Markets Continue to Tread Water Post WASDE Report and Begin to Monitor Weather.

Today, I am posting an article by a guest writer, John Chapman with Palmetto Grain Brokerage.  It is important that we look at the long term markets of all our crops given the interuption of COVID-19.  Since this is a corn growers blog, I’ve asked him to focus on our corn market.

“What information is baked in the cake at this point? It can be tough to find positive information in markets like these. Things seem to change in the markets every week as we digest new information revolving around this Chinese Phase 1 Trade Deal. Every person seems to have a different opinion about China’s intention to fulfill the deal in year 1. On top of this we have seen demand destruction as ethanol plants have shut down across the country, adding to the old crop balance sheet – diluting the basis markets, trickling down into the southeast.

Do not be discouraged as not all the information is negative in these markets. The new crop balance sheet showed a 6.1% increase in corn demand year on year as it shows a higher ethanol production figure as well as higher export demand and increased livestock feeding. Another positive is that as travel slowly opens back up, ethanol margins should increase with time. People will most likely rely on private transportation as they are hesitant to embrace public transportation too quickly. Airplanes, subways and busses do not burn much ethanol.

The market does have a huge new crop carryout, penciled in at 3.3 billion bushels! If realized, this could be the highest number in 33 years, since the 87/88 year when we had over a 4 billion bushel carryout. There are still adjustments to be made to these numbers as we factor in yield, acres, and increased potential demand. The balance sheet will be adjusted with time if an acre swap to beans is realized and we have the entire growing season ahead to make educated guesses on yield numbers. If we keep the same projected demand and have the same yield as last year, then carryout quickly slips from 3.3 to 2.3 bil bu. Thus, making weather events more important to monitor through the summer.

The next 45 days are going to be very important in the corn market. In a normal growing season, the highs are put in before the June 30th final acreage report. Then we slowly drag lower as we approach harvest time if there are not major weather threats late in the growing season. Every year for the past 30 years we have had some type of weather rally in May-June-July as the market puts in some type of premium. The last 5 years, the high has been printed in this time frame for corn contracts, but unfortunately we trade a futures market and not a history market. This has been a very odd year unlike many others and without any major weather event the highs on these contracts were punched this time last year.

So what to do now? How do you eat an elephant? One bite at a time. It is highly unlikely we are going to see a price in the next 6 months that will get us excited as we have a huge cushion to fall on with a big carryout and ample supply. We need to sell small and sell often. Scale in additional new crop near 3.50 futures – I hope I am wrong and these are the cheapest 2020 sales we make. However, we have to manage risk because if we make a crop on 97 million acres and lose demand there remains a significant amount of downside risk. We need to be playing defense here and not swinging for the fences. I like to fish ahead of the boat in these markets and we may need to fish further ahead of the boat!. With a monster crop on the horizon, big carries should be put into the futures as they pay you to carry the crop to deter everybody from bringing the crop to market at the same time at harvest. Hedging 3.50 December 20 futures with the idea to roll it to December 21 for the following year’s crop could potentially be 3.90-4.00 futures plus basis. If we can consistently do this year after year on part of our production to cover inputs, it will be hard not to lock in profits. Have objectives ahead of time and be consistent in doing something as opposed to not doing anything!

Chart below shows December 20 corn futures.”

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