| May 21, 2010 | Archived Issues |
The Next Few Weeks
In a majority of the past twenty years, corn and soybean prices offered during May and June have been higher than prices at harvest-time. Will that happen this year? If it does, prices in the next four to six weeks will exceed harvest-time prices. Some are likely to respond: "December 2010 corn and November 2010 soybean futures prices are well off of their early January highs, so current price bids seem low. Harvest is still months away. Wet conditions are continuing to delay planting or replanting and it is starting to get late. Some weather forecasters say that when the rains eventually stop, it may turn off hot and dry. Demand is strong and we may not grow much. It seems risky to sell now because prices could go up" Most of those comments are true and sometimes prices do go up into harvest time. But most of the time they don't!
The USDA's May 11, 2010 World Agricultural Supply and Demand Estimates (WASDE) offered their first monthly projections for the 2010-11 marketing year. The report projected 2010 production, anticipated use and what would be left over or ending stocks. Focusing on ending stocks as an important fundamental indicator going into the report, the trade carryover expectations varied widely. However, the USDA projections were near the average of these trade ending stocks expectations. Although prices showed some strength following the report, the trade's average carryover expectation appeared to be already reflected in new crop prices that were also in-line with USDA's price forecast. While ending stocks projections and other supply/demand numbers will change as the year progresses, the USDA projections provide the current "best" new crop supply/demand information currently available. These projections do not point to significantly higher prices.
Increased corn planted acreage and above trend yields are expected to result in another record corn crop in 2010. Although demand will be strong, 2010-11 corn ending stocks are projected to increase to 1.818 billion bushels. This is a large carryover! It is an increase over 2009-10s ending stocks of 1.738 billion bushels and well above the twenty-year average of 1.461 billion bushels. Global coarse grain and corn carryovers will also increase. These projections indicate US and World corn supplies will be more than enough. With more than adequate supplies, there seems to be few reasons for the markets to return to earlier price highs. The USDA forecast for the 2010-11 corn price range is from $3.20 to $3.80. Current new crop corn futures prices are near the upper end of this range. The low end of the range, coupled with a weak harvest time basis, suggests the potential for cash bids below $3.00 at some point.
2010 soybean acreage will increase, but projected trend yields result in somewhat lower total production than last year. However, use may slow with crush expected to be somewhat less in the year ahead. Chinese soybean imports are expected to increase, but competition from large South American crops is expected to result in somewhat lower US exports in the year ahead. The net results are increased US and Global 2010-11 soybean carryovers. Domestic soybean 2010-11 ending stocks are projected to be 365 million bushels and above the twenty-year average of 258 million bushels. The USDA's forecast 2010-11 soybean price range is from $8.00 to $9.50. Current new crop soybean futures prices are in the upper one-half of this range, but weak harvest-time basis and prices near the low end of the range could produce cash bids below $8.00.
A number of other factors continue to contribute to uncertainty in the markets-some are positive, but more are negative. Chinese corn buying supported the corn market during some recent trading sessions. This unexpected corn demand changed previous outlook and offered some optimism that corn exports would increase. However, many analysts point out that even fairly large Chinese purchases might not really impact overall supply/demand balances all that much and that corn carryover will still be large. Uncertainty about European financial problems has contributed to a stronger dollar, making US grain more expensive to buyers unless prices are bid lower. The European financial crisis and stronger dollar have also influenced energy prices. The Gulf oil leak has had little impact. Crude oil prices have declined sharply this month and lower energy prices are negative to grain prices. The financial worries have also led to weakness in the Dow Jones Industrial average, which is another negative influence on commodity prices. Although corn and soybean prices showed some surprising strength for a few days following the USDA projections, financial market uncertainty and energy prices continued to pressure prices during the past week.
The USDA price range forecasts and carryover projections, along with economic worries, suggest that a return to the early January highs for new crop corn futures prices near $4.50 and soybean prices of more than $10.50 is unlikely. Since much remains to be planted, it may still be too early for the market to price in bumper crops. However, normal progress in the next four to six weeks would lay many of the production worries to rest. While there are a number of possible reasons why prices could go higher (continued planting delays, summer weather, etc.), the USDA's supply/demand projections and other market factors suggest downside price risk may be greater.
Pre-harvest corn and/or soybean sales near current prices or at any prices near the upper end of the USDA's projected price ranges in the next few weeks should produce profitable prices. Downside price risk points to prices that would trim or eliminate this profit potential. This suggests that adding to sales in the next few weeks should, at least, be considered.
For those who still anticipate (or are just hoping for) higher prices and are reluctant to commit to additional pre-harvest sales, put options offer an alternative. Buying put options may result in significant cash outlays to cover option premium costs. However, buying puts can offer price protection at profitable levels and allow higher prices to be captured if prices rally. More complex option strategies (fences, etc.), to reduce premium costs, may also offer opportunities for those who understand them and are comfortable using them.
Markets often seem unpredictable. But if history is any guide, during the last twenty years corn and soybean prices have been more than twice as likely to decline (from early summer into fall) than they have to increase. If this holds true, the best remaining pre-harvest marketing opportunities for harvest deliveries of corn and soybeans may occur in the next few weeks.