Climbing corn prices

By Jon Scheve, Superior Feed Ingredients, LLC

The corn market continues to trade at new high levels for the year. This is only the third time in 25 years that the December futures contract high occurred after September 15.

Why do corn prices keep going up?

A big rally this fast requires a “perfect storm” of unexpected events happening at the same time. In this case, carryout predictions among market participants for the 2020 crop have decreased from nearly 3.5 billion bushels in the spring to under 1.5 billion this month. A 2 billion-bushel drop in such a short time is unprecedented. The trade has been known to be a bit extreme with their prediction compared the USDA’s numbers, however even the USDA has shown a record drop this year as well from 3.3 billion in the May report to 1.7 billion earlier this month. For reference, in 2012 the USDA carryout reduction was only a 1 billion-bushel drop from spring until after harvest.

Why has carryout decreased so quickly?

The biggest reason is that China could import four times more corn this year than what they normally do. In the last 30 years China hasn’t imported more than 7 million metric tons (280 million bushels) of corn in a year. There are many traders who believe that China could end up importing more than 30 million metric tons (1.2 billion bushels) of corn this year. Many of these traders feel that at least half and possibly as much as 66% of that corn could originate in the United States.

Several other events in the last 60 days have also contributed to a decline in potential carryout, such as:

  • Yield reductions due to dry weather across the Midwest that were larger than previously estimated
  • Decreased 2019 stocks nearly a year after the crop was harvested
  • The potential for a La Niña weather event in South America this January that could reduce Argentina’s yields by 25%
  • Typhoons hurting China’s corn crop late in the season
  • Ukraine crops were smaller than previously estimated.

Thus, when the huge potential of Chinese corn export demand is combined with several supply reductions the market is looking at a radically different carryout level projection from just 2 months ago.

Where could corn prices go?

Some predict corn still has significant upside potential. Following are some variables that could affect prices:

  • China import pace — it’s still unclear if China will continue importing large quantities of corn, and not cancel any purchases in the future
  • South American weather unknowns — while the last 5 La Niña events have impacted Argentina’s corn crop significantly, there is no guarantee it will happen again this year
  • Ethanol production — there could be profitability challenges going forward with higher prices that could slow grind
  • COVID — if the latest wave slows global economies, there could be less ethanol and/or meat demand, slowing corn consumption.

In the summer of 2019, many in the trade believed corn prices had to go higher, until they didn’t. Currently, funds are near record long positions, farmers have a lot of corn left to price, and export potentials are strong. However, if one of these groups’ changes direction, the corn market could pull back. If two of the three were to change directions at once the results could be like what the market did in the summer of 2019 when it pulled back very quickly.

Beans

After 27 months of beans being below $10, I happily sold the first 25% of my 2020 beans for $10 on Sept. 14 for what I thought was a great price.

At the time I mentioned it would take a U.S. yield reduction, increased China exports, and a South America weather issue for beans to trade in the $11 to $12 range. Two months later all 3 issues happened, and bean prices are flirting with $12.

Several predictions in the trade now suggest beans futures could trade anywhere from $13 to $17. For those type of price levels to occur it will take more South American weather issues and increased Chinese exports to push the market that high in the upcoming months. The bean market will be extremely volatile until the late winter when more is known about the size of the bean crop in the southern hemisphere.

On 11/20/20 I sold my second 25% of my 2020 bean crop at $11.90 on January futures. This was a goal I placed 2 months prior when beans were still in the low $10s. At the time, I thought this price level was unrealistic based upon where it has been the past couple of years. I also choose this price level because beans have only traded above $12 for one day in the last 6 years. I thought it would be prudent to have a sale order near that mark in case the market turned around and went lower like it did the last time we traded $12.

I’m now 50% sold on my 2020 bean crop for an average futures value of $10.95.

Please email jon@superiorfeed.com 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.

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.

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