There is fundamental support for a long-term, slow grind to the upside for corn. The May Supply & Demand Report from USDA featured a year-to-year 500-million-bushel cut to projected U.S. carryover. USDA also projected global corn consumption in 2018/19 will outpace global production by about 36 million metric tons, resulting in a slashing of global corn ending stocks. The domestic and global balance sheets for corn should keep “lift” in the market to attract more acres in 2019.
Projected 2018/19 U.S. soybean carryover at 415 million bushels was about 125 million bushels below trade expectations and global soybean stocks are projected to fall more than 5 million tons. That’s not a balance sheet on which to build a long-term bullish outlook for soybeans. Soybeans will have to be competitive with corn through winter to hold onto acres.
It might seem strange to bring up competition for 2019 acres at this point in the year, but that’s what determines how sensitive these markets will be to a summer weather scare in 2018. Let’s face it, we can talk about trade tensions with China, global consumption trends and USDA projections all we want—but if it is hot and dry in July and August, corn and soybean prices will rally. If normal weather prevails during pollination and kernel/bean fill, that’s a different story.
Even with normal weather, corn will be sensitive to threats in the forecast. Soybeans won’t let corn run away to the upside without following along, but corn is in the most vulnerable position. A 2% cut to yields from trendline would take 3.5 bu. per harvested acre away from the supply side of the balance sheet. Doesn’t sound like much, but it’s about 280 million bushels off the projected 80.7 million harvested acres. That’s enough to drag 2018/19 corn carryover under 1.5 billion bushels, putting a run to $4.50 in corn futures into play. 2%! That’s all.
A 5% cut to corn yield from trendline projections would erase 8.7 bu. per acre from the supply side—that’s a total of 700 million bushels. If that scenario plays out, the price outlook is simple: higher.
But how high? That’s the real question, and one you shouldn’t be worried about. If price movement heats up with summer weather, focus on your return on investment (ROI). It should be your go-to in determining when to sell and, in part, how aggressively to sell. (The “other part” is confidence in your yields.) The way the markets have traded since the 2012 highs, an opportunity to break even at your actual production history might be the place to start. At a positive 2.5% ROI, sell some more. Each notch higher, 5%, 7.5%, 10% ROI, sell a bit more of what you expect to produce.
For summer 2018, it makes sense to be a little bit more aggressive with soybeans than with corn. After all, corn has the longer-term “lift” that makes a rally more likely.
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