| April 15, 2011 | Archived Issues |
More of the Same?
The USDA's April 8, 2011 World Agricultural Supply and Demand Estimates (WASDE) report made no changes to expected old crop corn and soybean 2010-11 ending stocks. Corn ending stocks/use ratio is expected to be a near "pipeline" level of 5.0% and soybean projected carryover is only 140 million bushels. World coarse grain use is expected to exceed production and global soybean use continues to grow. Domestic wheat 2010-11 ending stocks are more than adequate, but world wheat use is projected to exceed production. This situation with tight supplies and strong demand, along with other factors such as a weaker dollar and higher energy prices, continues to support old crop grain and oilseed prices.
The picture for new crop supply and demand is unclear as well. The March 31 Prospective Plantings report indicated farmers intend to increase corn acreage by four million acres. However, tight supplies and strong demand suggest this will barely be enough, especially with anything less than trend line yields. Soybean acreage intentions point to 800 thousand acres reduction in 2011 plantings from last year. With already tight supplies, reductions in use and trend line yields will be necessary just to maintain minimum carryover levels! This creates a situation where planting conditions in the next few weeks and growing season weather into late summer will be critical. Other fundamental market factors aside, weather alone will be enough to keep the markets volatile and uncertain for the next few months.
Market participants will watch closely for updated production and demand clues. The USDA will release its first monthly supply and demand projections for 2011-12 crops on May 11, 2011. Although the "final" numbers may be significantly different, these first new crop supply and demand estimates may provide an initial market price direction going into the growing season. The June 30th Grain Stocks and Planted Acreage reports will provide more solid information on demand and production potential going into summer. The USDA's August projections will provide the first surveyed look at production and will be another highly anticipated report. Along with these reports, the weekly Crop Condition reports will also be used to watch for possible changes in production outlook. Just as in the past year, market uncertainty and volatility may cause large price reactions to any of these reports, especially if the report contains any "surprises" to the trade.
Producers will need to monitor changing market fundamental information. The updated USDA crop conditions and supply and demand reports will provide important information for adjusting market plans and setting additional price objectives.
Unfortunately, supply and demand fundamentals probably won't be the only thing affecting the grain and oilseed markets. Economic conditions (both domestically and abroad) and currency values could impact demand. Higher energy prices have tended to support grain prices, but they add to economic risk and other potential negative impacts on demand. Investors and fund traders continue to hold large positions in commodities. If they add to these positions, it will be positive. However, if these traders begin to liquidate, it could be very negative for corn and soybean prices. Changing government policies and budget cuts could result in unexpected market changes. Political unrest in other parts of the world, especially the Mid-East, adds to market risk. Unforeseen events or disasters, such as the Japanese earthquake, can blindside the markets and produce sharp price changes. It is more than just production and weather, any of these or a variety of other factors could provide bullish or bearish "shocks" to the market in the weeks or months ahead.
In spite of the uncertainty, market advice for dealing with volatile markets has not really changed in recent weeks. Current new crop prices are above most current projections for average 2011-12 corn and soybean prices. These prices also generally offer very good profits if production meets expectations. Prices are favorable and trying to hit a market high is not a reasonable goal. So it probably becomes less a question of whether sales should be made and more a question of when and how to add to sales.
Price sales targets (both for higher price goals and downside trap prices) or market signals to trigger sales (broken trends, support areas, etc.) should be identified and preparations made to "follow through" if these objectives are met. While harvest delivery contracted sales are most often used, other sales methods should be given consideration. This may include more complicated cash contracts, futures hedges or option strategies. Use of futures or options may require additional financing arrangements in order to cover margins or cover premium costs. Futures hedges can establish a price without some of the risk associated with delivery requirements, but account margins are a drain on cash flow in volatile markets. Option premiums are expensive, but options offer flexibility that other sales methods may not, especially in volatile markets where price movements of two dollars or more can occur.
With global markets, weather or events anywhere in the world can cause prices to "turn on a dime" and change market outlook. Many factors have and will likely continue to contribute to market uncertainty, risk and volatility. Just as in the past year these wide price swings can offer opportunities. But they also significantly increase risk. That has been the situation for some time and it looks like more of the same ahead.