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Market Commentary for 5/10/19
Friday's USDA report confirmed what the market already knew. Near perfect growing conditions last year, in the highest producing areas around the world, has generated too much corn and soybean supply in the US and globally. Unfortunately, due to problems with the African Swine Fever in Asia and the China trade war, demand has also decreased. With what we know today, it's unlikely either will be resolved before the end of the year.
Right now, the new crop market is likely overvalued, especially if most areas are planted on time and trend line yields are produced. But the big variable now is weather. Forecasts for the Dakotas and the eastern corn belt show a possible break in rain this week, but more rain is expected next weekend. This may mean farmers in those areas will wait for better planting conditions or take prevent plant. The Dakotas only have until May 25th, and the eastern corn belt until June 5th, before they have to declare if they are taking prevent plant on corn.
Will Farmers in These Areas Still Plant?
That is the billion-dollar question, and I don't think the market has fully addressed this. Right now, economics suggest that farmers should NOT push to plant their crop, IF they haven't applied nitrogen to fields yet, which many haven't been able to do.
Obviously, this goes against the long-held belief that a farmer needs to plant crops to make money. But essentially farmers right now are incentivized to NOT plant crops this year. The futures values for both corn and bean are certainly under the cost of production.
What If A Farmer Doesn't Plant?
Based upon conversations with crop insurance agents and farmers, depending on the average yield and insurance coverage purchased earlier this year, farmers could expect to receive around $300-$400/acre. In areas still dealing with excessive rain, these types of payments could cover a farmer's cash rent payments and weed control costs for the rest of the year. Plus farmers receive this money now, rather than waiting until after harvest. This could help with cash flow issues, and allow unpriced farmers to store their '18 grain until, or even after, harvest waiting for better prices.
If a farmer does try to plant corn, and prices don't go back up, it's possible they could end up losing money on any remaining unpriced corn in the bin AND unpriced new crop.
Will Farmers Really Not Plant Corn or Will They Just Switch to Beans?
I think some farmers will minimize their farm operation's risk and not plant corn this year, but I don't think many will switch to beans. Bean prices need to increase at least $1/bu for farmers to just breakeven.
Will Farmers Take Prevent Plant For Beans?
It's hard to say yet. Bean prevent plant decision dates are about 2 weeks after the corn dates, so there is still too much time to know.
If Farmers Are Incentivized to NOT Plant, Will More Be Considering Prevent Plant?
From what I understand, there doesn't seem to be any hard rules for how the claims process works. Basically, the insurance companies determine if farmers could have planted in their area, so prevent plant isn't necessarily a guaranteed payment to farmers. Still, there are a lot of areas that could be covered. Farmers should work with their crop insurance agents to determine if their area might be covered.
So, How Many Corn Acres Will Ultimately Get Planted?
It's hard to say at this point. While no two years are ever the same, 1995 had some historical similarities to current conditions. In 1995 the US loss about 4 million corn acres from March planting intentions to the final acres planted. If we use the same type of acres at today’s yields it equals about 700 million bushels (4 million acres x 175 yield).
A 700-million-bushel reduction to the 2.4-billion-bushel projected carryout (May USDA report) would leave 1.7 billion bushels, the tightest carryout since 2013.
On the surface this sounds very bullish, but it really isn't. If this happened, and futures rallied more than 30 cents, export demand and ethanol grind would likely slow, ultimately increasing carryout. Plus, the wheat supply is also high with Kansas City futures below $4. Wheat could easily replace corn for feed in parts of the southern plains.
Is There an Upside?
Yes, the national average yield in 1995 was 5 bu/acre lower than trend-line, due to poor summer weather. In other words, the variability and unpredictability of weather can still be a big factor. If the summer weather is too wet, too much nitrogen could be leached from the soil. If the summer is too dry, corn root systems may be too shallow, which could compromise yield. Both of these scenarios could be the match that lights a fire under the markets.
The market will be waiting until May 25th to see how much of the Dakotas will take prevent plant and what the 10-day weather forecast for the eastern corn belt will be. If I was a farmer in one of these areas and hadn't applied nitrogen yet, I would really consider not planting corn unless there were optimal conditions. The potential for losing money at this point would be too high.
If I really thought a market rally was likely due to wet conditions, there are risk management tools available that would allow me to participate in a rally without actually putting seed in the ground.
What About Your Farm?
Our farm in southeast Nebraska missed much of the recent rains. We finished planting our corn and beans last week. Still, it's been cool recently, so it's uncertain if some areas will need to be replanted.
On 4/23/19, when the corn board was in free-fall, I priced my remaining 2018 crop on futures. I didn't set a cash price, and instead I was waiting for a higher basis. I received $3.61 against July futures on the remaining 54% of my '18 crop I still had unpriced.
Why Sell Futures Now?
There were several reasons.
- I was concerned with how much corn prices had fallen already
- It was apparent to the market there was too much US and global corn supply
- I'm only 10% sold for my 2019 corn and have no 2020 sales
- The risk of African swine fever appearing in the US is always present
- Unknown trade risk with China
- Unknown if NAFTA 2.0 gets signed
- On 4/23/19 forecasts indicated that most of the corn belt would have a 15-day window of good weather to plant
So, in order to minimize my risk if the market didn't go higher, I sold. I hope this sale was the wrong decision, because that means I'll have higher prices to sell my '19 and '20 corn. Currently, '19 and '20 prices aren't at profitable levels.
What's Your Final '18 Futures Price?
When I combine the 54% sales above to my previous 46% futures sales I've rolled to the July contract to collect market carry, and the options premium I've been collecting to this point, my final 2018 futures average price is $4.01 against July futures.
What About Basis?
These trades did not have basis set on them. Since farmers weren't selling when price levels dropped, and because many were ready to plant, I thought there was a good chance for better basis. Today's basis levels in my area are better than on 4/23, so I'm pleased with this decision so far.
Hindsight Is Always 20/20
I sold my remaining 2017 crop last August at $3.60. In hindsight, had I sold all of my remaining 2018 crop on the same day, I could have rolled those sales to this July and collected 40 cents of market carry. In hindsight, that would have been the better decision than waiting for a rally that ultimately never came. Still, while less ideal than collecting market carry, I did manage to pick up some extra premium selling calls and straddles on my unpriced corn over the past few months, which has been a consolation prize to help with my overall average price.
It's hard to know yet if selling futures at these levels was the right decision. But, with what I know today (90% of my '19 crop is unpriced), I'm comfortable with my risk management decision. It was time to move on and focus on next year.
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