Chip Flory: Make the Market Prove It

March 4, 2019 03:05 PM
 
As 2019 started, many corn and soybean market-watchers were convinced the markets would be forced to give growers a financial reason to increase corn plantings.

As 2019 started, many corn and soybean market-watchers were convinced the markets would be forced to give growers a financial reason to increase corn plantings. (Perhaps it’s more accurate to say the market would be forced to give growers a financial reason to decrease soybean acres.) These fundamental analysts have argued for more corn acres in the U.S., and feedgrain acres globally, for two years. That’s because global consumption of corn and feedgrains has outpaced total production, resulting in declining global ending stocks of feed supplies and a tightening stocks-to-use ratio.

I do believe markets eventually reflect the fundamentals of supply and demand, but it’s not always a timely reflection. There have been times when the acreage mix pushed way too far in favor of one crop, leaving other crops wanting for more ground. And if a quick, one-year adjustment forces a big change in the acreage mix, it normally swings too far, forcing further adjustments in the following years.

I don’t think either market will “overshoot” in spring 2019. Corn does need more acres, but price (and revenue potential) is not at a level to make it a “no-brainer” to plant more corn. And soybean price (along with the lower input costs) is not discouraging soybean plantings—it just isn’t attracting acres.

The condition of the early 2019 corn and soybean markets suggests a measured movement of acres from soybeans to corn. However, I don’t anticipate a 5-million-acre landslide. Here’s how the shift should affect your marketing plans.

  • A 2-million-acre increase in corn plantings from a year ago will be easy to absorb for the corn market. Any threat to yield potential in that scenario, however, would support price. The risk of a threat to yield means new-crop cash sales should be balanced by either a “go-slow” approach to cash sales or by offsetting cash sales with a call option or reownership in futures.
  • Conversely, if soybean acres fall only 2 million from 2018, the combination of too many acres and a too-thick supply cushion (beginning stocks of more than 900 million bushels) means the market will be able to absorb more production risk than in a year with more manageable supplies. This scenario includes the risk of even more burdensome carryover supplies at the end of the 2019/20 marketing year.

I’m not saying the soybean market wouldn’t respond to yield threats, but you should be ready to take advantage of any weather scare. Be ready to sell a high percentage of expected 2019 soybean production near breakeven revenue. Based on the current fundamental outlook, don’t be overly concerned with reopening upside price potential. You can do that later, but only if the market proves selling early was a mistake. If that does indeed happen, you’ll be glad you took a go-slow or balanced approach with corn sales.


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