Head to Head: Lows Can't Last

January 29, 2014 07:56 AM

Q:    USDA’s latest report showed more feed demand for corn than what traders were expecting. Do you agree with USDA’s numbers, and what does this mean for prices as we move into spring and early summer? If you had corn in the bin, what would be your strategy, given these new numbers?

It’s All About Price Stabilization

mike florez

Mike Florez
Owner & Trader, Florez Trading

USDA’s feed use number was well above expectations, causing carryout to be much lower. Analysts advising farmers to sell the market screamed foul, saying that much feed can’t be consumed with today’s animal numbers. They didn’t mention feed use was consistently undercounted last year.

USDA has become a "price manager." Since the corn shortage appeared, they’ve released price stabilizing reports. They did not want $8 corn, and $4 is low enough.

Expect USDA to report friendly numbers when prices get too low and bearish numbers when they’re too high. My price outlook for corn is sideways, but a low has likely formed. We’ve been going down for more than a year. South America is progressing well, and we know the U.S. crop size.

It’s what we don’t know. Can the analyst who tells you corn is going to $3 know the size of the 2014 crop? Don’t forget how much it costs to feed your family, heat your house, educate your kids or visit the doctor. Don’t forget the world’s demand for protein.

Why should the price of all the goods you use go up, but the price of what you produce be immune to such pressures?

Market Might See July Peak

bill biedermann

Bill Biedermann 
Co-founder, Allendale Inc.

USDA has a difficult task surveying, ground-truthing data and calculating final numbers. A 14% drop in corn price made feeding corn economical and supports USDA’s findings. Poultry production is also up slightly.

But cattle on feed September through November was -7%, and hogs and pigs were -1% from a year ago. Weather has caused cattle losses and PEDV hit pigs, which will prove challenging in determining feed use.

Total grain-consuming animal units are at a nine-year low. I expect Decem­ber’s report to be historically viewed as a necessary adjustment that reflects inventory, not demand. Subsequent reports will likely reflect less demand, compared to first quarter use. Without a 2014 supply concern, this could cap the market in spring and early summer.

Farmers should sell July futures and store old-crop corn to benefit from the 14¢ carryout. This grosses 3.5¢ per month. With a 1¢ on-farm bin cost and a 2¢ monthly cost of money, that nets a .5¢ per month return to management. Any basis gains also return to management. But there is basis risk as we move into summer. To avoid this, lock in basis on a portion of inventory for summer delivery.

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.

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