Will Corn get back to $5?
May 29, 2014
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Corn has been under pressure in the last few weeks as the USDA suggested a larger than expected carry over number for new crop corn and planting progress has caught up to the 5-year average. Both July and December corn are now more than 50 cents from highs. Warmer temperatures and a quick catch up in planting progress has taken a lot of uncertainty premium out of the market, but was this the end of the story for corn?
In the last few weeks the trade has lost much of its fear that delayed planting and cold, wet weather would keep the corn crop from getting planted. In the mean time the USDA came out with a 1.73 billion bushel new crop ending stocks figure which was higher then trade expectations. This has eased most concerns and caused the market to fall quickly. However, if we look at the USDA's new crop balance sheet we still find some cause for concern and when we look at planting progress we have some concern as well.
The USDA's current balance sheet is assuming that the 91.7 million acres from the prospective plantings report will get planted. With a cool and wet beginning to the growing season there was concern that some acres would get lost or switched to soybeans. However, now that planting progress has matched the 5-year pace the concern has fallen away. But, if you look at the state-by-state breakdown we still see some concerning issues. North Dakota had been the biggest concern with only 17% of their corn crop planted 2 weeks ago. Weather got better and they made huge progress and are now 67% planted as of the last planting progress report.
This is a huge jump in a short amount of time but there is still 1/3 of the corn crop to get planted and at this point it is questionable whether there is still time to plant corn or not, the window of opportunity to plant is shorter the further north you go. If 67% planted in corn was the best we could do in North Dakota this would be about a 1 million acre loss in corn acreage. It seems unlikely that North Dakota stopped planting corn after last week, but what if they can only get to 80% before it is too late? This would still represent a 600,000 acre reduction in corn acreage and there are similar concerns about Michigan, Ohio, Wisconsin and Minnesota. Some acreage will be lost in northern areas. It also seems likely that some of the other states that are well ahead of pace will add corn acres but the result will likely be a net reduction.
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A lower planted acreage number for corn could take away some bushels from the USDA's big ending stocks estimate for new crop corn. The bigger issue may be that the USDA is using a trendline yield number that many people think will be difficult to realize. Currently the USDA is using a national average yield number that would be a record yield. It seems to be a bit of a stretch to expect a record yield at this point in time. It is interesting to note however that the previous yield record was set in 2009 which is a year that many weather forecasters are comparing to their expectations for this year. Even so, there is a lot of growing season to go and it would need to be almost perfect to get the yield the USDA is currently estimating.
With the potential for less corn acres planted, tighter than expected beginning stocks and the USDA expecting a yield number that may not be realistic the corn market should be very weather sensitive this year. Unlike soybeans there is really very little room for error for the corn crop this year. In order to have comfortable corn stocks next year we will need to have near perfect weather on the smaller acreage planted.
This means that if at some point we see a two week forecast that looks threatening (which happens most years at least once) corn could rally sharply to conserve old crop beginning stocks and slow export sales. The question will be where could we be rallying from if we were to get a weather scare. If it is much lower then where corn is now it may be difficult to get back to $5, but considering the potential issues we could have this year it would make sense for corn to find some near-term support near current levels.
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July Corn Daily chart:
July Soybeans Daily chart:
July Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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