What are Old Crop - New Crop Corn Spreads Telling Us?
Apr 29, 2014
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Corn prices have been strong to end the month of April. Old crop corn is finding strength from stronger then expected demand and a tighter US balance sheet. New crop corn is higher based on delayed planting and the potential loss of more acres. While new crop and old crop corn are certainly related they do have different factors influencing prices. So, what does the relationship between the new crop and old crop corn tell us?
In grains we refer to last years crop as old crop. This is the grain we grew last year and what we are currently using. New crop is the next crop that we expect to grow. This is the grain that we will be working hard to produce and that will be used after the harvest. There is certainly a lot of overlap in fundamentals between any particular grain's old crop and new crop. For the most part we assume demand will be constant unless a big fluctuation in prices were to occur. We know that there will be some old crop that we carry over into the new crop marketing season. And, how much or how little grain that will be carried over sometimes dictated how closely related old crop and new crop prices will be. What we do not know is supply. Grain production can vary from one year to the next depending on how many acres are planted and how good or bad the weather is during the growing season.
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Under normal market conditions there is usually a premium to the new crop contracts because we do not know how the next growing season will go. This production uncertainty keeps new crop prices higher. In a bear market this can be exaggerated as old crop prices can go lower to try to spur demand, but in a bull market this relationship can flip. A bull market generally means that demand is strong relative to supply. In this scenario many times old crop prices will be higher then new crop prices. The idea is that the balance sheet is tight now but could be better next year if production is good. When old crop prices are higher then new crop prices this is generally a good indication of a bull market. Because of this relationship old crop and new crop prices do tend to go in the same direction but that direction is usually lead by old crop.
So, what is the old crop - new crop relationship in corn telling us this year? Currently you have a 9 cent premium to the July (old crop) over the December (new crop). This is a rather small premium to the old crop for a bull market. For example July soybeans are almost $2.70 cents over the November contract. And, the May corn contract is about to go off the board with a 3 1/2 cent premium over November. This is a rather interesting relationship considering that corn has now rallied a dollar off the lows. Now, back in January when corn was on the lows the new crop December contract held an 18 cent premium over July. This was a good indication of a bear market.
With July now holding a 9 cent premium over December it means that the July contract has rallied 27 cents more then the December during this rally off of lows. This is what we would expect from a market in an uptrend, but it is not overly impressive indicator of a bull market. We are not seeing the strong premium in old crop over new crop like we do in the soybeans. This may be suggesting that corn is in the process of a correction in a longer term bear market.
Now, new crop corn has had it's own reasons to rally as well and at some points has been the leader of the corn complex. The old crop balance sheet has gotten tighter but is in now way a tight situation. So, old crop corn has not had to rally sharply to price ration demand like old crop soybeans have. In the mean time new crop corn planting intentions are 10% lower year over year which could be suggesting we will produce less corn next year. On top of that planting progress is 9% behind the 5-year average which is causing concerns that we may not get all of the intended corn acreage planted in time which means more acres may be lost and later planted corn may not produce as good of yields. So, new crop corn has had reasons to rally also. But, if we really are worried that new crop corn production may fall short then we should be putting a premium on what old crop corn we have left. The idea would be to price ration demand so that we could take as much corn into next year as possible. So, if corn prices were to continue to push higher we would expect old crop corn to begin to rally further and faster then old crop corn.
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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
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