Market Strategy: Deja Vu All Over Again

February 24, 2016 02:53 AM
 
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At the end of March, we will get another update on grain usage from the Stocks In All Positions Report that measures stocks as of March 1. It gives a much better analysis as to how much is being used and where the balance of the 2015/16 crop is stored. 

We will also get the first survey-based planted acreage estimate, updating USDA’s academic estimate of acreage and usage. Finally, an All Hogs Report also will be issued before the end of March to help refine corn usage going forward. 

The table below reflects expectations for the remaining 2015/16 crop and estimates for the 2016/17 crop year. It appears the popular estimate of a 900,000-acre increase in planted corn acreage would result in déjà vu all over again with very little change in ending stocks from this year, assuming another excellent national yield of 169.2 bu. per acre. 
  
Corn Cash Flow. Given anecdotal evidence from winter outlook conferences, including our own Gulke Group Annual Outlook meeting near Palm Springs, Calif., producers seem to embrace corn as the crop where they most likely can cash flow in spite of very low prices. 

Consequently, one might assume an increase in planted corn could exceed 2 million acres. Our annual client survey has a record of being very accurate and will be released around USDA’s. 

Weather forecasters are slowly coming out with their summer expectations. If you attended Top Producer Seminar, you know some with good track records are quite bullish on prices, while others are hanging back, suggesting it is too soon to know the rate of deterioration of El Niño to La Niña. 

All forecasts have a percentage of accuracy, of course—even at 85% accuracy, there is a 15% chance of being wrong. Yet it is likely this year might not be like the past year. The 1.8 billion bushels of incoming stocks next fall will be a headwind that comforts end users and cushions a minor production problem.  

In the chart below, Estimate A is the déjà vu scenario. Feed demand rises, ethanol slows and exports gain in 2017 as South American exports fall.

Consider Multiple Scenarios. Estimate B suggests a 2.4 million-acre increase with only trendline yields and not another near-record crop. Production drops nearly 200 million bushels, which is reflected in ending stocks, with no change in demand. 

Estimate C, reflects a 12-bu. drop in yield from 2015 but is only a 5% drop from trendline. In 2013, we thought a 158-bu. yield was acceptable. In 2012, a 123-bu. yield was unthinkable, even well into the end of June 2012. Spring planting went well and corn acres rose to a record 97.3 million acres. Yet production fell 1.4 billion bushels, ending stocks dropped to under 850 million bushels and exports fell by half. 

So far, 2016/17 looks similar enough to 2012 to make me tout flexibility in marketing. In that year, buy signals came one week before the $3 rally after the June 30 revised acreage report. Managing price risk and marketing flexibility is a must. That’s what futures and options were designed to do.

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