Analyst: Grain Markets Get Interesting
The much-anticipated quarterly stocks and acreage reports were released on March 31. Of particular interest was the corn acreage number, which indicated a 4 million-acre decline from last year's 94 million acres. The market was looking for 91 million. While 1 million acres is not enough to make or break the corn market, the trend of declining acres from expectations certainly caught the market's attention. It wasted little time tacking on a gain of more than 10 cents over the next two sessions. The key question, however, is: Do prices have a legitimate chance to rally?
We believe the answer is yes. Last year’s corn production was nothing less than phenomenal. Large acreage and record yield resulted in record production of over 15 billion bushels, pushing carryout to near 2.4 billion. With carryout this large, there was (and still is) no rush for end users to secure inventory. Yet, prices bottomed in fall and have since worked higher. The acreage number from the March 31 report suggests carryout could decline 600 million bushels (using a simplistic yield of 150 bushels per acre). This is where it gets interesting. Should yield drop 10 bushels per acre, on 80 million harvested acres (a conservative figure), this could equate to another reduction of 800 million bushels and bring carryout to near 1 billion bushels. Ten years ago, this was considered ample inventory. Today, it is not, as record demand continues to surface. When taking the usage divided by stocks, this could imply a stocks-to-usage figure of near 6.8%, versus last year's near 15%. In other words, stocks to usage could change from 10-year high levels to 10-year low levels.
It may be bold to suggest yield could drop as much as 10 bushels per acre. Keep in mind that it was bold last year to expect that yield could increase to 174 bushels per acre. Should less-than-ideal weather prevail, 165 bushels per acre may be a more accurate estimate. Better farming practices, genetics, and good weather (in most years) has made for a somewhat predictable increasing yield picture. Yet, recent history suggests that record yields don’t follow record yields.
In this Perspective, we have shown that shifting a few variables could have a significant impact on expected carryout. Often, futures prices move inverse of the carryout trend. Therefore, be prepared for prices to move higher if weather concerns suggest lower yield.
For those who buy feed, consider buying aggressively now, or buying call options as a safety valve against potentially higher prices, should weather adversely impact yield. If you are a producer and hoping for higher prices to sell, be careful what you wish for. Prices could zoom higher than previously placed sell orders. You then may regret you sold too soon. Our bias is to buy call options now and place sell orders above the market. If the sell orders are triggered, you have them covered with calls, should prices continue to trend upward. This is one way to provide a balanced approach.
If you have questions or comments, contact Top Farmer at 1-800-TOPFARM, ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.