Market Strategy: Black Swans Possible for Grains

September 3, 2014 09:41 PM
jerry gulke
October USDA reports often significantly influence the extent of harvest lows as well as any post-harvest recoveries. This year might hold a surprise.

With so much attention placed on just how much yields will exceed records, there might be room for optimism rather than the gloom and doom markets are reflecting. The Gulke Group crop survey estimates were never as lofty as some but rather in line with corn intentions of about 90.5 million acres. Factoring in about 1.5 million prevented planting acres, a figure announced in August by USDA’s Farm Service Agency (FSA), we revised our number to 89 million acres planted to corn.

Preliminary certified acreage data from FSA provides opportunity to evaluate changes USDA might make in October’s Crop Production report. One interpretation is USDA’s 2014/15 corn planted and harvested acreage estimate could fall by 2.5 million acres. Late plantings, reduced growing degree days and yet-to-be-numbered flooded acres suggest acres harvested for grain could drop more. USDA hinted at the possibility, reducing harvested area by 400 million acres. 

Harvested acreage totaling 80.8 million acres, instead of the 83.8 million acres in USDA’s August estimate, would produce crop of 13.736 billion bushels with the 170 bu.-per-acre yield assumed by the trade plus carry-in. That’s only about 300 million bushels more than USDA’s estimated demand of 13.435 billion bushels, raising ending stocks to only about 1.4 billion bushels. That hardly produces an oversupply of 2 billion bushels the market seems to be discounting. 

If corn yields reach 174 bu. per acre, it will add 320 million bushels and get carryover closer to 2 billion bushels. That would leave room for a demand surprise, reducing the need for prices to rise beyond $4.50 in the lead contract unless 2015 weather becomes a factor.

Soybeans appeared to be in trouble price wise starting with our early acreage survey.  The market offered a financial incentive to plant soybeans at the expense of corn. Corn prices plunged in May as corn plantings lagged, especially north of Interstate 90. In June, USDA raised soybeans to 84.8 million acres, well above my March estimate of 83.5 million acres. 

This past month, FSA’s acreage announcement implied a possible 1.5 million-acre reduction to 83.3 million acres planted and 82.5 million acres harvested. That would calculate carryout at about 375 million bushels using a soybean yield of 47 bu. per acre with a good finish in the Dakotas and USDA demand expectations of 3.535 billion bushels. That is much less than the 440 million bushels some expect. It will hold true unless soybean yields top 47 bu. per acre including in the Dakotas, where 10.5 million-plus acres of soybeans were planted. 

Alternative Surprise Scenarios. If a significant oversupply is to be averted, there needs to be an October acreage shock or a mid-September freeze. Absent a freeze, hope will lie in the prospect that U.S. producers heeded market signals and reduced corn acreage more significantly than the trade believed and that the cool, wet summer and fall dampened yields. If none of those events transpire, we’ll need either a demand-building phase for perhaps 18 months or a period of waiting until low prices result in fewer planted acres in 2015.

A final surprise this year might be the efficiency with which producers tuck crops into increased grain storage, particularly in northern areas with a wide basis. With cash corn well under $3 in the northern Plains, it seems rational to store below the cost of production and earn the market carry rather than to produce more of the same next year. 

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