Little to no room for error in 2021 crop season, analyst says
This week’s monthly Supply and Demand report indicated tight inventories, yet really did not offer a whole lot new to the marketplace.
Therefore, attention quickly focuses on items that could affect near and long-term price direction. In the near-term, a continuing decline in the U.S. dollar is viewed as supportive since exports will likely remain active.
From a long-term perspective, the market has mixed news this week, as better weather conditions could be taking premium from price. Ultimately, the battle between supply and demand will be determined by multiple variables.
Still, by far, weather is the most impactful. As crop planting subsides and growing conditions become more critical, much-needed moisture will be required on a timely basis, as large portions of the Midwest subsoil moisture remain at a deficit. A breakdown of the report will provide some perspective on just how critical the impact of weather will be for 2021 production and price.
When analyzing any market, there are multiple variables, and each has its level of importance. A big-picture perspective will look at all the supply line items and then subtract the demand line items to end up with a leftover supply at the end of the marketing year. The leftover supply is called carryout. In this month’s USDA report, it indicated corn carryout at 1.257 billion bushels for the 2020-2021 crop. This compares with 1.919 billion from a year ago, or a decline of 662,000,000 bushels, a reduction of 34.5%. The current stocks figure divided by usage is 8.5%, the lowest since 2012.
The bottom line for corn is that the report confirmed tight supply and strong demand. The USDA’s carryout forecast for the 2021-2022 crop is 1.507 billion bushels, 153 million above the prereport average estimate.
For soybeans, paper-thin carryout was confirmed for the 2020-2021 marketing year, with ending stocks forecast at 119 million bushels. This compares to 120 million the previous month.
The interesting observation for the year ahead is that carryout is forecast to only increase 21 million bushels, at 140 million. The current stocks-to-usage figure is 2.6%, a two-decade low figure with next year only projected to increase slightly to 3.2%.
The conclusion is there is little to no room for error with producing the 2021 crop, and likely no room for error for South American production in 2022. Rationing of inventory is currently occurring and may have to occur for new crop prices if weather is detrimental for production.
From a marketing perspective, stay focused on strategy and consider marketing tools to create a balance. Cash prices should be sold, when offering excellent value compared with cost of production. Consider covering sales for explosive upside price potential by using call options. Consider puts to establish price floors for bushels you do not intend to forward sell. Have critical conversations with all members of your management circle that can help guide you to decisions that make sense for you and your operation.
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.