Market Commentary for 7/11/14
Growing conditions are mostly good/great across the corn belt and expected to continue through pollination. There are small pockets of hail and wind damage, but those acres are minor compared to total acres. The potential record yields in the south will make up for the ND/MN prevent plant and flooded acres. Many predict a national yield average over 165…maybe hitting 170. I am planning for 165. Anything over 170 (while possible) is difficult to produce. Estimates of 175+ are completely unrealistic in my opinion.
As always the question everyone keeps asking, “where are corn prices going?”
Last year (2013) I estimated futures at $3.50-$4.00 with a national yield of 155-160. It took a few more months than I expected, but corn finally broke through $3.75 this week (with further potential price reductions possible). The USDA could soon show an increase in carryout or yield from 2013. This will likely have more negative consequences for the market. Many elevators and end users are reporting a significant amount of stored old crop corn farmers haven’t sold. This is the opposite of last summer, when the 2012 drought cause a corn shortage. Along with declining prices, I expect significant logistics issues will hurt many Midwest elevators. Elevators will have more inventory stored than in the previous five years during harvest. It will be difficult for unit trains to keep up with the demand and move product quickly. Plus, end users won’t feel pressure to raise prices during harvest. If this happens, Dec future prices will take another hit….most likely breaking through $3.50 with a 165 national yield to as low as $3.00 with a 170 yield.
As always, I love looking at historical trends for more insight. In each of the recent record corn yield years (1994, 2003, 2004, 2009) the initial drive down in the corn board did not stop until July 22 – 30 (right after pollination). That late July low was the bottom for only one of those years (2003). In the other three years (75% of the time) the July low taken out later in the trading year. So I suspect another two weeks of price drops before a slight rebound, maybe we can approach $4 futures but with limited upside potential beyond that with the information we have today. After the small ralley I look for us to retest lows based upon the national yield mentioned above.
I don’t anticipate all doom and gloom though. Futures prices won’t likely stay this low much past November 1st. Farmers won’t sell at these levels and will wait for futures or cash prices near $4.00/bu, with either basis or futures. I have spoken with a few end users the past couple days and farmers aren’t selling anything. Those that need corn will have to pay up to entice bushels. Bear in mind though that these bids will be week to week.
The bean crop is “made” July 15-August 15. Where can the bean price go? $9 is a possibility. But, there is always a chance prices $13+ with increased dry weather. Keep in mind, there is still $2/bu weather premium built into this market for even a slight hiccup.
I’m concerned about long-term corn pricing below $4/bu. Therefore, I sold a $4/bu Dec call for $.18 this week. This trade doesn’t give me any downside protection; however, if corn falls below $4 on Nov 25th then I keep $.18 and I sell nothing. But, if futures price are above $4, I sell my corn for $4 and keep the $.18, so it’s like I’m really selling $4.18 futures. As mentioned previously, I’m 100% sold for 2014, if futures are above $4 in December I can shift this sale to 2015 for an additional $.34 cent premium and be selling corn for $4.52, which I’m happy with considering what I know today.
Beans on the other hand have a wider range potential. I am also 100% priced on my beans for 2014 and 50% for 2015. I’m a bit concerned about 2015, so earlier this week I bought a $10.00 bean put for $.16 that expires on Oct 25th this fall. At that time we will know what kind of bean crop we raised and prices could be sub $10 or over $12. This put is cheap partial price protection for part of my next year crop.
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