Should Corn Add Weather Premium Soon?
Apr 30, 2015
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In the last ten days December corn has dropped a little over twenty cents as weather forecasts for this week showed an opportunity for aggressive planting in most areas. Much progress has been made however there will still be a lot of acres left to plant after this week. Looking out to the next ten days the forecast gets a little more concerning. From May third through May thirteenth regular rounds of rains are expected in a large section of the Corn Belt. This, along with the re4litive strength in soybean prices in the last few weeks could soon become a cause for concern.
Low prices in corn and relatively better prices in soybeans this year have caused a large shift from corn acres to soybeans. Even in the last two weeks soybeans gained 15-20 cents relative to corn. This has producers leaning toward planting more corn and less soybeans, not only because soybean price offer a better chance at profitable margins but also because soybeans cost less to produce and therefore represent less risk to producers. However, at this point corn acres may be dropping dangerously low to where another near perfect growing season might be needed to keep the corn balance sheet from getting relatively tight.
The regular rounds of rain starting next week over a large portion of the Corn Belt may also make it a difficult decision for producers to plant their intended acres of corn. For many varieties, corn planted after May 15 will start to loose some yield potential. We have proven in the last few years that this may not be as big of a loss in potential if the remainder of the growing season is near ideal. However, this may just be that added incentive to make some last minute switches to even more soybeans. In a year where corn cannot afford to loose any more acres corn may need to respond with higher prices to encourage planters to continue to roll out corn acres.
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Even if we do get all of the intended corn acreage planted corn may still need to add in weather premium at some point. As I sit here going over my corn production scenarios in preparation for the May 12th USDA WASDE report I cannot help but think that the USDA baseline yield estimate is a really lofty target. At roughly 166 bushels an acre this would represent the second best corn crop on record and only a 5 bushel an acre decline from the record set last year. To me it seems ambitious to expect such a high national average yield. As I have mentioned in previous articles - The last two times we set a record national average corn yield we followed it up the next year by dropping 12 bushels an acre on average.
On one hand many of the acres corn has lost this year are in areas that are traditionally a drag on the national average yield. Areas such as the Dakotas and Minnesota have been hit especially hard by low corn prices as basis is also at or near record lows due to rail competition with Bakken oil. These areas typically have lower average yields than states in the heart of the Corn Belt like Illinois, Indiana, and Iowa. So this could be a potential boost to the national average yield. However, the record yield set last year was just as much a product of very good yields in these areas as it was a product of good yields in the typically good areas. In a sense we set a record national average yield by having yields in "fringe" areas that we would normally see in the best areas.
On the other hand with lower corn prices there has been lots of talk of producers looking for ways to spend less on growing this crop. This means a number of things but most of them translate into lower yield potentials. This by itself may offset and potential bump to the national average yield by way of loosing some of the lesser yielding acres. On top of this some of the corn planted in the south and delta is already loosing yield potential as producers are unable to get out into fields and apply chemical due to wet conditions. Finally, the biggest problem might be in the Western half of the Corn Belt. For as wet as the East has been there is a large area in the Western half of the Corn Belt that has been very dry and missed on much needed spring rains.
Going forward I can see a number of reasons for the corn market to want to add weather premium. The lower planted acreage puts this crop at risk of coming up short if there were to be any major weather issue. To me it would seem likely that we will see a drop in ending stocks from year-to-year with anything short of perfect weather. This could suggest that corn prices may need to be higher down the road. This may will not happen immediately as at the moment funds seem content with building a massive short position in corn. However, a massive fund short position can be the recipe for a massive short covering rally if there was a weather issue to spark it.
Please give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried - (312) 277-0113.
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May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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