Corn Spreads May Suggest Corn Is Undervalued And Needs To Trade At $6
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Market Commentary for 12/3/21
Usually, the corn market is in a carry this time of year, meaning futures values are higher in later months versus current months. When the market is in a carry there is an incentive for those with storage capacity to hold grain for later use.
This week the December corn futures entered its delivery period and is now worth more than the March contract. This suggests the market wants corn sooner than later. Having an inverse in the futures market at this point in the marketing year is uncommon for corn and may signify corn is undervalued.
Is Corn Really Undervalued?
Since harvest finished throughout the US, basis values have continued to climb much higher. Some end users in recent weeks have had to increase their basis bids by 20 cents or more to keep corn flowing into their facilities. Others have turned to free storage or fancy marketing gimmicks to encourage farmers to deliver their corn right now.
However, the latest USDA numbers suggest carryout is adequate and prices should remain range bound. Therefore, market participants are wondering how much upcoming USDA reports will change, especially the highly anticipated January report, which will have final yield numbers. Some in the trade think the later harvested crop yields were down from early harvest, but this was mostly seen in the tar spot areas of the eastern corn belt. The rest of the corn belt showed little drop in yields as harvest progressed.
Market demand continues to be a big area of interest. Ethanol demand specifically has been extremely strong and will likely see balance sheet adjustments in future USDA reports.
Export pace usually takes off in February and March, after beans are shipped out. Therefore, it may be a little early to know what to expect here. However, something unique is happening in Canada currently. Since Canada grows a lot of wheat and canola, their export capacity shipped out of Vancouver to Asian markets is usually dedicated mostly to those products. However, due to drought conditions Canada’s production of most crops is significantly limited. Therefore, Canadian elevators have been shipping US corn out of Illinois through Canada, to the ports in Vancouver, and then shipping it to Asia to supplement these commercial elevators bottom lines.
Farmer’s overall lack of selling could also be contributing to stronger prices. Many farmers are waiting to see what happens to fertilizer and input costs this spring before deciding what to do, because with increased input costs, some may not raise as much corn as usual. Plus, if farmers decide to plant more beans, they will need less storage capacity next year, and feel less pressure to move corn when they usual would. Also, some farmers may wait to see what weather conditions are like next summer before selling anything more.
Bottom line, if fewer corn acres are planted next spring, upside potential could be significantly higher. Plus, South American weather issues become more critical over the next 60 days. However, if fertilizer prices begin to fade, more corn could ultimately be planted, which could have negative affects on prices longer term.
Market Action
In early January ’21, when March ’21 corn approached $5.00 and December ’21 corn traded above $4.25, I priced the first 30% of my anticipated 2021 crop production. After watching the corn market rally significantly in 2019 only to crash quickly below $4, I wanted to minimize some of my downside risk for the upcoming marketing year by selling at prices traditionally in the upper end of the market range since late 2013.
Also, last Wednesday a price target I recently set of $5.95 was triggered on the March ’22 contract for another 10% of my crop.
This leaves me with 60% of my 2021 corn left to price.
Want to read more by Jon Scheve? Check out recent articles:
How I Made Additional Profit In A Corn Market That Traded Between $5 And $6
Can Wheat Trade Above $9? And If It Does, Could That Mean $7 Corn?
Can Corn Trade Back To $7 Or Does It Drift Back To $5
What Is In Your Marketing Toolbox?
Can Corn Break Out Of The $5.10 To $5.40 Trading Range?
Should I Store Corn Or Beans This Year If I Am Limited On Space?
Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
