Carryout, the last nail-Bryan Doherty
This week's USDA Supply and Demand report raised carryout in corn and consequently the market promptly reacted by dropping 30 cents. This is the second month in a row where projected carryout was larger than pre-report estimates, and consequently the market reacted negatively. When viewing corn from a historical perspective, there is some correlation that suggests prices have more of a tendency to peak in the height of uncertainty. This is generally in the mid to late winter or spring months.
This year, prices peaked on April 26, and struggled since. On that particular day, the market also posted a very non-friendly technical bearish key reversal, which so far has held. Bearish key reversals can signal lower prices ahead.
So is the high in? Perhaps, but we're not quite ready to pound that nail all the way through. Carryout is still roughly 1 billion bushels less than a year ago at this time, and it's likely that there will be an increase in livestock production this year. Therefore, when you may pencil in other feed usages such as DDGs or wheat, the likelihood is the corn supplies will remain tight to the point where they are termed critical. This spring's weather has been somewhat less than ideal. Yet, the worry regarding planting delays has become less of a concern with the ability to plant a very large amount of crop in a short period of time. Weather still has to cooperate. What a late planted crop does, however, is create a greater sensitivity to weather, especially during key pollination or the ear-filling stages. Typically these are warmer, drier weather months than are the early spring months.
So while it's likely that history tells us the high is in place, it's likely we'll encourage both end user and producer to avoid getting too attached to that sentiment. As volatility picks up and prices drop, end users should be very cognizant of the idea that stocks are historically tight and will not likely grow significantly, even with a large crop this year. Therefore, be prepared to cover feed needs. As for producers who have been aggressively selling this winter, as good prices probably dictate you should have, don't fall asleep at the switch. If weather becomes a major factor, prices have the ability to potentially double in a short window of time.
The key to successful marketing will be a well balanced approach that helps you build an average price. Farmers in 2011 will have great opportunity to sell very positive returns on investments, some which have never been offered historically. Make sure you're well protected, both with the up and down side, whether a buyer or seller of grain. While it's looking more likely that the high price is in, it's still too soon to pound on the last nail.