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Old to new-crop transition eyed
The transition between old crop tight supplies and the hopefully more bountiful new crop is messy. And the transition will not take place in a day. No one wants to be the last person buying expensive old crop grain. So prices could stairstep lower as new crop supplies become available. And the first new crop available is wheat.
The news stories and rumors continue to suggest that both old and new crop wheat is displacing corn-in feed, in ethanol, etc. This is driven by the lack of old crop corn supplies and the attractive price of wheat. The extreme basis levels for cash corn signal this problem.
Even to grain importing countries, US wheat beats corn. The weekly export sales report confirms this idea. Today’s data showed wheat sales of 22.7 million bushels of old crop, while corn sales (also old crop) were a negative 2.0 million bushels. The US may come close to exporting the same amount of wheat as last year, while exports of corn may be half, or a little larger than half, the size.
The soybean market, at least for right now, has divorced itself from corn and wheat. The short term rationing situation (until fall harvest) in the beans is unsolved. There’s no real substitute product for beans—there is only a substitute location, which is South America. With the continuing logistics problems in Brazil, traders realize there is a real chance the US may not end up with enough beans.
Crop Insurance--A Personal Comment
“Back of the envelope” doodling on Friday afternoon revealed that purchasing 85 percent RA (versus 80 percent) could be an effective hedging/marketing tool for your corn crop. Get past the first comments that pop into your head, which probably are “it’s so expensive” and “the subsidy is less.” The extra premium can be cheaper than several possible options strategies. For example, buying December corn $5.00 puts on your crop could cost you $50/acre.
Using your guarantee, do a little multiplication with different combinations of yield and price. Here’s an extreme case to get you started. My guarantee on a farm with 85 percent RA is around $917 per acre (using a trend adjusted yield of 191 bushels). What happens if corn prices are $4.00 and my yield is 200 bushels? That’s $800 per acre, so the indemnity from my crop insurance policy is $117 per acre.
The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.