Don't throw out 2019 market thoughts yet, analyst says
As 2019 fades further in the rearview mirror, we need to look ahead to 2020. One can’t help but reflect on 2019 as, perhaps, one of the oddest years in the history of farming — at least for corn and soybean producers.
Never has the market seen a combination of such dramatic fundamental factors and sharp price moves that, even today, have many scratching their heads.
Let’s first start with the historically late-planted crop. This was particularly an issue for corn. On June 2, the USDA released its Crop Progress report, indicating that one-third of the crop was yet to be planted. This was, by definition, the most acres ever not planted by early June. Some states were already beyond their insurance deadlines for prevent plant, yet farmers in the second and third week of June apparently decided to push ahead with planting.
Ambiguous terminology from the USDA as to what the Market Facilitation Payment (MFP) would include encouraged farmers to plant. Producers were told that no plant equals no MFP. Additionally, farmers may have moved ahead with late planting, anticipating (betting) that the fall insurance revenue guarantee (determined by the average price of December futures in October) would be higher than the $4 spring guarantee (average December futures price in February). Can you blame farmers for their decisions to plant late? Not when you look at those two factors.
Other developments limited corn and soybean price rallies as summer unfolded. Mostly, normal weather for the rest of the growing season unfolded, including a late fall. Yield estimates crept higher, with the current estimate at 168 bushels an acre compared to the June estimate of 165.
In August, the much-anticipated re-survey of acres indicated farmers only planted 3 million acres less than they intended on the March acreage report. Many thought the number would be 5 to 7 million.
The August report sent futures prices limit lower. Just days prior to this, however, an EPA ethanol waiver was mandated. This suggested a potential demand reduction of 300 to 500 million bushels of corn, another fundamental blow to growers.
As if that wasn’t enough, rampant African swine fever in China was decimating the hog herd, and no resolution to trade wars sent prices reeling. Funds continued to add to short positions, pressuring futures to new lows by late summer. Lastly, Brazil exported a record amount of corn. The U.S. dollar climbed throughout summer, and the Brazilian Real continued to slide. Is there any wonder many would like to forget 2019?
There is some good news. Stronger-than-usual basis levels throughout fall and winter have provided opportunity, as has a carry in futures prices. Take advantage of these. 2019 did offer pricing opportunities and, for many who set target points above the market, these sales were triggered. 2019 was a reminder to have target points in place. The key is the discipline to keep them there. Purchasing call options during fall/early winter to cover future sales can help maintain a disciplined selling process. Basis levels have continued to remain firmer than usual, which may be telling us the crop size could be overstated.
Only time will tell.
Now that we are in 2020, the market will focus its attention on Southern Hemisphere production, which was record-large last year. Expectations are that Brazil will use about 5 million additional metric tons for internal usage and, therefore, will not have as many bushels to export in 2020. The perceived view is that U.S. farmers will plant more corn acres because they have nothing else to plant acres to other than more corn and soybeans. Poor weather this fall suggests lower winter wheat acres. While that may be true, it’s only a guess at this time what acreage will really be.
As we look ahead, we have to look back and realize the story from 2019 is probably not yet totally clear. A re-survey of five northern states, in which more than a billion bushels of corn was still standing after the first week of December, is to occur this spring. This could tell more of the story of 2019 crops. In addition, Coronavirus, acreage, currency fluctuations, trade agreements, weather, and price fluctuation will all be factors facing producers in the months ahead.
Consider selling 30% to 50% of expected production at trigger points placed above current price levels. Learn how to use call options to manage these positions. Pre-buying calls for the year ahead makes sense currently, as volatility is historically low. While many would like to forget 2019, focus on what you can control. This is what 2019 really taught us.
Be sure to consult with a professional before entering into any positions. Understand the risks and potential rewards of your marketing decisions, and how they may affect your operation.
If you have questions, comments or would like an idea for your farm, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
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.