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Market Commentary for 10/5/20
The USDA surprised everyone this past week with a 250-million-bushel carryout reduction in corn. As the chart below shows, in the last 20 years this was the largest decrease on record, and only the 3rd time carryout fell more than 50 million bushels.
Sources: Matt Campbell & USDA
Three factors likely impacted these carryout estimates – less acres planted in 2019 than previously estimated, yields were probably lower than originally expected, and feed demand could have been higher than previously projected.
This revised estimate drastically changes the upcoming 2020 carryout situation. While many were anticipating a record carryout only a week ago, now carryout may be within a “normal” range. A normal carryout could also mean “normal prices,” a welcome relief after so much “sub $3 futures fear” this summer.
Now that we have this new Stock report, this week’s USDA Supply and Demand report should provide more insight on where price ranges will be for the winter.
Forward Selling Corn
For the past few months, I’ve noticed increasing social media discussions on whether selling next year’s corn crop more than one year in advance made sense. I’ve also wondered if it was a good strategy for my farm operation. So, I’ve provided the following historical insights from my research below to help answer this question.
Historical Comparisons
First, I compared December futures since 1990 for both the year the crop was raised and the high for that same December futures contract a year prior. In the last 31 years, it paid to sell corn more than one year in advance 13 times, or only 40% of the time. In just the years after the 2007 ethanol mandate, it still only paid to sell in the prior contract year 6 of 13 years, or 46% of the time.
Of the approximate 40% “successful years,” on average there was a 40-cent advantage from selling a year ahead, compared to waiting until some point during the year the crop is grown. Interestingly, in the years that one would have waited until the crop was planted, it was more profitable by nearly a 95-cent advantage. This suggests there is a 2:1 advantage to wait to sell corn until the year the crop is planted.
I also analyzed 3 year rolling averages to see if outcomes changed over time. I also looked to see if using “Olympic-Style” weighted averages (i.e. throwing out the highest highs and lowest lows) changed the ratio and none of them had an impact on the ratio.
The price of corn didn’t seem to be a factor either. In 2011 selling corn ahead of time for 2012 would have been a big mistake, even though corn prices were well above breakeven levels. Conversely, 2017 shows us that even though prices were only near breakeven levels in 2016 it was a year that should have been sold ahead of time, because the 2017 growing year was normal.
Basically, the best way to hit the high in any given year would be to predict weather perfectly long-term.
So, When Does the Market High Happen Each Year?
While no one can predict the weather long-term, there are some patterns to when the highs occur in the crop year grown.
As the below chart shows, there is a 65% chance the year’s high will occur between March 1st and August 31st.
Other interesting observations include:
• In the last 31 years the high has never happened in October or February
• It only happened once in September - in ‘02
• 2 of August’s 3 high years were the ’11 and ’12 drought years
• 5 of June’s 6 high years were after the 2007 ethanol mandate was in place
• December hasn’t seen the high since the early 1990s
• November’s 2 highs were in ’06 and ’10
• January’s highs were in ’13 (after 3 drought years), ’01, and ’20 so far
Key Takeaways
- Historically speaking, there seems to be an advantage to waiting and selling corn the year that it’s planted.
- There is a 55% chance the year’s high will happen between March 1st and July 31st.
- While the year’s high happened in January 10% of the time, it was usually for a strange reason.
- If February has yet to see the high, it should be ok waiting until after March 1st to aggressively plan next year’s sales.
While all of this is a helpful insight in “playing the odds” in grain marketing, it is of course no guarantee. The past two years alone illustrate outlier years can happen anytime. Plus, weather unpredictability makes it impossible to know when the highs are happening until months later.
Still, for me, using historical analysis like this and having a grain marketing strategy that plans for historical averages and normal situations helps me to try and maximize profit potential while also minimizing risk on my farm operation.
Want to read more by Jon Scheve? Check out recent articles:
What’s In Your Grain Marketing Toolbox?
How Realistic Is $11 or $12 Beans?
Adding Profit While The Market Disappoints
Was Waiting Until May To Set My Corn Basis A Good Decision?
Dealing With 2 Black Swan Events & Only Losing 2 Cents Isn’t Too Bad
Sideways Markets Can Still Provide Opportunities To Capture Profits
While $4 Corn May Be Unrealistic $3 Corn May Also Be Unlikely
How Covid-19 Impacted Two Of My Recent Trades
Should Farmers Consider Setting Basis When Futures Are Unpriced
Factoring Futures, Basis, Interest & Storage In Bean Marketing
Why “Free” DP Hurts Grain Prices For All Farmers
Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
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