Outstanding spring for many farmers!
May 11, 2010
Its been an outstanding spring for many farmers in the Corn Belt. Some would say it’s been the best spring ever (Ohio through Illinois) while others in Missouri have been under water or too dry. As for the northern Corn Belt this weekend’s frost will not help crops and actually force some replant but overall the crop in great shape for this time of the year. So, from a supply side it’s all going to come down to rain and heat. Some weather boys are suggesting the end of the El Nino and start of the La Nina is going to force a serious dry spell into the market in August thru September. As we all know timing is everything. If it comes in late August, it will not hurt the corn but could really pressure beans. So right now, I have to say the odds are at least 65% for a crop in excess of 162 bu. per acre.
In my opinion any bullishness is going to have to come from the other side of the equation and that’s demand. I have to say the demand side of the ledger for corn is made of three primary areas.
First, feed usage and while it’s stabilized with some increase in the poultry sector, hogs and cattle are going to take some time to increase feed consumption and the net impact will be stable but limited growth for now. The next sector is domestic usage, specifically ethanol. It appears EPA is in no hurry to increase ethanol blend, the problem with the oil well in the gulf may help to hurry up the administration, but as it looks right now there is no change this summer, let’s hope they see the light. Therefore, corn ethanol’s big ally is the crude oil market. We are hovering around the $75. Talk is for long-term higher price action but the world economy needs to find its legs. What is happening in Europe right now could take more than a year to sort out, this coupled with weak employment statistics domestically would suggest there is no strong economic rebound immediately in front of us. I see the crude oil market remaining below $85 which keeps ethanol in check. Overall, I see the ethanol demand for corn increasing but not exploding and while this demand growth is currently factored into the market, it is not considered new demand.
This leaves the big wild card to my way of thinking. China! The price of corn in China is quite high. They can buy our corn, pay all the freight and taxes and still make profit. The problem is Chinese government wants to stimulate domestic production rather than rely upon us. They have recently bought some corn but it’s not the big buying spree everybody has been expecting. I would suggest its simply to get all the lines of communication on tariffs, export licenses and other operational factors figured out. The real buying will start this fall if they need it .
The final factor that will affect the corn price action this summer and fall is unpriced producer corn. I still believe there is a lot of unpriced old crop corn around that has to find a home off the farm some time between June and late August. Simply put there is not enough storage space on the farm for both the old and new crop corn. The longer we go into the summer and producers are not selling, the more dangerous it becomes if we confirm a corn crop above 162 bu. per acre yield. My suggestion continues to be if you have hedge-to-arrive contracts and are open the basis, you really need to be getting inventory locked up.
In summary: short term I’m concerned that no real supply bullish factor exists. Granted weather can change things but its going to have to be significant enough to bring corn yield down below 160 bu. per acre. Second, while demand is good it’s not exploding. In the end it’s about how much carryover for 2010 will we have left over. I’m still arguing for 1.65 billion bushels or higher—now there are a lot of people below 1.2 billion and many over 2.0 billion bushels. This is what makes the market.
So in the end as a producer I encourage you to remember why you are a hedger. Its about making a profit. For 2010, I believe the best opportunities are behind us now and all we can hope for is catch-up selling opportunities. I would suggest 2011 corn between $4.20 and $4.35 REPRESENTS A VERY GOOD BASE TO BE SELLING INVENTORY.
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