~~Market Commentary for 6/15/18
This week the USDA increased the export demand pace for corn. Should the US produce a trend line corn yield of 174/bu/acre this year, then carryout would drop from the current level of 2.1 billion to just below 1.6 billion by next summer. If that were to happen, then corn is undervalued.
However, the nearly perfect growing conditions across 90% of the corn belt is keeping prices down at the moment. The corn crop is setting itself up for a 180/bu/acre national average estimate, which would mean 500 million more bushels and a carryout over 2 billion. If that would occur then Dec corn is overvalued today.
On June 29th we will learn if the US farmers planted more corn acres than estimated in the spring by the USDA. Expectations are that an increase of ½ - 1 million additional acres might have been planted. That would translate into an additional 100-200 million bushels to the carryout. This is not something that will help those looking for something to help rally this market.
In 4 of the last 9 years (2009, 2013, 2014 & 2016) Dec corn futures drifted lower from mid-June through harvest. Weather analog years show 2009 and 2014 having similar weather conditions to this year so far.
In 5 of the last 9 years (2010, 2011, 2012, 2015 & 2017) Dec corn had a pop in prices at some point later in the summer.
Weather forecasts should be biggest driver of the corn market going forward. There is a lot of summer to go and its still hot in many parts of the corn belt, but rain makes grain.
The trade war certainly isn’t helping the situation but the amount of corn exported is small in relationship to beans on a percentage basis. The US produces over 30% of the worlds corn and soybeans, it’s not as simple as not buying our product.
Why I Want To Sell Corn Before Harvest
Over the last two weeks I've explained why I use average yields as estimates when selling corn prior to harvest. I've explained that there are a lot of advantages for selling before harvest.
Better Chances For Higher Prices
Historically, the best futures levels tend to occur during the middle of summer. Over the last 30 years, the price for new crop corn has been higher in May than October 75% of the time. Conversely, storing corn, hoping for a rally where prices the following spring are higher than at harvest, only happened 50% of the time. When a farmer stores corn they need to also factor in either the cost of commercial storage or home storage and the interest paid on the value of the stored grain. Either way this extra cost reduces the chances for better prices from harvest to spring to less than 50%. Even in the last 10 years only 2010 and 2011 saw significantly higher prices after harvest that exceeded those of the summer before harvest.
Taking Advantage Of Market Carry Premium And Basis Flexibility
Farmers can also take advantage of market carry premium in the market. That is when future months are worth more than current months. This opportunity is only available if a farmer has sold their corn by harvest.
There is also the benefit of basis increasing after harvest, which happens in most years, even if futures prices don't rally.
When considering the profit opportunity potential of market carry and basis there is a better chance to maximize profitability by selling before harvest than waiting until after, hoping for a rally while paying storage costs and interest.
Despite these benefits, a lot of farmers are fearful of committing to selling their grain before harvest.
Why I Don't Worry About Selling My Grain Before Harvest
My crop insurance protects all sales up to 80% of my normal APH yield, so as long as I don't sell over 80% of my APH yields, then my sales are covered against a rally. This doesn’t mean I will get to take advantage of those higher prices, only that I don’t have to worry about coming up with bushels to cover the sales I made if I don’t raise the crop.
Missing Out On Future Rallies
Often farmers fear missing out on futures rallies, so they wait. But from my perspective, every time I sell I could be potentially missing out on a future rally regardless of the time of year. Nobody knows when the highs and lows of the market will occur. Therefore, since I'm willing to presell 80% of my grain before harvest, I can still take advantage of future rallies, but they'll just be on next year's crop instead of this year. Pre-selling doesn't keep me from profiting on rallies when they come, it just may change which year I use it.
I use averages from the last 3 years and assume a minor inflation increase. I make sure to include all expenses, including fair market rental value for owned land, cost of living expenses, equipment custom rates, etc. In the end, I'm usually really close every year. My biggest expense variable can be fertilizer prices. Still, even a $100/ton price shift, which is pretty big, only adjusts my breakeven price by 11 cents or about $20/acre. I can eliminate this risk buy purchasing in advance.
Final Yield Uncertainty
Yields actually have the biggest effect on my breakeven prices, more than any other variable. For every bushel produced above or below my average production, my breakeven price changes 2 cents or $3.50/acre. Instead of letting this significant variable keep me from selling before harvest I use average yields for planning. I reserve the extra profits when yields are high, and pull from those reserves during dry years. This takes some discipline to do, but the extra profit potential makes it worth it for me.
I think the benefits of selling before harvest outweigh the negatives. The market usually trades above my breakeven point at least once during the marketing year, so I try to take advantage when it does. 2017 might have been the first year in a very long time where that didn't happen. So far in 2018 the market has already traded above the average farmers' breakeven point and there is no guarantee it will happen again.
Since weather is the main driver for corn prices and completely unpredictable, I need to have a grain marketing strategy in place that provides the best chances of profit potential every year. For me historically there is a lot of rationale to support selling most of my corn before harvest. Granted it takes discipline and planning, but it's worth it for the increased chances to maximize profitability for my farm operation and minimize my risk exposure.
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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