Why Many Traders Feel Corn Could Go Higher & Beans Lower
Aug 18, 2010
SOYBEANS: Hot weather during the pod-setting stage and now uncertainty about the extent of "sudden death syndrome" in soybean fields across Iowa have some traders a little nervous and have propped prices up in the past few sessions. Reports are floating around that an Iowa State plant pathologist thinks that over 50% of the Iowa fields may be affected with the soil fungus which can potentially cause yield loss from 20% to 60% in infected areas. Obviously this has traders on the edge of their seat, and we will continue to monitor the situation as it develops. Certainly there are reasons for concern about yield, but from our perspective the ending stock levels are certain to grow. To give you an idea, if we were to see ending stocks dip back to the 160 million bushel level seen last year, we would need to see average yield slip to near 41.5 bushels per acre from the 44 bushel level the USDA has forecast. We just don't see this as a feasible possibility. Yes, disease issues in Iowa, if they spread, could produce some short term bullish momentum. But the outlook for expanding US and world ending stocks even with the higher demand will ultimately hold this market back. As long as funds keep buying and fears about lower yields take center stage prices may continue to push higher. We are advising all of our clients to have their hedges in place and be prepared for a significant price pull break as we get close to harvest.
CORN: Traders are now hearing the first reports from a private crop survey group out in the field that is for the time being confirming the USDA's record corn yield forecast. Early indications in Nebraska are coming in near last year's record levels according to tour members. For now traders seem content, but if average corn yields begin to fall or China begins importing US corn again, the ending stocks outlook could get extremely tight. Remember our stocks usage ratio has only been under 10% just twice since 1973 and if yields drop to 164 from 165 bushels per acre, this will be considered the second tightest stocks/usage set-up since that time. Personally we believe the yields will start to fall in the coming months, and we will see a seriously tight situation developing. Given the potential jump in wheat acres and soybean acres next year corn may be setting up for an explosive move.
One of the main reasons we have continued to rally is that traders are starting to realize U.S. corn exports could easily exceed the U.S. Department of Agriculture estimates. World feed markets will have less wheat and barley production from Russia and Europe as a result of the extreme droughts, and that will make U.S. corn attractive to importers as a cheaper alternative feed source. Even after Friday’s 100mb increase, this year’s U.S. corn export projection is just 2.050 bil. bu. If Russian winter wheat crop sowings, which are normally completed by the end of September, are reduced by dry weather and replaced by spring wheat sowings next year, U.S. corn exports could explode even higher in the months ahead as the feed window opens a few more months wider. We would not be at all surprised to see U.S. corn exports top 2.3-2.4 bil. bu. in subsequent USDA reports. This would be extremely bullish.
Throw in the strong possibility that this year’s heat and wet weather may actually reduce the projected corn yields and you can see why traders are starting to get a little nervous. The bottom line: if yields come in lower than projected corn is heading to $5.00 plus.
Trading Strategies: From a trade perspective we like buying corn and selling beans. Buy (5) December Corn & Sell (2) November Beans. If you are looking for less exposure you can try a 2:1 ratio.
Hedging Strategy: We currently have a $4.25 floor in place for all of our clients in Corn and a $10.25 floor in beans. Look to roll higher if the market rallies during the next few sessions. Next roll to $4.50 in Corn and $10.75 in Beans. Re-ownership programs can be executed if you need to make cash sales.
If you would like more information about these strategies please feel free to call our Ag Hedge home office at (816) 322-9800