Farm Futures - Weekly Market Recap
Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
March 7, 2014
After this winter, a perfect storm may not be the best way to describe the rally in corn prices. But futures benefited from a combination of events that drove prices to six month highs.
Supplies are still relatively burdensome. Old crop inventory is plentiful and could increase with normal yields even if farmers slash acreage this spring as expected. But while that outlook hasn't changed all that much, the price environment has.
Credit a red-hot soybean market for some of the help. Soybeans surged on fears that production in South America was less than previously expected due to a combination of weather factors there. Not only could there be fewer soybeans available, but rain and logistical delays slowed their arrival on the world market as well. That shifted demand back to the U.S. at a time when it normally begins to fade. Existing shipments of U.S. soybeans plus outstanding sales already on the books are well above USDA's forecast for the entire marketing year, which still has some six months to run.
Corn production out of South America could also be below original forecasts, increasing nervousness from buyers already worried about sales from the Black Sea region. While tensions cooled a little over Russia's moves into Ukraine, end users are reluctant to book supplies covering both the near and long term.
Ukraine grows a lot of wheat, and that's another reason for corn's move. Wheat is trying to confirm a long-term bottom. Corn and wheat often move in tandem, which seems the case right now, feeding off each other's momentum.
Money talks, of course, and fund managers often make allocations according to price charts. Both old and new crop corn charts are trying to turn bullish. Big speculators, who put on a record bearish bet in corn last fall, bought it all back. If they turn really bullish, the market could get an even bigger lift.
These hedge funds appear to be falling back in love with commodities in general. The CRB Index, a measure of relative prices of hard assets, soared to its highest level since the 2012 drought, confounding experts who were bearish on commodities not long ago.
Corn market fundamentals could ultimately prove that view correct. But for now, a rising tide is lifting all boats, including corn.
Corn prices exceeded expectations this winter, rallying the March contract more than 85 cents as it prepared to go off the board. Now the question is whether the move was justified.
March 31 reports from USDA could decide the issue. While many point to the planting intentions estimate from the government as the market mover, the tally of March 1 grain stocks could be key. The amount of inventory that disappeared from December through February will be chalked up to livestock feeding, a difficult number to assess. This year livestock demand is even sketchier. Cold weather probably increased feed used per animal, but the number of critters out there is uncertain due to the impact of PEDv in hogs.
Corn likely is buying a few acres from soybeans and perhaps spring wheat thanks to the rally. Indeed the long-run risk is a big crop that could send prices substantially below $4. Getting a third of new crop priced over the next month, coupled with Revenue Protection crop insurance on trend-adjusted yields and the new county-level Agriculture Risk Coverage program will help the average grower go a long ways towards a profit guarantee in 2014.
Soybeans shifted to a bullish pattern for old crop, and are threatening to break higher in new crop as well. While such a trend would project higher prices, any move likely wouldn't be a straight shot. And rallies, however they look in March, sometimes don't last either.
That's why risk management is the name of the game for most growers these days. Risk is defined differently on every farm. Job one for the average grower is trying not to lose money. Old crop soybeans are certainly at profitable levels. But there's no way for the typical grower to guarantee a profit on new crop before harvest until prices top $13.
Good use of marketing tools can minimize the odds of losses. These include Revenue Protection on 85% of trend adjusted yields, Agriculture Risk Coverage, and price protection on 35% of expected 2014 production. We've already recommended getting started on those sales, which should be completed by early April. November futures is taking aim at $12, but a move significantly higher likely would take adverse weather here in the U.S. during the growing season.
Wheat prices should find support on the trouble in Ukraine for a while, as the dispute doesn't look like it has a quick, easy solution. But the Black Sea exporter accounts for only 6% of world wheat trade, bushels that can be replaced elsewhere as long as weather is decent. And when new crop Ukraine wheat does hit the market this summer it's likely to be cheap, a lure that could keep prices restrained.
Eliminating risk from the 2014 crop isn't easy, especially for growers of soft red winter wheat and hard red spring wheat. Producers on the central and southern Plains have a little easier job, as long as yields hold up. But they still should price 50% of expected production assuming they bought RP crop insurance and sign up for ARC.
Production remains uncertain, of course, due to winterkill and dry conditions on the western Plains. El Nino could revive to threaten Australia, where production estimates are falling even before the crop goes into the ground. Other major producers are holding on to hopes, keeping bulls restrained for now.