The USDA surprised everyone this past week with a 250-million-bushel carryout reduction in corn. In the last 20 years, this was the largest decrease on record, and only the third time carryout fell more than 50 million bushels.
Three factors likely impacted these carryout estimates — less acres were planted in 2019 than previously estimated, yields were probably lower than originally thought, and feed demand could have been higher than previously believed. This revised estimate drastically changes the upcoming 2020 carryout situation. While many were anticipating a record carryout only a week ago, now carryout may be within a “normal” range. A normal carryout could also mean “normal prices,” a welcome relief after so much “sub $3 futures fear” this summer.
The USDA supply and demand report in the next week should shed more light on where price ranges will be for the winter now that we have this new stock report.
Forward selling corn
For the past few months, I’ve noticed that there’s been increasing social media discussions on whether selling next year’s corn crop more than one year in advance made any sense. I thought it was a good idea to determine if this is actually a good strategy or not myself. I’ve provided the following historical insights from my research below.
First, I compared December futures since 1990 for both the year the crop was raised and what the high for that same December futures contract was a year prior. In the last 31 years, it paid to sell corn more than one year in advance 13 times, or only 40% of the time. If I just looked at years from after the 2007 ethanol mandate, it has still only paid to sell in the prior contract year 6 of 13 years or 46% of the time.
Of the approximate 40% “successful years,” on average there was a 40-cent advantage from selling a year ahead over just waiting until some point during the year the crop is grown. Interestingly, in the years that one would have waited until the crop was planted it was more profitable by nearly a 95-cent advantage. This suggests there is a 2:1 advantage to wait to sell corn until the year the crop is planted.
I also analyzed 3-year rolling averages to see if outcomes changed over time. In addition, I looked to see if using “Olympic-Style” weighted averages (i.e. throwing out the highest highs and lowest lows) changed the ratio and none of them had an impact on the ratio.
There was also no advantage in looking at the price of corn either to determine if selling a year in advance was the right decision. 2011 showed us that selling corn ahead of time for 2012 was a big mistake even though corn prices were well above normal breakeven levels. 2017 shows us that even though prices were only near breakeven levels in 2016 it was a year that should have been sold ahead of time because the 2017 growing year was normal.
It comes down to predicting weather perfectly to hit the high in any given year and so far, nobody has figured out how to do that with any long-term success.
So, when does the market high happen each year?
While we might not know what the weather will do there were some patterns to when the highs occur in the year the crop was grown. There is a 65% chance the year’s high will occur between March 1 and Aug. 31.
Other interesting observations include:
• In the last 31 years the high has never happened in October or February
• It only happened once in September — in ‘02
• Two of August’s three high years were the ’11 and ’12 drought years
• Five of June’s six high years were after the 2007 ethanol mandate was in place
• December hasn’t seen the high since the early 1990s
• November’s two highs were in ’06 and ’10
• January’s highs were in ’13 (after 3 drought years), ’01, and ’20 so far
Historically speaking, there seems to be an advantage to waiting and selling corn the year that it’s planted. While January has only seen the high about 10% of the time it’s usually a strange reason for that to occur. If February has yet to see the high, it means that I should be ok to wait until after March 1 before I get overly aggressive on staring my next year’s sales plans. There is a 55% chance the year’s high will happen between March 1 and July 31.
While all of this is a helpful insight in “playing the odds” in grain marketing, it is of course no guarantee. The past two years alone illustrate outlier years can happen anytime. It’s impossible to know if what we are seeing are the highs for the year until many months later because of weather. Still, for me, using historical analysis like this and having a grain marketing strategy that plans for historical averages and normal situations helps me to try and maximize profit potential while also minimizing risk on my farm operation.
Please email firstname.lastname@example.org with any questions or to learn more. 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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