Head to Head: Grain Glut

September 7, 2016 02:06 AM

Q: USDA estimated record production for corn and soybeans in its August report. Some in the trade have now looked to 2014 as a potential analog year. In that year, corn yields were reported as a record in September, yet yields later declined and the grain markets staged a strong rally into the end of the year. Can you discuss any comparisons to that year and what you are expecting with regard to prices as we move through harvest 2016?

 Randy Martinson 
  Co-Founder, Martinson Ag Risk  Management

Corn To Test Lows, Soybeans To Stabilize

In 2014, the average national corn yield dropped from 171.7 bu. per acre to 171 bu. per acre. Then USDA decreased harvested acres by 700,000. By the final estimate, corn production was 100 million bushels lower than expected in September, and demand was 100 million bushels higher. The combination pushed corn prices higher into year’s end. 

This year, the scenario is different. USDA expects strong demand, with most categories at or near record levels. Crop-condition ratings have been higher than in 2014, so it is less likely yield will decline barring weather issues. Corn prices will likely test previous lows.

Soybeans saw a yield increase of 0.9 bu. in 2014, while harvested acres declined 1.5 million. That left production virtually unchanged. Prices rallied on a large increase in demand
of almost 300 million bushels. Today, soybean demand is estimated at record levels and has little room to expand. It is likely soybean prices will decline into early fall, but if demand projections remain, soybeans will need to continue to entice farmers to sell. That will leave prices stable through the winter.  

Contact Randy at randy@martinsonag.com

  Matt Bennett 
  Owner, Bennett Consulting

Protect Profit Going Into Fall Harvest

When looking at these two years, a couple of things jump out. In 2014, prices were higher earlier in the year, coming off of several years of higher prices. We saw a huge rally for both corn and soybeans coming out of the biggest corn crop the U.S. had experienced. This year, USDA again came out of the gate aggressively, but with high good-to-excellent crop ratings, it’s not surprising. Prices have fallen $2 on soybeans and $1 on corn since mid-summer, so producers are looking at tight profit margins. 

Although producers in many situations will have a tough time showing profit on corn, even at yields well above actual production history (APH) levels, soybeans are different. Soybeans are $1.25 above the spring insurance price and still above cost of production for most farmers, meaning we have two different situations. It might be tough for producers to be as profitable in 2016 as they were in 2014 in the absence of another big rally. Therefore, producers should be prepared to protect what profit there is on the table going into harvest, while maintaining enough flexibility to participate if we get blessed with a rally once again.

Contact Matt at matt@bennettconsulting.net

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 the advice we give will result in profitable trades.


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