Outlook: It's Hard to Turn a Tide

April 23, 2016 02:39 AM

We have to respect the corn bulls—they took a real hit after the March acreage report. While many folks immediately thought the acreage numbers were a USDA fantasy, they were more concerned about their positions than the facts.  

A lot of ground has been worked and is in good condition to plant corn. When farmers run their budgets, corn remains competitive with soybeans. Now that the dust has settled, we’re seeing some corn acreage drift over to soybeans, but it’s not going to be enough to change the overall gain of big corn supplies.

The simple truth is we still have too much global corn, soybean and wheat inventory for current demand. Producers everywhere are being squeezed for revenue to pay for expenses. The alternative of voluntarily allowing acres to lay idle or reducing yields is simply not an option. Right now everybody is focused on getting the maximum production at lower prices to raise the necessary cash flow to keep their operations going. 

If demand doesn’t explode and producers aren’t going to voluntarily reduce supply, how do prices get back to reasonable profit levels? I see two paths: 1) “In time” unprofitable production acres will be weeded out and low prices will give rise to increased usage. I still predict a major price low will not occur until fall 2017. The good news is subsequent acreage reduction in spring 2018 could set the stage for 1988 prices if a weather event occurs.

2) It appears we are in an identical price pattern as spring 2012—bleak, but then we experienced a major yield reduction event that bailed out producers. A lot of producers are betting on the same type of weather pattern to bail out prices this year. 

Big potential corn supply numbers depend on planting, yield and demand assumptions. There are rumors of more than 2.3 billon to as low as 1.8 billion bushels. Granted, it’s a big enough range to keep traders active but it isn’t enough for producers to get December corn back above $4.50 futures and cash prices above $4. 

We’ll need two things to accomplish this: 1) Reduce corn carryover to at least 1.3 billion bushels. 2) The “perception” has to be the worst is behind us and good times will persist to drive carryover down below 1 billion bushels.  

The second part of the equation—perceived good times for the economy—is my biggest concern. If the U.S. dollar can rebound against other currencies, it will make an already weak export market difficult. 

As global demand growth continues to be strangled by increasing debt, consumers will be increasingly concerned about their jobs and the overall economy. I find it hard to argue for significant improvement in consumer opinion unless there’s a massive change in the tone of the global financial outlook.

As a result, I have not changed my basic strategy for 2016 to sell early and hard. If a June/July weather event does occur it could be the last chance to lock up a reasonable rate of return on expected 2017 production before we go through the price flush phase that will be necessary to drive acres out of production.

However, since many producers are selling at or slightly below their cost of production, it will require a flexible marketing plan that can react to a summer weather event. I continue to suggest making early spring and summer sales via in-the-money puts rather than cash or futures sales. If anyone is locked into cash sales, have some form of call protection in place by the end of May and plan to hold them until mid-July. 

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. 

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