Market Strategy: How Much Is Enough?

January 7, 2014 06:26 PM
JerryGulke MarketStrategy

With December 2014 corn futures $2.50 per bushel lower and soybeans $6 per bushel lower than most farmers were offered two years ago, the financial incentive to produce corn has disappeared.

While most producers knew it would eventually happen, the significant drop in corn prices might have surprised some. We forgot that all we needed to meet the past year’s reduced corn demand was 11.2 billion bushels. That’s only 128 bu. per acre on 87.2 million harvested acres. Iowa had a bout with late planting and was responsible for some of the 9.418 million acres of prevent plantings.

In March, Gulke Group estimated 99.1 million acres planted for 2013. If realized, the U.S. would only need a yield of 123 bu. per acre on 91 million acres. That alone is reason enough why December 2013 corn futures didn’t start out at $7.50.

As late as June, December 2013 futures had more than a dollar weather premium, in case we didn’t finish a good crop. One can imagine what prices would be if the full 99 million acres of corn and 78 million acres of beans had been planted.

Imagine "what if" for 2014. Due to the low corn prices, research firms, such as Informa Economics, suggest we might plant 3.8 million fewer corn acres and increase soybeans by 7.3 million acres. A precedent was set in 2008 when corn acres dropped 7.6 million acres and soybeans gained 11 million acres.

If there is a repeat, even with a 350-million-bushel increase in usage, a trend-line corn yield means stocks could further increase.

Soybean carryover would double to 370 million bushels, even with a 200-million-bushel demand increase. To match this year’s optimistic demand, yields next year only need to be 156 bu. per acre for corn and 39.5 bu. for beans.

Abundant Supplies. From what level will we reduce plantings? The 95.2 million acres or the 99.1 million first planned in March 2013? The fringe states around the Corn Belt will likely cut corn acres the most.

Farmers can reduce phosphorus and potassium for one year, and capital expenditures on machinery could be put off for a long time, which could potentially cut costs by $80 to $100. If you add renegotiating rents into the equation, growing corn is psychologically more palatable than most think.

There are many ways to skin a marketing cat, but buying expensive puts might not be one of them. In times like this, options were made to sell. While we work to build new demand and wait for our competitors to have a production shortfall, it appears we’re in for a long sideways-trading market. 

Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, send an e-mail to or call (707) 365-0601. 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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