part to limited DDGs in the market and the need for an alternative protein source in feed rations. Soybean meal is the most likely choice. This increased meal demand, combined with logistical uncertainty in South America, has led to better prices.

 

USDA spring planting intentions

The March 31 report showed the highest reported corn acreage of the year, and by the June 30 report corn I anticipate acres will be reduced from the USDA acreage estimates of 97 million acres. There are several ways this could happen.

 

Breakeven and prevent plant

With the average farmer’s corn breakeven at 20 to more like 40 cents higher than current prices against December futures, I suspect most farmers will wait for perfect conditions to plant the crop. While most farmers will plant on time and in good conditions, a few will hold out, hoping for prevent plant in their area, especially those in the extreme north and eastern Corn Belt where conditions are currently wet.

This would be a huge change from last year when farmers avoided prevent plant because they thought corn prices could rally above $5. Now with prices well below $4, farmers likely want to minimize financial losses and may look at prevent plant as the best scenario.

 

Reconsidering marginal acres

While I still expect most farmers to plant every acre, like they usually do, some farmers may reconsider planting next to tree lines or near mud holes where yields can be more than 50% lower. They may think, if the best part of the field isn’t profitable, why plant in areas that won’t even cover input costs. There is also some marginal ground in the fringe areas of the Corn Belt that simply shouldn’t be planted at all to any crop this year with such low prices.

 

Could these shifts offset the ethanol grind reduction?

To offset the expected ethanol grind reduction over the next 2 to 3 months we would need to see about 2 million fewer corn acres planted. With prices where they are right now that seems entirely plausible.

 

What if more corn acres are switched to beans?

This may happen. However, bean prices are still well below breakeven, so I doubt many farmers are going to make big switches at this point. If futures prices were to inch closer to $9.50 then it’s much more likely that some corn acres would switch to beans.

 

Finding solutions

In 2016, the market was concerned that huge harvest productions would cause massive carryout, resulting in prices falling below $3. However, the market only traded below $3.20 on the December futures for 3 days before it rebounded that year back to around $3.50.

That’s because farmers figured out ways to store corn longer than many thought possible. Since then many farmers have built more on-farm storage or have grain bagging equipment. This year a few farmers had to experiment with leaving the crop stand in the field into the middle of winter with a lot of success. Farmers are solving problems every day, so it’s very likely they will put lessons from the past to work again to find solutions to be more profitable as we move forward

 

Relief from the government

There are provisions in the recently passed spending bill for an MFP 3.0 for farmers this spring. This could help carry a big crop further forward than the market thinks possible right now. It also may keep prices from falling to $3.

 

The market is predictable in its unpredictability

Nobody knows how the market will react, but corn doesn’t usually spend much time below $3.50. While things are far from usual, maybe in time low prices will be the cure for the low prices. Last summer, corn had a lot of bullish news and $5 seemed inevitable, until it wasn’t. Recently, corn has had a lot of bearish news, yet it bounced off the lows. With all the continued bearish news hitting the market, $3 corn seems likely right now, but maybe it doesn’t happen.

It’s important to remember that there is a lot of time left for unforeseen things to happen that could help prices turn around over the next 3 to 6 months.

 

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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