Producers Need a Goldilocks Year

April 2, 2013 09:47 PM
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Corn and soybean price rallies of 2010/11 and 2012/13 peaked prior to or just at the beginning of their marketing years. Both price rallies stemmed from less production, not an explosion in demand.

China’s year-over-year increase in soybean demand helped these rallies, because demand from the rest of the world did not significantly increase. In fact, without the five-year growth realized by the ethanol industry’s consumption of 4 billion bushels of corn from 2006/07 through 2010/11, these prices would have been short-lived. In 2008, corn’s price explosion above $6.50 per bushel only lasted six months. Remember, crude oil went to $145 per barrel on the idea we were going to run out and in the process we were burning food for fuel. Then prices collapsed in the fall of 2008.
Corn spent almost three and a half years waiting for an increase in demand or a drought to get prices back above $6. China didn’t do the job, but the crop problems of 2011 and 2012 did.

Memory Blocks. A do-nothing approach of selling at harvest worked as well as anything during the last two bull markets. My column in the Summer Issue of 2012 dealt with the need for flexibility using crop insurance. Those who initiated early cash sales last year discovered that using crop insurance as a risk management tool was not the remedy they thought with half a crop.

The approach of buying December puts and rolling them up every 50¢ to raise the price floor cost nearly a $1 per bushel by the time the puts expired. The memory of last year’s corn price jumping from $5.50 to $8.50 per bushel in 60 days might be why producers struggled to lock in $6 to $6.50 futures for the 2013 crop.

"South American ending stocks plus normal soybean yields in the U.S. this year means as of Sept. 1 global soybean supplies will be a billion bushels more than a year earlier."

There is a huge difference between 2012, when we had strong demand and low production, and 2013, when we expect reduced demand and global increases of corn and soybean supplies. The United States’ inability to produce a minimum of 12.5 billion bushels of corn caused prices to explode. As a result, demand dropped 1.2 billion bushels.

Need to Recalibrate. A supply shortfall incentivizes farmers to expand acreage or end-users to cut demand in order to meet existing supply or some combination of both. Both strategies are in the works for corn and soybeans. South America and Europe have increased corn and soybean acreage, and we can expect the same for the U.S. All the while, corn demand has been curbed to meet a 11.2 billion bushel crop. A below-average crop of 150 bu. per acre this year could yield 12.5 to 12.7 billion bushels of corn. Buying back demand won’t happen at $8 corn; we’ve already proven that.

South American ending stocks plus normal soybean yields in the U.S. this year means as of Sept. 1 global soybean supplies will be a billion bushels more than a year earlier.

Needless to say, with the February insurance revenue average at $5.65 per bushel for corn and $12.87 per bushel for soybeans, there is still considerable risk. A corn yield 25 bu. below trendline and a soybean yield 5 bu. under trend will mean a price repeat of last summer. Conversely, 156 bu. corn and 44.5 bu. soybean yields might leave summer of 2012 prices a figment of our magination. We need a Goldilocks type of year—not too big and not too small, but just right. This would keep the market on edge, without exploding prices inviting more competition and changing the livestock industry more so.

As they say at the Chicago Mercantile Exchange, there is risk in trading grains and oilseeds; perhaps $2 up or down this year. Crop insurance might become what it was intended to be: a stop loss vehicle, not a profit center. Nor do we need a 156 bu. corn crop that suggest a couple years of low price demand building. As I have stated in previous columns, it will be the lowest price seller that wins competition, not the lowest cost producer.

For a long-term look at corn prices on the chart, visit the Gulke Group at

Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. Gulke Group recently published Technical Analysis: Fundamentally Easy. For information, send an e-mail to or call (815) 520-4227.

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Spell Check

4/5/2013 09:27 AM

  what do you mean lowest price seller wins the competition????

4/5/2013 09:27 AM

  what do you mean lowest price seller wins the competition????


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