Thursday, April 15, 2010
Did You Miss The Spring Rally In The Grain Markets?
Has the “tractor seat bounce” in the market gone the way of molded metal seats that used to carry Dad through the field? Your current work environment as you move through the field is cushioned by millions of dollars worth of comfort research to eliminate bounces. And that springtime rally in the market while you are typically busy planting may have been smoothed out as well.Seasonal trends have always been important elements in marketing plans, but University of Missouri marketing specialist Melvin Brees wonders what happened to those seasonal trends. His recent marketing newsletter says 65 to 70% of the time the spring offers an opportunity to lock in commodity prices that are equal to or higher than harvest prices. Brees says November beans and December corn futures have risen from their lows and pre-harvest marketers depend on spring rallies for pre-harvest sales. His data shows that in the past 20 years, spring price declines have occurred only 3 times for corn and 4 times for beans, and he is adding 2010 to that list.
The 60¢ drop for corn and 90¢ drop for beans since January have resulted from increasing estimates for ending stocks, larger acreage projections, abundant global supplies, energy price volatility, the stronger dollar, and liquidation of speculative fund positions. And Brees says the trend may continue, based on USDA’s estimates. Those include a reduction in corn being fed to livestock, which caused the April Supply and Demand Report to raise ending stocks to 1.9 billion bushels by the end of August. With such a large domestic carryout and a similarly large global surplus of corn along with wheat dampens the prospects for increased export business.
In addition to the current stocks, the expectations are rising for a large new crop with the Prospective Plantings report pushing corn acres up to 88.8 million, more than 2 million acres higher than 2009. Brees says some market analysts are also looking for the 2011 carryout to exceed 2 billion bushels as well, and prices pushed below the $3 mark.
The typical spring rally has also overlooked the soybean market, and Brees suggests large South American supplies will push global stocks to record levels, with 78 million new US soybean acres being planted this spring. And he says that may push soybean prices below the $8 mark.
Corn and soybean producers trying to update their marketing plans might take interest in Brees’ estimation that prices are within the range of profitability, and marketing alternatives might be considered. He says with the downside risk in the corn market, December futures at $3.80 will provide a breakeven price for low cost producers. And he says any break below $3.70 would signal a greater fall, so current profit margins should be protected. He says one possible tool is a minimum price contract or a put option. Those provide downside price protection, but allow a marketer to participate in any price rallies. An option premium would cost 30 to 35¢ per bushel, and a minimum price contract would deduct at least that much from the cash price for the service offered by the elevator to buy the option.
Brees also suggests making some soybean sales since November futures are well above $9 and would net cash prices in the upper $8 range. He says any soybean rally above current levels would signal a move to higher prices and such a price action should be accompanied by scale up sales or trailing sell stops. But he says any collapse below $9 would suggest lower prices and should be met with adding to your sales to avoid lower prices.
While the spring price rally has not occurred, it still may come, but any failure to do so does not mean that harvest prices will not see rallies at some point.
Summary:
The typical spring price rally for corn and soybeans has not occurred this year, which is somewhat of rare phenomena, but there may be future opportunities for fall prices to rise before harvest. The lack of a spring rally can be attributed to large grain stocks, the stronger dollar, and more planted acreage expected this year compared to last year. Producers should adjust a marketing plan to either take advantage of a rally, if it comes, but also be prepared to protect current profit margins should corn prices collapse below $3 and soybean prices to fall below $8.
Posted by Stu Ellis on 04/15 at 01:27 AM | Permalink
Comments
Posted by: Freeport, IL at April 19, 2010 1:01PM
Projected US 2010 Corn Yield from Planting Progress the End of First Week of May
Corn planting progress was detrended to reflect modern practices and equipment size. Corn yields were also projected to 2010 production from historic values. The maximum and minimum yield may only be affected at the extreme ends of planting progress, over 90% planted and under 40%. The maximum average and mid-point yields seem to occur between 90% and 70% planted. The end of the first week in May (USDA’s week 18) should have 60% to 80% of the corn planted, forty percent of the time (17% + 23%).
Expected US Corn Yield from Update Corn Planting Progress
.................Corn Planting Progress Range end first wk
....................100%.............90%................80%............70%.............60%................50%............40%.............30%
.....................90%.............80%................70%............60%.............50%................40%............30%..............0%
Max…...........156.7…..........175.1….......173.7….........173.4…..........171.3….......171.8….........170.2…..........158.8
Min…...........117.1…..........157.9….......157.0….........146.5…..........154.4….......142.2….........123.0…..........128.2
Ave…...........136.9…..........166.5….......166.1….........156.7…..........160.8…,......154.4….........153.4…..........146.2
MidPnt…........136.9…..........166.5….......168.8….........155.9…..........156.6….......151.1….........167.0…..........149.0
%.of.X…..........7%................7%...........17%...............23%...............10%...........13%...............10%...............13%
Should one want to “smooth” projections into a “nice” relationship, the minimum yields for 90%-80%, 80%-70% and 60%-50% might be lowered to the 140 something level to maintain to relationship of the 70%-60% and 50%-40% planting progress yield levels. The 30-0% planting progress might see lower minimums as well to reflect the 100%-90% planting to yield relationship. A smoothing process is expected to drop average and mid-point yields for the smoothed fields. (In other words, the 90-80%, 80%-70%, 60%-50% and 30%-0% planting progress levels may have minimum, average and mid-point yields that are too high.)
New history occurs every second or year in this case. So the projections in the table above may have no being on the current year. Use at ones own risk.