The markets have not been quiet this summer—and, while the August report has given us some indication of USDA’s expectations, yield uncertainty will continue to drive the corn and soybean sectors, as will an overall change in the tone of the markets.
It all goes back to the wheat complex. As we all know, the Russian drought plus the poor condition of this year’s U.S. wheat crop led to a rally from $5 to $8 in less than 30 days. This was an eye-opener for end users; if demand remains stable and corn carryover moves below 1.2 billion bushels and beans below 300 million bushels, there is little room for additional supply surprises. End users vividly remember 2008’s price action, and all the talk about inflation has them wondering if they should lock up inventory. I anticipate strong buying on any modest fall correction—say, December corn below $3.95 and November beans below $9.
Implications for sellers: More or less, it’s the same old game. Maintain focus and discipline. Concentrate on protecting your bottom line; there could be a lot of volatility, which implies a lot of stress for decision makers. Develop your plan and then put it to work.
For prices to mimic a 2008-type scenario, the following needs to happen: 1) crude oil prices exceed $100 per barrel; 2) corn carryover drops below 1.1 billion bushels; 3) 2011 planted acres stay below 89 million; and 4) a yield reduction event in 2011 pushes yields below 162 bu. per acre. The odds of all of these things happening are less than 25%.
Be a strong seller of the carry. If the December 2010 to July 2011 spread exceeds 30¢, roll your December hedges forward. Don’t worry about locking up basis until spring.
For 2011 corn, assume a cost of production close to $3.50 per bushel and 175 bu. per acre production. The December 2011 contract should offer an opportunity to lock up at $4.50. If you roll forward to July 2012 and capture at least 15¢ more than storage cost, you’ll pocket $4.65, or $1.15 above all costs, which is a 33% return on investment.
In the long run, this level of profit must be protected. Therefore, focus on selling December 2011 between $4.40 and $4.60 and then wait until April 2011 to buy a July call option to protect against spring weather concerns.
Final note: If the market were to experience a 2008-type price event in 2011 because of inflation expectations or a dry-weather event, it should be viewed as a multiple-year selling event. I cannot stress enough the importance of starting to plan now with your banker, elevator operator and business partners to avoid constraints on cash flow exposure and lack of control on input costs. You need to devise a game plan now.
Old-crop bean supplies are tight and sending the cash market to a premium above the futures price. The market has limited carry because it wants inventory now, not in the future. So until the new crop comes on board, the bean complex will remain strong.
Downside risk: If we can muster a bean yield higher than 43 bu. per acre, we will keep carryover at a solid level. South American acreage will likely increase, so odds favor world supply at an adequate to increasing level. Normally, this would be very bearish, but the Chinese are on an
aggressive buying spree.
- September 2010