Spring has sprung, and summer is just around the corner. It’s an exciting time on the farm as planters roll. The final numbers for planted acres will come out at the end of June. I’m guessing corn acres will be close to 89 million and soybeans will be above 84.5 million. But how much?
At this point in the year, it’s perception of the facts, not the actual facts, that keeps farmers on edge. Here’s the lay of the land as I see it. We have too much unpriced corn in the bins, and producers will continue to dig in their heels until at least June. While they’re holding out for $4.50 plus, I think any move in July corn above $4 after mid-June will move a flurry of inventory. As for the new crop, we will ring in summer with a significantly lower amount of expected 2015 corn priced than normal. Again, producers want prices above $4.50 cash. What has to happen for that to occur?
Let’s assume demand is constant—89 million acres are planted and 83.5 million are harvested. It will take a
carryover level below 1.5 billion bushels and a move below 1.3 billion to excite the trade to $5 corn.
Let’s look at the numbers. If we start out at 1.8 billion bushels of carryover and we need to get down to 1.3 billion, 5.8 bu. have to be shaved off the national average yield, currently at 165 bu. How much do you want to bet the June to August weather will be bad enough to drop the U.S. total yield below 159.2 bu.? Only the big guy upstairs knows, but betting on a 1988- or 2012-type weather event has worse odds than winning big at the blackjack tables in Las Vegas.
Some tough decisions need to be made soon. Once the crop is planted, producers should have a floor under the market for at least 50% of their expected production using a flexible strategy, such as a long put. Once it gets to the pollination stage, move up to 75%, and then past mid-July, convert puts to cash positions to capture carry and narrowing basis. If producers elect to do nothing (as I suspect many will), it will be next May or June before good pricing opportunities develop.
It’s time to accept the best soybean prices are behind us and carryover could grow to levels not financially healthy to farmers’ bottom line. The only good point about low soybean prices is it will discourage domestic and international production for fall 2015 into 2016, which will set the stage for a significant price event once demand eats through the stocks and reduced acres. I hope it is by spring 2016, but I fear it might not happen until spring 2017 simply because of limited financial alternatives.
With this type of fundamental backdrop, what can farmers do? If more than 85 million planted acres and average yields above 46 bu. are confirmed, carry will be at levels that will result in prices below the cost of production, big carrying charges (an incentive for producers to store) and potentially wide basis. Aggressively price soybeans at $9.50 to $9.80 basis in the November contract. Be prepared to roll forward to capture carry this fall. Unless producers can get a good basis bid now, I anticipate no action until winter.
While corn and soybeans have some price opportunities, the wheat market has already driven prices down to levels where aggressive selling is not warranted. For now, roll forward cash sales to capture carry and wait for basis to narrow. If the corn market does materialize, it will be difficult for wheat to make a significant low until fall.
I believe wheat prices will bottom first, but it will be due to global fundamental problems rather than U.S. production. Buy deep-out-of-the-money July 2016 wheat calls to help sell expected 2016 inventory from December 2015 to March 2016. Plan on having all the calls bought before the first of September this year.
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.