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May 16, 2013
Prices for new crop corn, soybeans, and wheat are still very high by historical standards. Most producers understand this. Most producers also understand that by this fall, prices may no longer be as strong as they are now. Despite this understanding, producers have been forward selling grain much less aggressively than in years past. Compared to the same time last year, producer sales for corn and soybeans are down by at least half.
Selling a significant portion of one’s upcoming crop in the winter and spring months used to be considered a good business move. For the past three years however, selling early meant getting punished later. In each of those years, values moved higher as markets digested less than ideal growing conditions in the summer that eventually resulted in below trend yields.
Given where prices have been and how forward contracting has worked over the last three years, it is pretty easy to see why producers are not eager early sellers. It’s hard to blame a producer for not wanting to sell new crop soybeans at a $3.00 discount to old crop beans still sitting in a bin. It’s also hard to put blame on someone that is not willing to lock in new crop Chicago corn futures at $5.25 when they peaked at over $8.00 per bushel last summer.
The problem for producers in this predicament is that having too little sold at what are still historically strong prices may eventually prove costly. Wet weather has resulted in a slow start to US corn planting, but it has also served to recharge depleted moisture reserves in many areas. This might be the year where the late seller is the one that gets punished. The crop will eventually be planted, and timely rains this summer would result in potentially burdensome inventories by fall.
It may be wise for producers to take advantage of some of the hype surrounding delayed planting to make catch up sales of new crop production. Making such sales in increments would protect some downside risk, but should also leave room to participate in another weather-related rally should it develop this summer.
The market is now relatively comfortable with the idea that old crop corn supplies are sufficient to match the pace of demand until new supplies become available this fall. The US has been nearly priced out of the export markets as cheaper alternatives are available elsewhere. The USDA estimates that year-over-year US corn exports are likely to fall by more than 50%, leaving just enough of a corn supply to satisfy domestic demand for ethanol and feed use. Given the relative stability of the old crop corn supply and demand situation, the focus of the corn market’s attention is now squarely on the crop that should be in the ground.
Planting is progressing at slowest pace since the USDA officially began releasing such records more than 30 years ago. The much-delayed start to corn planting has given analysts reason to trim estimates for planted acres and yield. It is not hard to imagine that planted corn acres could fall by one or two million from the USDA’s current 97.3 million figure as growers switch to soybeans or elect to declare the land as prevent planting.
It is generally thought that corn yield potential is lost with every day that planting is delayed past the middle of May because the critical reproductive phases of the crop’s growing season are pushed back to time periods that tend to be hotter and drier. History however reminds us that this is not always the case and cautions against becoming too bullish based on delayed planting. Corn will eventually get planted and the timing of summer rains during pollination will be a more critical yield-determining factor.
Weather issues over the coming weeks and months can certainly light a fire under the new crop corn market, but the bottom line is that current S&D’s allow for a major rebuilding of corn stocks even with a yield that is significantly below trend. The USDA has acknowledged the slow planting pace by reducing 2013 corn yield from 163.6 to 158 bushels per acre on May 10th; yet current new crop carryout estimates are close still to 2 billion bushels. The USDA’s large carryout figure already factors in a major rebound in domestic feed and ethanol use, as well as a doubling of exports compared to the 2012 crop year. In other words, it would take a major weather event this summer to necessitate supply reductions as drastic as last year. At this point, delayed planting would not yet constitute such a major weather event.
Old crop elevator prices for corn are still relatively strong considering that end users are pretty well covered in July. Ontario’s big corn inventory is slowly working its way into export markets. Bids in the nearby US markets for truck corn are still strong; however logistics remain a factor that limits the amount of Ontario corn that can hit that particular market. Corn has become tight enough in some areas outside of Canada that vessel shipments are finally happening. This should help to clear some inventory, but it remains difficult at this time to paint an overly bullish case for local corn basis levels.
Ontario farmers have benefitted from better weather than have their US counterparts. Planting in many areas of the province is complete and a large new crop of 2.2 million acres is expected. A good yield from those 2.2 million acres will result in a big corn surplus once again that will necessitate a large export program at some point during the marketing season. The timing of those exports will depend on when producers decide to sell.
The old and new crop soybean markets continue to drift apart in terms of market direction. Old crop soybeans have enjoyed recent strength while new crop soybeans struggle to keep up. The reason for the value discrepancy between old and new crop soybeans is simple; there just aren’t enough supplies to satisfy the North American marketplace now, but there will likely be lots by the time harvest is complete this fall.
As expected, the pace of old crop US soybean sales has finally slowed to a trickle in recent weeks as logistical backlogs in South America ease. It is unlikely that the US will be much of a soybean importer for the rest of the summer, but so much of the 2012 crop has already left the country that US domestic crushers are paying vary strong premiums compared to Chicago futures to buy whatever supplies may be available.
By late summer, the soybean market in the US may begin to relax as buyers look forward to new crop and delay purchases. It is possible, even likely, that some South American soybeans and meal may make their way into the US marketplace later on this summer. Without a weather problem, it is likely that old crop soybean values will eventually work their way lower to converge with new crop values. There are still opportunities for some periodic fireworks in the soybean marketplace, but Chicago values should struggle to gain much traction given the prospect of building world inventories.
In Ontario, old crop soybean basis levels have remained strong as inventories in the province dwindle and producers disappear to tackle fieldwork. Statistics Canada’s latest stocks report suggests that soybean inventories in Ontario are not sufficient to maintain the current pace of crushing until new crop becomes available in the fall. Eventually the province will virtually run out of soybeans and the pace of soybean crushing will need to be reduced.
The value that was lost in the Chicago futures market when the May contract was rolled over to July has been more than compensated for in the form of higher basis levels. Currently, the spread between old crop July Chicago futures and new crop November futures is more than $2.00 per bushel. Holding unsold inventory through such a steep inverse is risky. Eventually, crush margins are likely to decline to the point at which the crushers will need to slow down. This may not happen for several weeks, but once it does, end users may set their bids versus the cheaper November futures and may not fully compensate the seller for holding onto inventory.
US hard wheat crop prospects have diminished amidst concerns related to freezing, drought, and abandonment in the plains region of the US. The soft wheat crop in both the US and in Ontario on the other hand is looking to be pretty large. Yields are unknown at this time, but harvest will be getting underway shortly in the US. Despite the diminishing production prospects for hard wheat, demand for all wheat classes remains sluggish. US wheat is still high priced relative to the rest of the world and any weather related rally would only serve to further diminish export potential. Without further exports, wheat is likely to continue getting most of its price direction from corn.