The Tuesday USDA report surprised many with an increase in world bean stocks, making levels the highest in history. With stocks to use rations also very high (third highest ever), conditions are not bullish and significant rallies are very unlikely.
To put this into perspective, current U.S. stock levels are more than double levels in the last 10 years. In the last 26 years, stock levels were only higher two other years — 2005 and 2006 — the last time bean prices were under $7.
The market seems poised for a long-term downward grind.
The South American weather was ideal for corn and beans this year. Production estimates continue to increase. This news hits beans harder than corn because the South American crop is over 50% of the world’s bean production while its only 20% of corn.
The USDA report also showed a slight decline in feed usage and a slight increase in corn for ethanol usage. Corn stocks will be the highest on record since the mid-80s, with stocks to use rations the highest since before the 2007 ethanol mandate.
For prices to increase long-term, yield reductions will be necessary. The reduction in planted corn acres could have an impact, but it would still require a reduction in yield. A five-bushel (or 3% below trend line yield) would certainly help drive futures levels higher. Unfortunately long term weather predictions currently do not favor this scenario. Still there is potential in corn, and any small weather scare may bump prices back up to $4. However, if yields exceed trend line again this year, $3 corn may be a concern long-term.
Getting caught up in the headlines
With the market not moving much over the last several months, headlines about relatively insignificant issues are ever present. Farmers can get so focused on these issues, that sometimes they miss the big picture and what really affects farm operation profits. Following are three big ones I’ve noticed.
Many farmers are always concerned with their diesel inputs. While it’s important to be diligent about all input costs, fuel only represents 1% of a farmer’s overall budget. Let’s look at the numbers. Average farmers use a gallon per acre per field pass, or about three to six gallons per acre per year. Even if fuel prices adjusted a full $1 per gallon this coming year, the added expense is only around $5 per acre. This translates to 3 cents per bushel on corn or 10 cents on beans. The corn and bean market can move that amount in any given day. Realistically fuel fluctuations could be closer to maybe 50 cents per gallon and that would mean a change of only 1.5 cents for corn and 6 cents for beans on the bottom line.
Fertilizer is probably the largest input cost for farmers that has significant cost adjustments. Similar to fuel costs though, even if prices increase or decrease by $100 per ton this year (a big swing), the cost would be about a $15 per acre swing. This equates to about 10 cents per bushel on corn’s breakeven point. Between the two, fertilizer is the bigger worry, but still relatively small in the grand scheme of things. Market prices can swing 10 cents in an active day for the corn futures.
The realty of corn production globally
Weather-related events in other countries can also make big headlines. Recently, I read that South Africa will have a bumper crop this year and that they will increase exports. On the surface this seems like a bearish story; however, South Africa only produces 1% of the world’s corn. To put it into perspective, the state of Michigan produces the same amount of corn as South Africa. The market does not get overly concerned if Michigan is having a good year or not. This makes me want to look at the production of other countries in the world.
- Brazil is the third largest corn producer in the world — equal to corn production in Illinois and Indiana combined.
- The European Union (28 member countries) produces about 10% more corn than the entire state of Iowa.
- Ukraine and the other 12 countries of the Former Soviet Union produce about the same amount of corn as Nebraska and Minnesota combined.
- Argentina usually only produces a little more than Kansas and North Dakota combined
- Mexico’s production is equal to South Dakota.
- Canada and Ohio produce almost the same amount each year.
- Russia, the largest land mass country on the planet, raises no more corn than the state of Missouri each year.
- India, with the world’s second largest population, only accounts for the same amount of corn grown in Kentucky, Wisconsin and Pennsylvania combined
So, what does matter when looking at the corn market?
- The United States (35%) and China (23%) account for 58% of the world’s corn production.
- If Iowa was its own country it would be the fourth largest producer of corn in the world.
- Iowa, Illinois, Nebraska, Minnesota, Indiana, and South Dakota produce 25% of the world’s corn.
- Over 8 billion bushels of corn are in storage around the world, or nearly what China produces each year.
- About 25% of that stored world corn is sitting on farms probably unpriced in bins across the United States.
What does have a big impact on farm profits?
When looking at the big picture, the number of bushels raised per acre has the biggest profit impact. Growing just one more bushel of corn per acre reduces costs by three cents/bushel (one bushel of soybeans reduces costs by nearly 20 cents per bushel). One bushel more in yield can cover a large fluctuation in fuel and has a big impact in fertilizer cost adjustments.
Large-scale weather issues in the U.S. or China will have a big impact on the market. And while isolated incidents around the world can cause price volatility, it is usually on a short-term basis. Savvy farmers will be ready to take advantage of those small rallies in their marketing plan as they become available.
Developing a market strategy that includes market carry and basis planning
As I continue to explain, having a developed marketing plan that considers the farm operation’s goals and objectives and incorporates market carry and basis strategy should not only bring bigger profits to farm operations, but reduce risk.
Bottom-line, rather than spending so much time obsessing over all those headlines, sit down and spend your time developing a more sophisticated marketing strategy. If this makes you nervous or you aren’t sure how to start, consider working with a seasoned grain marketer who can explain the more technical aspects in a way that you can both understand the process, and make you feel comfortable about what you are doing. Often there are choices available to farmers that they didn’t even realize. The potential profits available for farmers will likely out-weigh fuel or fertilizer input fluctuations.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
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