Winter still has a grip on the country, but thoughts are already turning to spring and summer markets. This year is no exception—there’s a basic “hope” some type of event will occur to drive prices higher.
Let’s focus in on the corn market for now. The demand side is more or less dependent on two primary areas: domestic and foreign usage. Domestic corn usage has increased from 10.1 billion bushels in 2008 to 12.3 billion bushels in 2016. That’s 2.2 billion bushel increase.
For 2017, I think we’ve finally reached a level of domestic usage where limited growth in feed, ethanol or industrial usage will occur. I’ll budget 12.3 billion bushels for total domestic usage for 2017; it’s still solid but no surprise. This places the burden on the export market to spark demand growth. In 2008, we saw exports at 1.84 billion, but in 2012 it slipped to 730 million because of the price spike due to the weather. So the corn export market is more elastic to price and subject to potential big swings in usage levels. In 2015, we saw 2.23 billion bushels in exports (up 376 million bushels) for an average 63 million increase per year since 2008.
With the new administration making waves about poor trade agreements, we should assume a modest correction in exports this year to 1.95 billion. For planning purposes, I’ve pegged domestic usage at 14.22 billion bushels, which is only slightly down from 2016’s record pace of 14.53 billion bushels. For demand to become a bullish event we will need at least a 350-million-bushel increase somewhere.
With demand stable, the burden of higher prices falls squarely on the shoulders of the supply side which frankly is no big surprise. For many years, I’ve seen that supply-driven bull markets are difficult for producers to sell because they simply don’t know their inventory. Subsequently, they wait until the corn is in the bin to price it, but by then all the uncertainty is out of the market.
Let’s look at the numbers. In 2008, we planted 86 million acres to corn, which grew to a peak in the 2013 season to 95.4 million acres. With the drop in prices we saw a corresponding drop in acres (to 88 million) in 2015; but then acres immediately rebounded to 94.5 million in 2016. These 6- to 7-million-acre yearly swings account for a lot of the price variance in corn and why the April-to-June period holds the most market uncertainty of the year.
The early reports from the field seem to support a solid acreage decline again in 2017—between 3 and 4.5 million acres. It’s a little strong for me, but for budgeting purpose I will bow to the will of the trade. I’m quick to note this will impact the final production numbers in June. If we find more acres and weather has not been a factor, it will cast a negative tone in the market from July to fall.
For budgeting purposes, I’m content to work with a 90-million-acre planting number. This figure has equally had a significant amount of variability since 2008. We ended 2008 with a 153.3-bu.-per-acre production average and then started on a roller coaster the next six years.
In 2009, we saw a 10.1-bu. year-to-year jump to 164.4 bu. per acre. In 2010, average yield backed off to 152.6 bu. and in 2011 it backed off again to 146.7 bu. Then we were hit hard with the weather event of 2012 that drove yields down to 123.2 bu. The next year yield was back close to trend at 158.1 bu., for a 34.9-bu. net yearly change. In 2014, it increased again to 171 bu., for a two-year net change of 47.9 bu.
When you multiply this by the harvested acreage of 83 million, the net impact was close to a two-year net change of 4 billion bushels. From 2012 to 2014 there was not only a massive net resumption of production but the high prices of 2011 and 2012 drove down export demand and it took two years to recover.
The big question for 2017 is what yield should we expect? This past year’s record yield of 175 bu. drove up the trend line yield, which forces many number crunchers to use a yield projection close to 171 bu. The other reason why yield has to increase is the acreage reduction will be in poorer production regions, which allows overall yield to increase.
Conclusion: Corn has the best chance of a price event this summer because we start off with a solid demand base and reduced acres. This will make the market very sensitive to weather developments from May to July. Use a high yield figure to offset some of the bullish impact of a large acreage reduction.
Expected impacts on marketing plans include:
- Market volatility could be excessive from May to July. Avoid selling calls as a naked investment until well into the production period; wait until late June to early July.
- If a yield reduction event starts to develop, expect significant movement in the spreads. Specifically, watch for the nearby contract to move up faster than the deferred contracts. This will impact producers who have short futures or forward cash contracts on the books in nearby contracts, but plan to hold all the way to fall. Immediately roll 2017 hedges to the most deferred 2017 contract that offers carry. The objective is to keep hedges in the month that will go up the slowest. Then roll back to the September corn contract between late June and early July to take advantage of carry being put back into the market.
- Based on my experience, farmers find it difficult to sell in summer weather scare markets when the reason for the rally is hot and dry conditions. Conservative players buy calls; aggressive hedgers find ways to reduce costs by selling deep-out-of-the-money puts and calls. The objective is to get costs under 5¢ including commission, fees and option premium.
- Because of the possibility of market volatility from May through July, I urge farmer to buy deep-in-the-money puts rather than using futures or cash sales. Puts can provide flexibility during a price event if it occurs.
Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions.