In November, I wrote regarding the evolution of the then-past bull market and how it might only be a matter of time before prices could gravitate to $3.35/bu. I questioned whether price adjustment to overproduction would create a five- to-10-year sideways price range while global demand caught up—or whether it represented a pause that refreshes before a return to 2011/12 prices. Considering the current price environment, an update seems warranted.
Before the price rally early this year, corn prices had declined for almost two years following the peak price generated by the small U.S. crop in 2012. The sharp decline in prices since May 9 reflects increasing prospects for a large harvest this year that might further build up stocks.
Resultant price pressure could have a negative influence on the grain sector, requiring a minimum input adjustment of between $100 and $150 per acre to keep cash flow alive. Items such as fertilizer, high-tech seeds and land will be affected.
How burdensome will corn stocks get? Will the crop be slightly above trend (165 bu. to 167 bu.) or exceedingly good (174 bu. or more)? Should the good-to-excellent rating of 75% continue through August, odds increase that the latter will occur, adding nearly 600 million bushels to production and taking carryout above the 2.2 billion-bushel mark predicted last year. If that happens, oversupply will extend well into 2015 and perhaps beyond, barring weather.
High prices brought roughly 147 million acres of additional global arable land into production in the past eight years, and once new land becomes available through price incentives, it seldom retreats much.
We won’t have a good handle on planted, prevent planted or failed acres until the October update from USDA. The Gulke Group client survey in March told us the U.S. corn farmer reacted to falling prices by lowering planting intentions of corn to 91.7 million acres versus the USDA’s 95.3 million acres last year. This year’s June 30 reports confirmed the trend, as intended corn acres didn’t change. The key word here is "intended"! Iowa, Illinois and Nebraska were basically done by June 1. To assume areas above Interstates 90 and 94 were not affected by record rainfall after May 25 might be naïve.
Since May 9, corn prices have plunged. Several factors are needed to keep fall prices above $4.
Uncertainties remain. If planted-harvested acres fall 1.5 million acres, it might not be enough. We need a production shock via a late fall with normal or early frost to trim another 400 million to 500 million bushels along with a sub-170 bu. per acre yield to keep prices above $4 this fall.
In surplus times, price often gravitates to the variable cost per unit. A price with a "4" in front of it with a wide basis puts leveraged farmers in jeopardy as well as those new to the production game—for example, Argentina and Brazil. Well-heeled producers will look at falling land prices as an opportunity. I still view agriculture as a long-term opportunity, but timing is everything.
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, send an email to firstname.lastname@example.org or call (707) 365-0601. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.
- Summer 2014