Important Information In Regards to Old Crop Bushels
Feb 06, 2012
There has been a lot of talk as of late from some of the smarter players in the game that the "800-pound" gorilla in the old-crop corn balance sheet may in fact be ethanol demand being grossly overstated. The exports are starting to slip, gasoline usage is down the past several weeks (in fact the worst in 10 years), margins are weakening, and the DOE numbers suggest we are simply out of storage capacity/space... Net-net there is now starting to be talk that a slowdown in the ethanol grind is inevitable.
Remember, unlike soybeans, US corn exports only account for about 15% of our total usage. Any type of domestic setback in demand would obviously be a significant pinch on the "basis" forcing the front end to fall under serious pressure. I am personally not "sold" on the fact we are going to be seeing "long-term" setbacks in ethanol, but I do believe some seasonal hurdles may now be in the cards, leaving the front-end vulnerable to supply side pressure during the next 60-90 days. If the setback in ethanol offsets the projected gains in exports, the basis could start to weaken across the board. Once again, this is just another reason why I am apprehensive to jump on board the corn "bull-spread bandwagon."
Producers who are sitting on a large amount of "old" crop bushels should pay close attention and be very cautious as we move forward into Spring. Our good friend Ed Usset (Grain Marketing Specialist from the University of Minnesota), wrote an excellent article last spring about "inverse's" that have been occurring in the "old" crop vs "new" crop spreads, and in particular why producers should be careful holding the bushels too long. I have included a link to the entire article as well as a few of the highlights listed below: "Old-and New-Crop Challenges" by Ed Usset, ran in Corn & Soybean Digest back in April of 2011. Ed makes some fantastic points, and I thought the timing might be right to consider the data. I am not saying the "old" crop run is over just yet, but if past performance is any indication of future results then you need to get your finger on the trigger and be ready to make more sales during the next 90 days:
- Since 1990 there have been seven years that an inverse of more than $0.05 cents occurred. Meaning the July contract trading at a premium to December.
- In each of those years cash prices declined sharply form April to October... there were absolutely NO exceptions!
- The six-month decrease in the cash price has ranged from $0.31 cents in 1997 to $1.59 in 2008. Understand the decline can be significant.
- The price break in the cash market tends to happen extremely quickly, most often within a short three-week time period.
- In these "inverted" years, "New" crop pricing was actually better at the discounted price to the July contract in April than it was at a more traditional carry price later in October. Meaning the Dec contract may look cheap in April in comparison to the July contract, but later in the marketing year (October) the odds are the Dec "New" crop contract will be even cheaper.
Despite not being a huge fan of bull-spreading corn, I do however like the thoughts of bull-spreading soybeans. The export basis seems to be firming and there is more outside interest flowing our direction, especially as the line-up in Brazil grows and the wait extends to almost 3-weeks. I am thinking these problems could only intensify once sugar starts to come to port along with the late planted corn. In any regards, you have to believe those caught short the export basis may need to be buyers in the March. Bull spreading in this environment may be a little risky as the funds begin to more aggressively roll out of the front months this week, so you may want to patiently wait for a slightly better opportunity down the road. In any event, I do like the thoughts of bull-spread beans. Timing the entry might be a little tricky.
I hate to sound like a broken record, but any of you who are thinking about "BUYING" premium... either puts to establish a floor, or calls for re-ownership...you should pull the trigger now while the "volatility" is somewhat low. Understand that as more "risk" hits the marketplace the price of both the "puts" and the "calls" will become inflated, ultimately costing a "buyer" more money.
In case you didn't hear on Friday, the Russian government changed their tune once again about restricting grain shipments. If you recall they were going to limit exports in some manner after they reached 23-25 million metric tons. Remember, this is an election year, and as I pointed out early last week, I highly doubted anyone was going to pass a measure that would further irritate an already frustrated farming community. Therefore rather than limiting exports, like most had anticipated, the government elected to bump the allowable export totals higher to 27MMT's.
Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO. You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.
Click this link to find out more Grain Marketing Seminar 2012. Like this blog and want to read more, sign-up for our free trial of the daily report. Click here