Spreads suggest undervalued corn needs to trade at $6

By Jon Scheve, Superior Feed Ingredients, LLC

Usually, the corn market is in a carry this time of year, meaning futures values are higher in later months versus current months. When the market is in a carry there is an incentive for those with storage capacity to hold grain for later use. 

Last week the December corn futures entered its delivery period and is now worth more than the March contract. This suggests the market wants corn sooner than later. Having an inverse in the futures market at this point in the marketing year is uncommon for corn and may signify corn is undervalued.

Is corn really undervalued?

Since harvest finished throughout the U.S., basis values have continued to climb much higher. Some end users in recent weeks have had to increase their basis bids by 20 cents or more to keep corn flowing into their facilities. Others have turned to free storage or fancy marketing gimmicks to encourage farmers to deliver their corn right now.

However, the latest USDA numbers suggest carryout is adequate and prices should remain range bound. Therefore, market participants are wondering how much upcoming USDA reports will change, especially the highly anticipated January report, which will have final yield numbers. Some in the trade think the later harvested crop yields were down from early harvest, but this was mostly seen in the tar spot areas of the eastern Corn Belt. The rest of the Corn Belt showed little drop in yields as harvest progressed.

Market demand continues to be a big area of interest. Ethanol demand specifically has been extremely strong and will likely see balance sheet adjustments in future USDA reports.

Export pace usually takes off in February and March, after beans are shipped out. Therefore, it may be a little early to know what to expect here. However, something unique is happening in Canada currently. Because Canada grows a lot of wheat and canola, their export capacity is dedicated to those products out of Vancouver to be shipped to Asian markets. However, due to drought conditions Canada’s production of most crops is significantly limited. Therefore, Canadian elevators have been shipping U.S. corn out of Illinois through Canada, to the ports in Vancouver, and then shipping it to Asia to supplement these commercial elevators bottom lines.

Farmer’s overall lack of selling could also be contributing to stronger prices. Many farmers are waiting to see what happens to fertilizer and input costs this spring before deciding what to do, because with increased input costs, some may not raise as much corn as usual. Plus, if farmers decide to plant more beans, they will need less storage capacity next year, and feel less pressure to move corn when they usually would. Also, some farmers may wait to see what weather conditions are like next summer before selling anything more.

Bottom line, if fewer corn acres are planted next spring, upside potential could be significantly higher. Plus, South American weather issues become more critical over the next 60 days. But if fertilizer prices begin to fade, more corn could ultimately be planted, which could have negative effects on prices longer term.

Market action

In early January ’21, when March ’21 corn approached $5 and December ’21 corn traded above $4.25, I priced the first 30% of my anticipated 2021 crop production. After watching the corn market rally significantly in 2019 only to crash quickly below $4, I wanted to minimize some of my downside risk for the upcoming marketing year by selling at prices traditionally in the upper end of the market range since late 2013. 

Also, last Wednesday a price target I recently set of $5.95 was triggered on the March ’22 contract for another 10% of my crop. This leaves me with 60% of my 2021 corn left to price.

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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