Major USDA reports will hit Chicago futures trading pits on Monday, potentially ushering in lower prices on the expectation of growing stocks and increasing yield potential. But with the advent of new trading tools including short-dated options and even weekly options, producers can protect against an outcome even more bearish than what the trade expects for corn and soybeans.
That’s the view of David Hightower of The Hightower Report, who spoke at a pre-report Chicago Mercantile Exchange webinar this week.
"I prefer to hedge and to hedge the hedge" using a combination of futures and options, Hightower says. A look at historical price reaction to USDA’s June Grain Stocks and Acreage reports shows the potential risk for producers without price protection.
Historical prices reveal volatility following June reports
For soybeans, November contract prices on report day moved lower more than higher going back to 1990, Hightower’s analysis shows. Prices were lower following release of the June reports 13 times for an average decline of 15 cents per bushel. The maximum decline of 31 cents occurred in 2004. In 11 years, prices were lower 10 days after the release of the reports, with an average decline of 39 cents and a maximum of 77 cents in 2009.
A reverse price move is also possible. On 10 occasions, the reports were the primary factor driving same-day soybean prices higher, with an average of 18 cents and a maximum of 40 cents in 2007. In 13 years, prices rose 10 days after the release of the reports for an average gain of 53 cents and a maximum of $1.63 in 2012.
For old-crop soybeans—the August contract—prices moved lower on the day of reports 14 times and higher 10 times. Ten days later, it was a split decision. Old-crop prices rose 12 occasions and fell on another 12 occasions.
Turning to corn, the new-crop contract for December also moved lower, on average, on the day the June reports were released in 12 years for an average of a 14-cent-per-bushel dip and a maximum of 30 cents in five different years. Prices moved higher in 11 years for an average increase on report day of 7 cents and a maximum increase of 30 cents in 2010. In 14 years, prices fell 10 days after the release of the USDA reports for an average decline of 22 cents with a maximum downward spiral of 90 cents in 2008. In 10 years, prices rose 10 days later with a 36-cent average and a maximum of $1.38 in 2012.
Under each of those scenarios, producers faced considerable risk.
2014 June reports storyline: Soybean conundrum
This year, the bigger pricing conundrum might be soybeans. Old-crop and new-crop fundamentals are divergent, and a $1.91 price inversion early today could widen further over the next few weeks. For example, the old-crop July contract traded at $14.24 this morning, but the new-crop November contract stood at $12.33.
Unlike corn prices—which largely reflect bearish prospects of excellent growing conditions and increased acreage—soybean prices have held strong. That likely won’t last much longer, Hightower says, noting that a $2/bu. to $3/bu. price break is not out of the question.
"We remain very bearish for November soybeans and are expecting a test of the $10 level by late July/early August if the weather remains normal," he says.
Although November soybean prices might retreat sharply in a few weeks or sooner, old-crop soybeans tell two stories. Some experts think old-crop beans might head higher in the short term.
"It’s a night-and-day scenario with higher yield and more acreage but a huge challenge for old crop," Hightower says. For example, old-crop stocks-to-use is at a record low of 3.7%, yet 2014-15 ending stocks are likely to be 14.2%.
"The potential exists for a large amount of volatility," Hightower explains. At the same time, there is potential for negative demand news from China and elsewhere.
Adding context to the market outlook for corn and soybeans is a new report from Rabobank. It notes that old-crop soybeans are likely to trade at $13/bu. to $14.75/bu. in the third and fourth quarters, while new-crop prices likely will be in the $10.50/bu. to $12.50/bu. range.
"Price rallies are likely needed to ration old -crop stocks and imports to cover U.S. demand through October," Rabobank says. While the bank’s economists look for a substantial collapse in soybean prices, the drop-off might not occur for a while. "Soybeans from 2014-15 will only begin making their way to crushers in late September at the earliest. This leaves a considerable period where the dwindling old crop will be needed to supply demand," Rabobank says.
Additionally, South American soybean imports are failing to satisfy U.S. demand and to reduce domestic price pressure. "To reach the record high USDA (import) projection of 90 million bushels and maintain ending stocks at the current low level of 125 million bushels, the U.S. would need to import nearly 15 million bushels each month through August," Rabobank notes. "This is 3 million more than the previous single-month record of 12 million bushels in July 2013 and over double the next-highest level reached in September 2013."
Lower corn prices and high livestock prices would enable pork producers to pay more than $700 per ton for soybean meal—40% higher than current levels. Poultry producers would be in a similar position with record meat prices. "Depending on the amount of physical coverage at the feeder level, we expect use of soybean meal for animal protein production to remain strong on both a global and domestic level," the bank says.
Overall, Rabobank says, these factors suggest that "a bearish surprise in USDA’s June Grain Stocks report is doubtful. Our expectation is for USDA not to find more soybeans (which some anticipate) but potentially report a record low."
The trade, meanwhile, expects a jump in soybean yield and planted acres.