Let the big guessing game begin!
Jun 16, 2008
This year the producer may finally have an edge on the market since he’s actually closer to what’s happening out in the fields. The 1993 flood is the current bench market the trade will be evaluating this years’ flood by. I’ve received reports from many farmers down the river from Iowa who say the rivers are actually higher now than in 1993.
So the big questions that will now be asked are:
- Exactly how many acres have we planted when you look at all the preventive planting and flooding that’s been done in Iowa, Illinois, Indiana, Missouri, and Kentucky? Are there any other states increasing acreage that will offset these areas? Remember losing planted acres has a bigger impact than reduced plantings.
- What type of U.S. yield will be seen? The USDA has already been proactive and reducing corn yields in the last USDA Supply and Demand report. Do we really have the loss potential of 1993 when it was down 25%? We are now going through the bullishness of reduced acres. I don’t really believe the trade can get a handle on reduced yield until the combines start to run. Anything below 148 bu. will eventually lead to demand rationing.
- Finally, with all the supply bullishness hitting the market how will the demand side react? At 12.5 billion bushel corn usage, the USDA has already cut usage by 300 million bushel. So if we do see production in the low 11 billion bushel, who’s going to quit corn usage first—the hog and chicken producers or the ethanol? My opinion is both. The key however is, will supply be reduced before we have confirmation of reduced acres off the combine or will we wait until we see further price rallies? This will have a major impact on how high the market has to go to ration usage.
In summary: We have some extremely powerful fundamental factors reducing supply. The key is how fast will demand react? Since getting out means major adjustments I really believe there will be a lot of talk but the bulk will only reduce usage once they are sure the yields are not there. This means October to March is going to be interesting for not only the grains but the livestock complex as well.
Marketing implication: If you have sold bean or corn inventory via a futures to arrive contract and you must sell off combine, you need to be getting inventory locked up now. Just ask the wheat producer. Second, if you want to defend against further weather problems such as going from wet to hot and dry, I would defend in a limited risk vertical call strategy rather than a net long future at these high values. Finally, in regards to 2009 to 2012 marketing, it’s not going to be easy. It’s going to require huge cash flow obligations. You need to be getting in touch with your banker now so you are not under capitalized once you start to enter long term positions. For now I would not suggest you extend your coverage of 2009 and 2010 beyond current positions. I would wait now until the December to January time period before extending coverage.
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