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Market Strategy

July 28, 2010
By: Jerry Gulke, Top Producer Market Strategy Columnist
 
 


The Game Has Changed

It is not unusual for USDA’s reports to affect price, which is exactly what happened with the June 30 Planting Intentions report when it revealed fewer than expected corn acres. USDA also made changes in its supply-and-demand projections that have positive implications for feed grain prices, a mixed to positive effect on wheat and a neutral effect on soybean price outlook. The long-term implications may be even more important than the immediate price response.

Given the numbers in the report, demand threatens to outstrip production three years running, and extrapolating numbers into 2011 reveals an urgent need for more corn acres. So we could see an intense two-year competition among ethanol, feed and exports.


The table below shows some startling revelations:

• I assume we’ll lose 650,000 acres due to prevented planting, failed acres and waterlogged acres that will likely not be found until the October crop report.

• Under only one assumption (high yield of 170 bu.) does production exceed use.

• Supply and demand are in critical balance. A shortfall in production or unexpected demand would result in a price shock.

• Next year requires 89 million acres or more plus another near-record yield to keep ending stocks above 1 billion bushels, but still results in a critical under 10% stocks-to-use ratio.

A 170-bu. yield is required for comfortable ending stocks next summer. Should the global economy revive in 2011 or China suffer a 15-million-metric-ton production shortfall, world corn supply could make for an interesting price discovery to thwart demand and keep supply and demand in balance.

The odds of a good soybean crop and increased carry-over should make buying more corn acres easier than in the past, provided China doesn’t need more beans than analysts anticipated, as so often has happened. 

Price volatility, influenced by weather, will likely be apparent until further acreage and yield adjustments are made in USDA’s October report. Options to control price risk will offer the peace of mind needed. So will marketing using cash forward contracts for cash flow or to capture maximum storage gains. Understand that history has shown there is little that can be done in the long term with $4.50-plus corn until global economies return to pre-2008 growth and employment.

T10110 tableJerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact him at jerry@gulkegroup.com or (312) 896-2090.



Top Producer, Summer 2010

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