Are price swings ahead?

The trade was surprised by the USDA reducing corn yield estimates, but at the same time raising bean yield estimates. What does this mean?

Corn

Carryout for the 2015/16 crop was reduced to under 1.6 billion bushels. Many think this is bullish and corn won’t trade below $3.50. The top end of the trading range could be $4.10 in the near term. Currently, there is 1.77 billion bushels of carryout from the 2014 crop and the market is trading below $4. Assuming no large issues, it’s hard to believe prices could change much from this yield estimate adjustment.

Potential issues that could cause price swings

• Exports are a wildcard. The U.S. dollar is very strong. If interest rates increase, it won’t be bullish for grain exports.
• Early reports of lower than expected yield in the south seem bullish. However, the amount is minor compared to the corn in the upper Midwest, where yield estimates are largely expected to be good and harvest will start in 10 to 14 days.
• China announced they will import less sorghum. Combine this with farmers raising an additional million acres this year and we could see 100 to 200 million extra bushels in need of a home. With fewer export opportunities, this extra sorghum will likely go to feed at the expense of corn domestically.
• Worldwide wheat stocks are burdensome on the market. Estimating just an addition 5% of the domestic wheat crop going to feed due to quality would mean 100 million bushels of corn displaced in the feed ration.
• While ethanol margins are positive, some estimate crude oil prices will continue to slide. This could cause a reduction in the ethanol grind later in the year. Just a 2% reduction means 100 million bushels added to carryout.
• Yield is still the biggest driver and question market in this market. Continued yield reductions will be needed to keep the market pointed higher.

Beans

Many think the bean yield estimate increase is premature. There have been some heat waves and dryness reported throughout the Midwest recently, which may mean aborted pods.

Similar to corn, increased interest rates would strengthen the dollar and reduce export demand for U.S. beans. The current value of the Brazillian Real is making the value of soybeans there the highest farmers have seen in the last three years. Additionally, Brazillian farmers are projected to increase soybean planting by 5% this winter, which may keep a lid on soybean futures.

The current price ratio favors U.S. farmers planting more corn than soybeans next year. So, the shift in soybean acres from North to South America becomes a zero-sum game and may just shift exports from one continent to another.

Plan ahead

I strongly urge farmers to put some price goals in place before harvest. There is a good chance the market may rally to levels you wish you had sold once harvest is finished. Don’t miss opportunities because you are busy thinking about other things.

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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