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Volatility has been high in the corn market as we attempt to determine how many acres could be lost to this wet start and late planting. As we try to determine how many acres could be lost I think it is a good idea to look at the current USDA balance sheet and come up with a few different scenarios while keeping the demand structure and yield estimate unchanged. Yield is a big if at this point, but with crop conditions at 63% good to excellent in corn we are on pace to hit the USDA estimate. Demand numbers are a big if as well, and many would agree that some of the current USDA projections are much too high.
The USDA is currently looking for 89.5 million Harvested Acres in corn with a 158 bushel per acre Yield. Under their current demand structure that works out to a 2.004 billion bushel carry over. But it seems very likely that acreage numbers will be coming down, so we worked out ending stocks numbers based on a 2,3,4,5 and 6 million acre reductions in harvested acreage. They are as follows:
87.5 Million Harvested Acres (reduction of 2 mill) = 1.689 Billion bushel carry over
86.5 Million Harvested Acres (reduction of 3 mill) = 1.531 Billion bushel carry over
85.5 Million Harvested Acres (reduction of 4 mill) = 1.373 Billion bushel carry over
84.5 Million Harvested Acres (reduction of 5 mill) = 1.215 Billion bushel carry over
83.5 Million Harvested Acres (reduction of 6 mill) = 1.057 Billion bushel carry over
Keep in mind, these are harvested acreage numbers not planted acreage numbers. We did this because we feel that the percent of harvested acres could go up this year. Currently the USDA assumes that 92% of planted acreage will be harvested, we think that when all is said and done it could be closer to 94% this year. But, even if we hold true the USDA's assumption of 92% this would mean a 6.55 million acre reduction in planted acres would be a 6 million reduction in harvested acres.
I gotta say I'm having a hard time being bullish based on these numbers. Using the same yields as the USDA (158) if we lost 6 million acres in harvested acreage (which translates into a much bigger loss in planted acreage) and kept the current USDA demand structure the same we would end up with a 1.057 billion bushel carry over! I have to say, at this point that is the absolute worst case scenario for acreage, and it seems unrealistic to me.
Furthermore, we feel the current USDA demand structure is much too high. For example - How does the USDA justify a 925 million bushel increase in feed and residual? Cattle on feed numbers are consistently disappointing, and there will be significantly more pasture this year. Or, a 310 million bushel increase in Food, seed and industrial when ethanol numbers are consistently falling behind current USDA projections? Or a 550 million increase in exports? You get the picture.
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When all is said and done we feel like even if we lost 6.5 million planted acres in corn we could still end up with 1.4 million bushel carry over, and that's is with only a modest reduction in feed (down 350 million to 4,995 which is still well above 2012/2013 at 4,400 and 2011/2012 at 4,545) and I left exports and ethanol unchanged even though I could build a very strong case for them being way too high as well.
From talking to clients I cant imagine it being as bad as our worst fears. I am having a hard time finding many producers that haven't been able to plant anything. Between me and my other 3 guys who work for me we only have a handful or two of guys that have yet to plant corn (In Iowa, Minnesota and North Dakota) and aside from guys in the very northern areas they are still expecting to get corn planted. As far as conditions are concerned my guys do not seem to be worried at this point, they want heat units but feel that will come. Development may be slow, but guys feel conditions are ideal going into the warmer months.
Make no mistake about it, markets will be very sensitive to weather this year. Acreage reductions put huge pressure on yield performance. Everything we talked about above is based on hitting the USDA's target yield of 158 bushels an acre, but if weather issues start to cut into that yield production numbers will drop fast. It might be true that a good amount of the acreage lost will be fringe acreage and therefore raise the average yield potential, but weather will need to agree. If there are issues similar to next year look out for new highs.
On another note, I think that is really interesting that hedge funds are so bullish. I suppose I could go both ways on that: on one hand it seems that the speculators are always the most bullish at the top and most bearish at the bottom, on the other hand I would assume that these guys pay a lot for the research they are getting. That being said, if the large speculator mentality is bullish they could certainly push prices higher in the short term as I do not see a whole lot of producer selling at the moment. However, I have to say that so far it has been disappointing to the bulls that after a 30 cent drop in corn in 3 days we can not muster more then a 6 cent bounce off this gap. Price action seems to be dominated by spreads at the moment but overall feels week.
We are set up for a wild month now with Monday's crop progress report being a huge deal, then we have our monthly USDA report on Wednesday and then what might be the biggest report of the year in the June 28th stocks and acreage reports. In the mean time we will continue to trade as a weather market. So, buckle up right?
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Situations like these are exactly why we always consider different strategies when marketing. Sometimes futures make sense, and sometimes option strategies that leave upside potential open or partially open make sense. If you are looking for ideas or want to talk strategy feel free to give me a call or shoot me an email, you will find my contact info below.
December Corn Daily chart:
November Soybeans Daily chart:
December Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have corn near $7.00 and soybeans near $14.00. 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 email@example.com
Please check out my Blog at: http://tedseifriedfutures.com/
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