How much of your corn crop has been forward contracted? 25%? 50%? More?

Last year farmers sold early, only to miss out as prices nearly doubled in the fall and winter. If farmer selling practices are like nearly every year in the past, they will have been reluctant to book sales early this year, thinking it will be like last year and they won’t want to miss out on the higher prices next fall. Since most farmers are not particularly adept at outguessing the market, there is probably a lot of corn yet to be sold. However, probably more corn was forward contracted this year than ever before, just because $4 seemed like a good price to sell some. How much of your unsold corn will get booked for $4? $3.50? $3.00?

By the way, what happened to $4 corn? The Titanic-like commodity, seemingly invincible with its ethanol-demand buoyancy, hit the USDA acreage iceberg on March 30th, slipped beneath the $4 waves, and plummeted into the netherworld of $3 values. Not that $3 corn is bad, mind you, but everyone had the chance to taste the expensive stuff and it tasted pretty good. And you want it back.

At the University of Missouri, Outlook Specialist Melvin Brees with the Food and Agriculture Policy Research Institute said the market was comfortable with $3 corn until the January crop report, “The low January carryover estimate was followed by limit up price moves that continued a price rally toward an unusual February high near $4.50 for May 2007 futures prices (old crop) and near $4.30 for the December (new crop) contract.” But prices began to fade, and USDA’s March Planting Intentions report accelerated the trend, “By April 3, May corn futures prices had declined about $1.00 per bushel from the February highs and December futures prices were down about sixty cents.”

“Old crop corn supplies may not be as tight as earlier estimated.” Brees says livestock producers have softened their demand for corn as a result of the high feed prices, adding 125 million bushels back into the supply. That raises the ending stocks to the level of adequacy, subsequently lowering prices. World corn stocks are also tight says Brees, increasing demand for US corn abroad. But with the higher than normal prices, China has found some corn it can sell. Brazil and Argentina have a new crop to sell, and the pressure on US corn exports is easing.

“The market was successful in attracting acres for the 2007 corn crop.”
The healthy prices convinced farmers to plant more acres than the market anticipated, leading to expectations of an abundant supply. Soil moisture is good and the market knows crops suffer more from drought than from too much water. So yields should be at trendline or better, providing adequate supplies without the need for rationing.

“Fund liquidation and negative technical market signals point to lower prices.” In recent years commercial hedgers have yielded their market influence to hedge fund speculators, and in recent weeks they have liquidated some of their long positions in the market. Since more have yet to be liquidated, corn prices remain weak, and the weaker they are the more likely they will sell their remaining holdings. The technical market signals commonly watched are indicating continued weakness in corn prices.

“A number of factors could still push corn prices back above $4.00—maybe well above $4.00.”
If all of the intended acres are planted, there will be a sufficient supply of corn and capable of meeting the demand. However, the supply demand balance will leave little for carryover and that points to potential market volatility in future years. Since we have had a cold, rainy, and slow start to the planting season, there has been a combination of factors that caught the interest of the market:

• Insufficient seed for replanting
• Late planting means pollination during hotter weather.
• Uncertainty about sufficient summer rains.
  The strong demand for corn, from ethanol, exports, and livestock, should keep supplies tight, says Brees. We will go through the acreage-bidding process again next winter and spring and any production concerns this year or next will have a price impact.

  Summary:

  $4 corn came and went, without a guarantee that it will return. Its presence forced some rationing that rebuilt supplies, which in turn convinced traders that supplies would be sufficient for now. But with a close relationship between supply and demand, there is little margin for error, and any increase in the demand or threat to the supply will return the market to the $4 territory.

  Stu Ellis

  Leave a Comment

  Name (required)

  Email (will not be published) (required)

  Website