Prices and weather… weather and prices

By Jon Scheve, Superior Feed Ingredients, LLC

May corn prices blew past $6, and then a few days later $6.50. Additionally, May futures gained on July futures by almost 10 cents this last week, which is huge, because in a normal week in a normal year a 1-cent move on that spread in a weeks’ time would be a big deal. Basis values across the US also increased another 5 cents this week. These are clear indications that the market is begging for corn and is unable to find it.

How much corn is left to sell by farmers?

The last USDA WASDE report showed on-farm cash corn prices unchanged at $4.30 from the March report, suggesting most farmers already priced the majority of their 2020 crop at lower values compared to today’s prices. Plus, elevator mangers across the Midwest are telling me that a lot of corn was sold around $4 futures and then most farmers sold another big portion of their production again in November when prices hit $4.50. When corn shockingly hit $5.50 last month, a few farmers sold again, most likely cleaning out their bins before planting. Therefore, the consensus is that very little corn remains in on-farm storage.

What about commercial elevator storage?

Commercial elevators have been selling corn as fast as they can buy it. This is because commercial elevators hedge the grain they buy right away to reduce futures risk on the trade. The current inverse market encourages commercial elevators to move corn now, because any stored bushels could be worth less in the future. When the nearby contract is worth more than the contract after it a hedger loses money to roll their hedges forward. Therefore, it’s unlikely much is left in their storage either.

What will end users who need corn do?

It will be a challenge for those who still need to buy in the cash market between now and mid-September. Basis values are approaching levels not seen since the drought years. With tight carryout estimates, both basis and futures have a lot of upside potential. It’s a sellers-market and buyers could feel a pinch. 

Bean outlook

New crop beans lost ground to new crop corn this week, which doesn’t make much sense. Old crop bean carryout is the tightest in history, and new crop carryout is expected to be just as tight. Plus, the new crop corn-to-bean ratio (i.e. Nov beans at $13.50 divided by Dec corn at $5.57) has gone down from 2.6:1 to 2.42:1 in one month. The closer to 2.4, the higher probability more corn acres will be planted this spring. 

In other words, beans were already desperate for more acres and with the current corn-to-bean ratio it seems like beans will not be buying enough acres from corn.

U.S. weather

There has been growing concern over persistent cold weather throughout the Midwest and excessive dryness in the north and southwest. Some have suggested these events could impact upcoming yields. There is some recent historical data that my friend and market contact Matt Campbell observed that would suggest this belief is misguided. 

Comparing 2021’s average April temperatures to similar years

The charts show that the average April temperatures in 2013 were much colder than they are today while 2018 was only slightly colder. 

Corn yields in 2013 were only slightly below trend line and in 2018 yields were slightly about trendlines. This could suggest that April temperatures might not have a significant impact on yield potential.

Comparing 2021’s drought monitor to similar years

The following charts show the US Drought Monitor Index in 2021, 2018, and 2013.

After 3 years of persistent dry weather in 2013, many believed there would be a fourth year of dry weather. However, that didn’t happen. 2018 started off as one of the driest years since 2013 but still had above normal yields.

Winter Drought Monitor Index — 20-year comparison 

Over the last 20 years, there does not appear to be any correlation between Midwest drought conditions during the previous winter and final upcoming national average yields.

For instance, the increased dryness in 2006, 2007 and 2008 had virtually no effect on final national yields. Also, 2013 started off as one of the driest years, yet yields were near trendline. Conversely, 2011 started off relatively normal, but lack of summer rain caused big yield reductions. 

Looking forward

This analysis seems to indicate that winter and early spring weather have limited impact on final yields. However, timely rains from June through August are CRITICAL to crop production. Unfortunately, predicting weather conditions, especially precipitation, long-term isn’t available yet and that will continue to create uncertainty in the market. That’s why risk management is extremely important for farmers to remain successful year after year.

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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