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Is USDA right? Be prepared either way

04/18/2012 @ 8:42am

You know what? I'm going to go out on a limb and declare the USDA report wrong. This last USDA report kept corn ending stocks for the U.S. unchanged at 801 million bushels. Trade isn't buying it. Me either. Most analysts are still using between 570-740 million bushels as the true U.S. old crop corn carryout versus the USDA's recent announcement of 801 million bushels.

There are a number of reasons why analysts think the numbers are wrong, and they range from simple miscalculation to conspiracy theories. The USDA just might be dragging their feet to admit the truth in regards to how tight current carry out levels are until the mega acres of corn are securely planted this spring. Dragging their feet has a much less dramatic effect on prices. It will be easier to admit the truth when at the same moment you have an ace up your sleeve knowing that the mega acres are going to save the day. That's kinda like when someone comes up to and says, "Well, do you want the good news or the bad news..." They only fess up the bad news because there are traces of good news coming behind to make the bad news not seem so rough. My six year old does that to me all the time.

So when will the USDA numbers be "adjusted"? Most likely after July pollination when there is a better guesstimate on yield potential. If the crop is growing "just fine" and there is potential of tremendous yield, then the bomb will drop in the August and September. USDA reports and carryout levels will be adjusted lower. But then, the market won't be able to respond, because, at that same moment, just in time, there is a bumper crop available to replenish tapped out supplies.

Quite frankly, I hope these kind of political calculations aren't happening. Rather, I hope it is simple miscalculation. Either way, the market has an opinion of its own, and it's our job to be prepared.

We aren't victims here of some grand plan. We have brains in our heads and tools in our pockets to handle whatever comes our way. Time to take this approach: market scenario planning.

Likely scenarios

Cash corn basis will likely tell the true story, allowing for basis (the difference between your local cash price and the Chicago Board of Trade Price) to strengthen. Capitalize on that with any old crop corn you have on hand (we're talking no. 2 yellow corn). Know your local cash market and track it daily.

Right now, it seems that two likely scenarios are going to emerge over the next few months; July Chicago Board of Trade corn futures seem unlikely to break above $6.75 (unless the USDA should admit tighter ending stocks within the next two months), yet have ample support at $6.00. For now, that trend may continue for quite some time. When prices touch near $6.75 are on the Board, with July futures, pull the trigger with some cash sales. Now, if by chance, July corn futures can climb above $6.75, the upside target looks to be near $7.50. And for now, that will most likely be as good as it gets, because there will be such a large crop coming soon.

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