The acreage mix is gaining a lot of press this year, as it should. A lot rests on whether or not we will sufficiently cut corn acres. Research firms go through this exercise every year to try to guess what we farmers will do.
USDA provided its baseline projection early last month of 93.5 million corn acres and 78 million soybean acres. The March 31 Prospective Plantings will show intentions, but as we have learned from years past, we won’t have an accurate report until the June 30 Acreage report. I’ve already covered how much is enough in January; however, there are issues that can affect the acreage mix.
Farmers might still think that something will happen to add a dollar to prices. By nature, we are eternal optimists, and have been strengthened by the market’s ability to rebound after being beaten down. We like to plant corn in the major corn states, as 200 bu. corn or better can be obtained with greater odds than 60 bu. soybeans. The non-farmer market participants understand this.
Weather is an obvious influence as 9.4 million acres went unplanted last year. Odds are, if plantable this year, half or more of those acres will go to corn. Late planting dates for corn from Ohio to Iowa haven’t had the effect on yields the past couple years, so a delay of 30 days isn’t what it used to be, psychologically. The extended summer growing season has come to be expected.
"Until final production prospects are more known, marketing flexibility is extremely important."
Additionally, USDA and private firms, such as Informa Economics, start the year assuming trend-line yields of 163 bu. corn and 44.5 bu. soybeans as a national average and adjust from there. Given reasonable expectations for demand growth of corn and soybeans, a good starting place is 2013/14 disappearance plus 400 million bu. for corn. For example, adding 400 million bu. to the 2013/14 usage of 13.3 billion bu. takes 2014/15 usage to 13.7 billion bu.. Planted acres of 93.5 million with 85.8 harvested at a yield of 163 bu. per acre results in a 13.989 billion bu. crop, plus 1.481 carry-in, for total supplies of 15.47 billion bu. Put this against 13.7 billion bu. usage and it equals a carryover of 1.77 billion bu. That’s still not a shortage, but it’s hardly a gross oversupply exceeding 2 billion bushels. A supply reduction of 500 million bushels is needed to keep December 2014 futures above $5.20. Early indications of planting under 90 million acres could do the trick. We reduced corn acreage 7.5 million acres in 2008, so it is possible, but not probable, as total available acres have increased in the past five years.
Be Flexible. A lack of profitability needs to be present into the planting season for farmers to reduce acres. The other option is weather transpiring into another planting season like 2013.
Insurance won’t bail out the farmer who is covered at 80%. Revenue Assurance starts at $3.64 per bushel or about $200 per acre less than last year’s stop-gap measure. The Prevent Planting option isn’t attractive. With total arable acres equal to or larger than last year, we’ll need to transfer grain and oilseed production back into hay, pasture, cotton and other grains to balance supply and demand, without a weather-induced reduction.
Until production prospects are better defined, marketing flexibility is extremely important. It doesn’t make any sense to buy a put option at near or below cost of production that might cost half or all of the potential profit we make. Farmers have to maintain beneficial interest in the physical commodity until more is known. The end user has an equal stake in the potential price volatility that we know can happen when we least expect it.
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.
- March 2014