TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.
With late planting concerns hitting a fever pitch this week should the corn market be concerned about loosing more acreage? And, more importantly what would happen if we couldn't get a million of the intended corn acres planted? Lets take a look at the potential impact.
As of Monday April 21st corn plantings were 6% complete compared to 14% as the five-year average. However, we are slightly ahead of the record slow pace of last year when we were just at 4% planted at this point and we still got 95.4 million acres planted. It sure was a bitterly cold winter season (the term polar vortex comes to mind) and we have been slow to warm up. Soil temps have been slow to get to adequate planting temps and in some areas frost line is still a concern. The two week forecast is also cooler and wetter then ideal which is adding to the concern.
In the last 20 years acreage numbers change by +/- 1,127 million acres on average from prospective planting to actual plantings. Now, I would think it is very likely that the corn crop gets planted, and we have seen in recent years that late planted corn does not necessarily mean a big hit on yield potential. But, with corn acreage already dropping 4% to the lowest level since 2010 what would happen if we lost another million acres to late planting?
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
At the beginning of April we put out our first new crop production estimate at 13.933 billion bushels on 92.3 million acres with a 164.5 bushel an acre yield. In this scenario we were increasing planted acreage by .5 million acres. But, if we go the other way with that and take a million acres off our planted acreage estimate what would that do to our production number? With 90.7 million acres and an assumed harvested acreage number of 83.7 million acres with our yield estimate of 164.5 it would give us corn production of 13.769 billion bushels compared to our previous estimate of 13.933 billion bushels and last years production of 13.925 billion bushels. This would be roughly a 165 million bushel reduction in production from our previous estimate.
Keep in mind that we are using a conservative yield estimate compared to the USDA's trendline yield of 165.6. We do feel that even with late planted corn we would have a good chance at hitting our yield target yield because of the nature in the shift of acreage. The largest reduction in corn acreage is coming mostly from the lower yielding areas. For example, the largest shift from corn to soybean acreage is in North Dakota. So, with less planted acreage in the lesser yielding areas we do feel it would be easier to hit or get near trendline yields this year given normal weather.
However, what would happen if poor weather during the growing season were to start to cut into yield potential? For example, lets use the same acreage numbers but with a yield of 160 (a 3.5% reduction from the USDA trendline yield). This would give us a production number of 13.392. This would be a 540 million bushel reduction in production from our previous estimate and could give us a tighter balance sheet then the current marketing year. It is easy to see that much more of a reduction in yield would quickly cut production and put the balance sheet in a tight situation. This could cause a need for price rationing.
So, from this exercise we see that losing some corn acres due to late planting is not the end of the world but it certainly puts more pressure on good yields. With lower acreage it will be very important this year to hit strong yield at or near the USDA trendline. This could make for a very sensitive and very volatile weather market going forward. Currently longer term forecast are looking at a good chance of a moderate El Nino weather pattern for the growing season which would be good for crops. But any hint of weather issues this year might be met with significant concern and possibly higher prices. On the other hand, if weather is near ideal we could still have a record crop this year.
Sign up for our newly renovated Morning Ag Hedge newsletter! If you have signed up previously there is no need to sign up again, you should be receiving it. Sign up here: http://www.zaner.com/offers/?page=17
I am happy be a guest analyst on US Farm Report this week, so tune in if you get a chance!
Feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.
May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, 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
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.