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This Week’s Market Forecast from Minnesota Jon…

Jon Scheve
Jon Scheve

 

 

 

Market Commentary for 9/26/14

Harvest started this week south of I-80.  Preliminary yields are amazing, leading most to think the national yield could reach 175 or even 180.  As an example, after harvesting 5% of the corn on our farm in southeast Nebraska, yields are averaging 15% higher on both irrigated and dry land fields.  Even farmers damaged by hail are generating normal yields. 

 

Bean yields are also really high, averaging 20% above average across NE, SD, ND, MN and MS.

 

The corn board had been range bound between $3.25 and $3.43.  It is unlikely to rally past $3.40 through harvest.  On the flip side, the market closed below $3.24 on Friday, which was the 2010 low.  Breaching this technical resistant point means that hitting $3 becomes a possibility. Beans still seem overpriced. $9 is likely to be traded on Monday with a test of $8.50 or lower pending yields in the next 30 days. 

 

Reasons To Be Bearish or Bullish

Which side do you land on?  Following are some of the marketplace factors for both sides. 

 

Reasons To Be Bearish

  • Record yields suggest the market has not hit its low
  • USDA Reports show big crops getting bigger
  • End users suspect the corn board price could drop below $3
  • China also has a large crop and sizeable inventories
  • Breakeven prices for farmers are lower with these higher yields – prompting some farmers to sell on any small rally
  • Beans are overvalued in relationship to corn
  • Carryout will grow – even with reduced acres and trend-line yields next year
  • The surplus of feed wheat globally could keep pressure on corn prices
  • Substantial bean planting intentions in the Southern Hemisphere
  • Lack of DDG exports to China could put pressure on both corn and bean prices
  • US Dollar is increasing in value, which lowers the purchasing power of other countries to buy US grain
  • Interest rates could climb in 2015, causing the dollar to increase more in value compared to other world currencies
  • Farmers only have 20% of corn priced for 2014
  • Farmers lack sufficient on-farm storage for the huge crop being harvested

 

Reasons To Be Bullish

  • Ethanol is still profitable
  • Brazil increased its ethanol blend rate
  • Farmers collectively are not selling much grain at these lower prices, they appear to want a price closer to $4
  • Corn prices are undervalued in relationship to soybeans
  • Fewer corn acres are expected to be planted in 2015 (both North and South America)
  • Weather probably cannot be better next year. Can it?
  • Livestock producers are profitable and looking to expand
  • Possible acre reduction for the 2014 crop based on FSA insured acres
  • Technical signals indicate the market is oversold on the current downtrend
  • Farmers have about 40% of 2014 beans priced and may not need to sell more at harvest

 

The Importance of Consistency

Something that is not mentioned enough, is the importance of consistency in farmers’ marketing plans.  Meaning, using the same techniques and strategies year after year regardless of market volatility.  Farmers can get into trouble when they chase a new idea all the time or worse, they think they can time the market.

 

A common strategy among farmers pre-2012 was to sell 30% new crop while planting, 30% during the summer and the remaining 40% after harvest.  From 2010 through the summer of 2012 they missed market rallies with this plan.  So they switched to waiting to sell everything until after harvest the next year.  Then 2013 was painful, as prices dropped.  Now unsure what to do as prices fall, famers have done nothing.  With the 2014 harvest approaching these same farmers have missed opportunities again.  They know they have been wrong 5 years in a row and it is painful. 

 

To take back some control, I recommend to my clients that they take the same approach each year using historical data and market trends that gives them the best chance to optimize farm operation profitability while limiting risk.  Did I hit the top in 2010, 2011 and 2012? No. But, did I take the bottom in 2013 and 2014? Very far from it.  Do you have to adjust assumptions of the market with current information? Yes. But, making substantial changes to a marketing program usually is not wise.  Sometimes farmers need to accept that hitting the top is not possible, because, taking a loss in any year is not an option either.  A farmer must have a plan and should usually stay with the plan year in and year out.

 

Last week I mentioned one of the strategies I use. I explained how using basis and carry has been more profitable for farmers 80% of the time, versus just hoping for a market rally.  Clearly there will be years when that system will be beat. But, it’s been right so many times, that I feel comfortable using it every year.  The key is to stick with the same (or similar) strategy each year (hopefully that is based upon sound rationale) and farmers will ride the price volatility with less anxiety and more profitability.

 

 

Storage and Carry

Last week I wrote about the advantages of farmers selling the carry.  It is important that farmers realize this option is really most profitable to farmers who store grain at home.  Let’s look at the numbers.  It usually costs $.03-$.05/month to store grain in a commercial elevator.  As mentioned last week, profit from the carry is usually about $.04/month.  While storing in a commercial elevator still has basis appreciation potential, the risk/reward in my opinion is not worth.  Especially this year, when there is significant supply.

 

This is why I strongly advocate building home storage for 100% of farmers’ crop.  I’ll expand on this again next week.

 

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