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Market Commentary for 1/18/19
The March corn futures have been range bound for the last 150 days, usually staying within a tight 3.70-$3.90. March corn was only above $3.90 for 3 days during that time, and over the last 100 days, March corn has traded below $3.70 for only 3 days.
This lack of movement is clearly illustrated in the closing prices of March corn over the last 8 Fridays, which has been within 10 cents consistently.
- 1/18 - $3.81
- 1/11 - $3.78
- 1/4 - $3.83
- 12/28 - $3.75
- 12/21 - $3.78
- 12/14 - $3.84
- 12/7 - $3.85
- 11/30 - $3.78
Current Corn Fundamentals – Why I Think There Is Price Rally Potential
There are several current corn fundamentals that to me show there is a realistic expectation of higher corn price potential
Global Position - US corn prices today are the lowest priced corn globally. US corn is about 5 cents lower than Argentina and 15 cents below the Ukraine.
Upcoming Planting Acre Estimates - Corn needs nearly 3-4 million more acres planted in 2019 to maintain current carryout levels. Currently the new crop corn/bean ratio is 2.36 : 1 (for an explanation of the corn/bean ratio calculation click here). While the current ratio should encourage farmers to switch a small number of bean acres to corn, it may not happen. The wet fall could have prevented some acres from getting the necessary fertilizer and/or fall field work done when prices were much more favorable to plant corn.
Carryout - March corn is trading 30 cents higher today versus a year ago. Last year March corn rallied 30 cents from this date forward when the carryout was reduced from 2.3 billion at harvest to 2.0 billion as the year continued. Currently the carryout is projected at 1.78 billion and may be reduced to 1.7 billion once the final yield number from the USDA is published. Even if the carryout isn’t lowered further, this will still be the lowest carryout in 4 years.
Demand - Corn demand has been steady the past couple of months. Exports continue to be strong, feed demand has been steady, and the ethanol grind has maybe only slowed a little. There is a good chance all three will offset each other to keep demand the same or maybe even generate a slight increase. Still, until the government can reopen to provide production and usage information, everyone is in the dark.
Overall corn has several positive fundamentals going into Spring, which could mean good news down the road for farmers. If China would start buying a little corn to offset the trade imbalance, which was discussed in the trade on Friday, the news for farmers could be even better.
Markets are close on Monday Jan 21st in observance of Martin Luther King Jr Day
Does Fertilizer Buying Correlate With Corn Selling?
This week several farmers throughout the Midwest asked for my thoughts on selling corn when making fertilizer purchases for their 2019 crop. Evidently these farmers had been approached by fertilizer sales teams trying to show a correlation between corn and fertilizer prices and how they should sell some of their corn when they buy their fertilizer.
I don't have the details of the sales pitch the farmers were given to provide any advice there. However, I can look at the effects of purchasing fertilizer on farm operation budgets as well as the correlation between corn and fertilizer prices.
Comparing Fertilizer And Corn Prices The Same Way
In most years fertilizer prices don't change more than $100/ton year over year. While $100/ton may sound like a lot, the price per acre is low and usually only amounts to about 11 cents per bushel at most on the budget. I calculate all farm operation budgets on a cost per bushel, so prices are comparable to each other (i.e. apples to apples). Considering that corn futures had an 85 cent trading range during the last growing year, fertilizer's 11 cents doesn't really compare.
What Causes Fertilizer Price Movement
There are many things that can affect fertilizer prices, here are just a few:
- Fertilizer production inputs are a major factor. For example, natural gas is the main ingredient in many fertilizers, so big shifts in natural gas prices can change the demand structure. But, there are also substitute fertilizers not containing natural gas that could increase or decrease production to offset big price adjustments.
- Acre shifts could have an impact, but a change bigger than 5% in either direction is rare. While a 5% shift could send an initial price spike or dip in the short-term, the impact long-term should be minimal.
- Seasonally fertilizer prices have highs and lows depending on demand. Just as there are seasonal trends for corn (for example harvest tends to have the lowest prices of the year), there also seems to be seasonal patterns for fertilizer, when farmers are and are not applying product.
Usage Correlation Between Fertilizer And Corn
The total tonnage of fertilizer used per acre is 20-70 times less than the total tonnage of grain harvested from the same acre, depending on the type of fertilizer applied. So, I don't see how this would be a relationship between the price of either commodity. The sheer size difference is just too big to be relatable. Plus, in reviewing historical data, I couldn’t find any type of trend to support a price correlation between the two commodities.
So no, I wouldn't adjust my corn marketing strategy to align with my fertilizer purchasing. They are different commodities with separate and independent price fluctuations. Instead, I would just buy fertilizer when it looks like the right price at the time of year it makes sense for my operation. And I don't see any reason to sell some corn, just because I bought fertilizer on the same day.
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