Marketing Your Corn - 2009 Part IV

By Mark Soderberg

For those who were following the marketing advice in Part I and II of “Marketing Your Corn in 2009” a farmer would have had 40% of their 2009 crop sold at an average price of $4.45 basis Dec-09 futures. In Part III, which I wrote in early Aug-09, after the market had peaked the first few trading days in August, I recommended that a farmer price an additonal 10% of the crop at $3.70 on a retest of the early Aug-09 highs. For much of the past 2 months, Dec-09 corn prices never seriously challenged this price level until very recently, as Dec-09 corn prices peaked this week at the $3.70 level. Some of my clients were able to sell Dec-09 corn futures at this price. For those that were not able to I suggested we just go ahead and get the 10% priced on the fear that prices may have peaked, once we began trading below the 100 day moving average, currently near $3.66 (see chart below). For simplicity I’ll assume that this last 10% was sold at $3.65, basis Dec-09 futures, bringing cumulative 2009 corn sales up to 50% at an average price of $4.29, basis Dec-09 futures. At this point I think it would a good time to reexamine the fundamental factors, which are driving corn prices and to review our marketing plan going forward.

As of my last writing the USDA, in the July-09 report, was forecasting the 2009 corn crop at 12.290 bil. bu. at an average yield of 153.4 bpa. The demand for the 2009/10 marketing year was forecasted at 12.525 bil. bu. leaving ending stocks at a comfortable 1.550 bil. bu. Since then the production and demand forecasts have been increased in both the Aug-09 and Sept-09 reports. Currently the corn crop is estimated to be 12.955 bil. bu., up 665 mil. bu. from the July-09 estimate, with an average yield at a new record of 161.9 bpa. Much of this supply increase has been absorbed with higher demand estimates. In the Sept-09 report the USDA is forecasting total demand to be a record 13.025 bil. bu. which is up 500 mil. bu. from July-09. This demand increase was broad based with feed use up 150 mil. bu., ethanol up 100 mil. bu. and exports up 250 mil. bu. With the increased demand, ending stocks are currently being forecasted at a manageable 1.635 bil. bu. As of this writing we await the Oct-09 USDA production report where the market is expecting another modest increase in both production and ending stocks.

Since my last writing, Dec-09 corn prices have traded down to a new low of $3.02 in early Sept-09, while recently peaking at the $3.70 level. It’s my sense that at this month’s lows the market was discounting a mammoth crop of nearly 13.5 bil. bu. at an average yield approaching the 170 level, and ending stocks over 2 bil bu. The recent surge in price I think can be attributed to several factors. The continued lagging maturity of this year’s crop only heightens the risk of an early frost trimming this year’s production. The forecastfor a season ending frost across much of the northern Midwest during the weekend of Oct. 10th and 11th will surely prevent crops in these area’s from reaching their optimal yield potential. Recent heavy rains and forecasts for more will only further delay this year’s harvest, while raising the risk of field loss due to lodging. As of Oct. 4th, only 10% of this year’s crop has been harvested, which is well below the normal pace of 25%. In addition, only 57% of the corn crop is mature, which is well below the normal level of 84%. While a portion of the 5.5 bil bu. of corn that is still not mature, will reach maturity this week ahead of next weeks frost, much of it will not and the impact of the frost cannot be quantified until actual harvest data can be obtained. Another supportive feature has been the weakness in the US Dollar, as the Dollar Index has recently traded down to 12 month lows. Finally, the continued rebound in global equity markets supports the theory that the global economy should continue to rebound from the deep recession. The SP 500 index recently peaked at the 1080 level, 62% above the Mch-09 lows. I believe the US dollar weakness and strength in the US equities markets has also fueled a recent surge in speculative buying in the corn market. In early Sept-09, the Non-Commercial traders held a short position of just under 40,000 contracts of corn. As of the most recent CFTC commitment of traders report, the Non-Commercial traders were long almost 20,000 contracts, a net change of almost 60,000 contracts in 3 weeks. Meanwhile the index funds bought another 13,000 contracts during this time.

So once again we are at that point where we must ask, “where do we go from here?” In August I wrote that I felt US corn yields this year would wind up between 155 and 162 bpa, depending on weather August forward. Since early August, weather has generally been favorable as evidenced by crop conditons being the second highest in the past decade, trailing only the record yielding year of 2004. Moisture has been plentiful for finishing off the crop and so far having avoided a widespread damaging frost. Given this I’ll revise my final yield forecast up a bit to between 160 – 163 with production being between 12.8 and 13 bil. bu. I’m guessing that disease pressure and this weekends frost forecast will ultimeately keep this years yield below the 165 level that some have forecasted. Given the production forecast and higher demand outlook, I feel the likelihood of Dec-09 corn going below $3.00 is quite low. In order for Dec-09 corn to trade above the $4.00 price level, I’m guessing final yields would have to slip below 158. Even if yields were to slip this low and prices surge above the $4.00 level, I question how long it could sustain that high of price. If this were to occur we would have to closely monitor the price of hogs, cattle, poultry and ethanol. A valuable lession that should have been learned from last years speculative commodity bubble is that high prices are indeed the best cure for high prices. If these industries mentioned above aren’t able to pass along their higher input costs to consumers in order to maintain a profit margin or least break-even levels, demand rationing will quickly occur and, as a result, prices should correct back under the $4.00 level. Although the equity markets are telling us the worst is over in terms of the global recession, not all are convinced a sustained recovery is imminent. In fact, a recent survey by the Association for Financial Professionals found that over 2/3rds of US corporate executives believed the recession will last into next year, contrary to recent remarks by Fed Chairman Ben Bernanke. Currently 62% of these executives went on to say their companies are likely to keep payrolls at current levels over the next 6 months and 58% said capital spending would be cut or maintained at current levels over this time. My bias is that between now and expiration of the Dec-09 contracts, corn prices will stay between $3 and $4 per bu. with much of the trade activity over the next 2 months to be between $3.30 and $3.70.

Given this outlook I’d recommend producers that are currently 50% sold on their 2009 corn crop to price an additional 10% of the crop at $3.75 basis Dec-09 futures, taking cumulative sales up to 60%. Price an additional 15% of the crop in Dec-09 futures at $3.95. If the marketplace doesn’t provide the opportunity to advance sales from current levels, stay at 50% priced awaiting a post harvest rally to capture the carry in the market by selling deferred futures. Use a sell-off under $3.20 basis Mch-10 futures to look at reowning a portion of your 2009 sales with a limited risk option strategy. In my next post-harvest article we’ll update the 2009 marketing plan, while also looking forward to the 2010 crop.

Disclaimer: Futures and options trading involves risk of loss and is not suitable for everyone.