"A Big Correction, Then A Rebound: Get Ready For More!"
After peaking in early May, corn and beans lost over $1.30 per bushel in just 3 weeks. Fund selling and most likely some late buyers scrambled to get out as the free fall continued until last Thursday morning when we found a bottom and raced higher. Corn futures were down the 40 cent limit one day, and traded up limit the next. We can point to a number of factors but safe to say there is probably more of this to come, as the market watches each weather forecast, ( a new one is out every 6 hours) and there is plenty of things to talk about. Over the holiday weekend we had reports of frost, and the National Weather Service changed their June forecast a bit, adding some heat and taking some moisture out of the picture. These two factors along with a weaker dollar shot prices higher this morning, with corn once again trading limit higher and ending with strong gains. Crop conditions came in better than expected, with corn at 76% good to excellent this afternoon, and planting progress reports were strong as well with 95% of the corn in the ground, and beans well above the 5 year average. Bottom line is the crop is essentially planted, conditions while not perfect in all areas are generally good, and weather will be key until the next USDA Reports on June 10th the monthly Supply/Demand Report and the latest estimate of Crop Production. The next big day is June 30th, when we get Planted Acres along with the Quarterly Grain Stocks Reports. With tight stocks, excellent demand from the export and ethanol sectors, any hint of a threat to supply will generate buying interest. On the flip side, funds are still long, not as long as in early May, but still a decent size long in both corn and beans. Key factors in the June 9th reports are:
1) Updated numbers on South American Production. USDA last month had the Brazilian corn crop at 102, latest State numbers from Brazil at 95, and many in the trade at 90 or below. Someone will be surprised!
2) Updated demand numbers: will USDA recognize the steady pace of corn exports and raise that number? Will the profitability in ethanol translate into more use?
3) Projected US carry outs for both corn and beans: up, down, or unchanged?
4) World carry out numbers: how will USDA deal with a big drop in Brazil corn production?
5) Watch what USDA does with "average farm prices" in all three grains
6) Wheat crops in both hard and soft wheat look very good to excellent, will USDA increase crop size but also feed use?
While there will be reactions to these numbers there will still be one eye on the weather maps as any minor adjustment in carryout may be quickly replaced by a positive or negative forecast. Many areas of the corn belt are on the dry side,(a few too wet as well) and with subsoil depleted, any prolonged hot and dry spell will very likely find buying as long as demand numbers are solid. Our fellow producers in the Black Sea region as well as Europe, Canada, and Australia will all be trying their best to produce, as much as possible, but will need good weather as well. Most of this is now well known, the only variable is rain in reasonable amounts and timing. Sounds easy! Yes, it sounds easy, but look at the last 3 weeks of May and you know better. Funds don't need any particular reason to sell, and they remain the biggest price influence with money either going in, or out. They liquidated about half of their corn longs in 3-4 weeks, and could easily continue to do so. They don't buy things to lose money. We have to continually ask ourselves, as this IS a futures market, "has this been priced in already"? The Memorial Day holiday brought us some new news, frost and a drier outlook that we traded today. What's next? Frost damage assessments and the next forecast. If the market can continue to rally with initial crop conditions coming in so high, it will be a good sign. There is still a lot of uncertain weather ahead.
Our next focus will be on the June 30th Reports, and here is where we are concerned and want to get a plan in place and executed before that important day. While we are now dealing with a much tighter supply situation than was projected 6 months ago, we are still dealing with numbers that could change dramatically on June 30th. I think we have covered the bullish side of the market, and are comfortable with the upside possibilities, but now we have to look at what "might go wrong" and take another $ out of our corn and bean prices. We don't need to dwell on what $1.30 drop in price means to you if you average 200 bushels per acre, we just have to make sure that doesn't happen without having some sales made or put protection in place. Here are our concerns on the month end reports:
1) While we firmly believe the 2019 corn crop was overstated due to test weight and quality issues, we fear the 2020 crop may have been understated, and could show up in the Quarterly Grain Stocks
2) Some analysts are predicting as much as 97 million corn acres planted. March 31 intentions were under 92 million
3) There may be more corn and beans around than the trade thinks, bean basis has weakened, and anecdotal reports from the country have more corn out there waiting for more confidence in this years crop before selling out
4) Wheat prices make feed bunk use economical, and if quality is affected by too much rain, more may be available at cheaper prices. Will USDA address this?
5) Grain Stocks could be impacted by imports: we know some beans have come in from Brazil, and their prices are cheaper than ours, meal supplies seem plentiful
On our farm, we now have all new crop corn covered with a combination of HTA sales, put options, and short September futures that are now spread with long December futures. We are now trading the December, trying to add to our price using stops.. We added one increment of new crop bean sales at 13.50, but will hold the balance for $14.50 or better. We are in the process of sweeping corn bins, so old crop will be long gone before June 30th. We like adding to corn sales or adding put protection above $5.80 in December corn (or above $6 in September if you can roll later to December) and would add sales or put protection above $14.50 in new beans. We will be willing buyers of short dated calls on any big breaks to cover previous sales as long as we feel we have potential weather issues to generate rallies. Above all though, we want our production covered before a major risk day, and we are sure by now you know when that is!
In conclusion, there is not much more to add, we have witnessed a huge rally from last August to May 9th, and then a huge correction. The dollars "lost" by not selling were pretty extreme for that short of time, but that is the environment we are in. 40 cent daily limits in corn and $1 in beans makes the price of delay potentially devastating. With costs going up dramatically since last fall, we really need to make sure we are profitable, as everyone in the world will be trying to produce more. Our latest chat with our friends in Brazil cast a warning: they are gearing up to produce much more, prices and currency spreads are making their margins incredible. They will add acres, and lots of them. We will be looking at any good weather rally to sell not only this year, but get some coverage on next year as well. If we are going to grow it, we need to sell it, call us for some specific ideas on how we can help you find the right combination that puts the mind at ease!
Dates to Remember:
- Every Monday: Export Inspections, Crop Progress
- Every Thursday: Export Sales and shipments
- June 10th: Monthly Supply/Demand Report and Crop Production
- June 25th: Cattle on Feed
- June 25th : July options expire
- June 30th: QUARTERLY GRAIN STOCKS AND PLANTED ACRES REPORTS!