Really, $6 beans? Probably not.

Corn

Corn pushed to the top of the trading range last week. However, with 2.3 billion corn bushels carryout (compared to 1.8 billion last year), farmers are anxious to sell, so prices pulled back by Friday. It will likely take a significant drop in corn acres next year and a weather event to see $4 by summer. Expect sideways trading for the next 80 days and it could be a tight range of $3.45 to $3.60 on the March futures.

 

Beans

Prices continue to inch lower week by week. Currently, there appears to be enough beans in the U.S. to meet demand. In South America, Brazil is on track to produce a record crop while pockets of Argentina are too wet. This may mean 100 million bushels will be lost in Argentina, but Brazil’s record crop may make up for it.

Still many speculators are betting what happened last year will happen again. While possible, is seems unlikely. In two weeks after the South America weather forecast is seen and as harvest progresses the market will know more. Remember the market will have the prices locked in before we actually know the results, so have a plan ready.

 

Really, $6 beans? Probably not

This week an analyst forecasted “Bean Futures Starting with a $6.” This created a lot of social media buzz and traders in Chicago even took notice.

Obviously, stories like this cause a stir in media. There is always somebody making a wild prediction so that if it happens, they can say they said it first. Reading between the lines, the forecast could just mean $6.99 futures, which is much closer to $7, but they did say Iowa farmers could see cash prices around $6 which has more sizzle. Regardless, talk of prices dipping this low can scare farmers.

 

How realistic is $6 beans?

While it could happen, it’s not very likely. For it to happen, a “perfect storm” would be needed including the following scenarios:

  • Bean acres — More than the forecasted 87 million bean acres this particular $6 analyst stated would need to be planted (we probably need closer to around 90 million).
  • Weather — great weather conditions across 90% of the Midwest
  • Bean yields — Above trend line yields, which currently are about 46 to 47 bushels per acre would need to be probably 52+
  • Decreased demand — Examples of this would include a trade dispute with China, too much palm oil, excessive South American beans harvested this winter, etc.
  • Corn/bean ratio — Very low.

What is the corn/bean ratio?

The ratio shows the price of 1 bushel of beans to X amount of corn bushels. For example, in the last two years the market has traded, the corn/bean ratio between 2:1 and 3:1. “Normal” is around 2.4:1.

As of Friday, the ratio between Nov ’17 beans (9.835) and the Dec ’17 corn (3.8575) is 2:55:1. Two weeks ago it was 2.7:1. At these ratios, it encourages farmers to plant more beans than corn. When the ratio is 2.4:1 or lower, prices encourage planting corn over beans. In other words, corn prices can also have an effect on bean prices longer term. So, corn prices would likely have to decrease significantly too.

Example: Let’s assume too many bean acres are planted and there is a normal corn crop but with only 91 million acres, if corn prices go to $3.40 this fall as a result:

  • Low bean ratio (2:1) and $6.80 bean futures are possible.
  • Mid bean ratio (2.4:1) and $8.16 beans — not a great value when it was $10.16 last week, but better than $6

What are the chances of $12? It’s just as unlikely. Basically, the opposite of many of the above examples would be necessary.

 

What should farmers expect?

With what we know now beans will likely range between $9 and $10.50 for another month until it is better understood how many acres U.S. farmers will plant. The market could drift towards $8 if a large amount of acres are switched to beans in the March USDA report. In the meantime, South American weather conditions will shift prices daily within this range.

I like to avoid getting caught up in sensational stories that include crazy lows or highs. Typically the market stays in the middle making outliers look foolish. Every once in a while somebody will get lucky, but it’s rare. Historically, extreme predictors don’t do well.

 

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.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

 

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