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Corn has been under pressure in the last month as crop conditions are very good. December corn has now fallen over 75 cents off April-May highs. Weather has turned good after a cool wet start to the growing season and crop conditions are tied for the third best in 20 years for this time of year. But, with months left in the growing season and some longer-term weather forecasts turning drier could corn put in a near-term bottom soon?
Corn conditions are very good at 75% good to excellent. To put this in perspective this puts the corn crop tied for the third highest crop conditions in the last 20 years behind only 2007 and 2010 (both at 77% G-E). So, obviously this corn crop looks very good right now. However, good crop conditions this time of year does not guarantee a record yield. In fact, there are 5 of the last 20 years with corn conditions rated 72% G-E at this point of the growing season and of the 5 only one ended up producing what was a record yield at the time - 1994. Actually, the two highest rated and also most recent years that corn was above 72% G-E at this point were 2007 and 2010. Both years were at 77% G-E at this point and both years ended with good but not record yields. 2007 produced a national average yield of 150.7 and 2010 produced a national average yield of 152.8 (keep in mind yields have trended higher over time) compared to 160.4 in 2004 which was the record until 2009.
In most years it is not super important to have record yields to have a good corn crop, but this year may be a little different. First of all the USDA Planting Intentions report showed that we intended to plant fewer corn acres this year (down almost 6 million acres from the 2012 high) and a cool and wet start to planting may have caused some of the intended corn acres in the northern growing areas to get switched to other crops or not planted. So, with fewer acres it becomes more important to have the acres that do get planted produce very good yields. Now, much of the reduction in corn acreage comes from areas that historically have lower average yields. This may help boost the national average yield but near prefect weather will be needed to hit the mark. The USDA will give us their Planted Acreage number on June 30th which will give the market a better clue on just how good this corn crop needs to be.
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The second reason it is important to have a record yield this year is that the USDA is currently using a record yield for their new crop 2014-2015 balance sheet. So, if the national average yield were to fall short of the USDA's current projections it could tighten the new crop balance sheet, possibly significantly. For example, if the national average yield were to drop to 163, 2.3 bushels an acre below the current USDA estimate of 165.3, it could mean a 200 million bushel reduction in ending stocks resulting in about a 1.5 billion bushel carry over number. Now, a 163 yield is still very, VERY good. In fact it would still be the second highest national average yield on record. But, what if there really was a minor weather issue and yield dropped a little further? If the national average corn yield matched last years 158.5 (still the third highest yield on record) ending stocks could drop almost 600 million bushels to just over 1.1 billion bushels.
At this point it is probably not very likely for a huge drop in yield expectations like in 2012, but lets look at one last scenario. As we said before 2010 was the last time we had crop conditions at or above what we have now, 77% and 75% respectively. The final national average yield in 2010 was 152.8, the fifth highest on record. At this number new crop corn ending stocks could drop 1.05 billion bushels under the current USDA demand estimate. This would leave us with about 770 million bushes for ending stocks. This would be a very tight number and would demand price rationing. Ultimately the ending stocks number would not fall that low as higher prices would cut back some demand but the key here would be higher prices, maybe sharply higher.
So, although the corn crop is in very good shape right now this crop is far from made. It would seem to me that it may be a bit early to consider the USDA yield estimates, and therefore new crop balance sheet, a done deal. This should make the corn market very sensitive to any possible issues in a weather forecast. So far there have not been any issues, but it is pretty rare that we get through a whole growing season without at least a scare at some point. And, there are now some weather forecasts that are getting drier after this week. Really, some drier weather would not hurt the corn crop if there is rain behind it, but if there isn't.... Because of this corn could be getting close to carving out a low for now. I would think there should still be some weather premium left in the market at least until we get through pollination. And if there really is a weather issue this year, look out.
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July Corn Daily chart:
July Soybeans Daily chart:
July Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
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