Last week we crossed the mid-way point on the corn averaging contract. Let’s just agree that the average feels so much less than average this year. Through the close of the market last Friday, June 19th, the DEC corn accumulated average is $3.42, and the SEP corn accumulated average is $3.32. Unfortunately, the averaging program so far has looked about as limp as I projected back in May (Houston, We Have a Problem). Furthermore, we are currently at the point where the averaging contract price is lagging the current price because we’ve been in a very weak uptrend since the program began, so it starts to feel a bit like a mistake.
So, Where to From Here?
Of course, the more important question is, what pricing opportunities are likely to remain before harvest? What are the odds of a significant price rally (that might cause me to regret having sold corn)?
A lot of us are a bit more on edge because the weather this year has been a departure from previous years – not really worse weather, just sub-optimal in different ways. Whereas in the last couple years we’ve been exceptionally wet, it feels alarming to be trending dry. The stress of weather concerns makes it extra difficult to pull the trigger at such low prices, when it feels like the market isn’t paying any weather premium.
In addition to weather concerns, it’s that time of year when “experts” start guessing what NASS will show for planted acreage on June 30th. I think a lot of folks simply gravitate to 94M acres, which would be a 3M drop in acres from March intentions. Last week an executive with a major fertilizer company raised some eyebrows by projecting acres would come in at 92M, or 5M acres below intentions. While the fertilizer guy may indeed be ultimately proven correct, I’ll take the under on his guess of a 5Ma drop.
Measured over the past 10 and 25 years of history, it has been much more common for NASS to show an INCREASE in acres from March to June. Indeed, some folks assume that, since 97Ma is so huge, it must come down; in fact, the only other time in modern history we had >97Ma in March intentions, the June planted acres INCREASED by 97,000 acres. Over the past 25 years, the average change has been an increase of 260k acres, or since 2010 an increase of 91k acres (Table 1, below). When there has been a drop in corn acres, in the past 25 years there have only been acreage reductions greater than 1M on three occasions: -1.09Ma in 2019, -1.19Ma in 1997, and -3.3Ma in 1995.
Regarding the acreage question, the only number that will really matter is the planted acres number that NASS will publish on June 30th, and my guess is that acres will not be reduced by more than 2M acres. There indeed may be further adjustments to acres later in the crop year, but they won’t be published until well past our last chances for pricing grain before harvest.
The following Table (2) shows three potential new-crop corn balance sheets: the first is what USDA printed in June; the second is a thought exercise on the “tight” scenario if the fertilizer guy’s prediction of 92M planted acres actually happens, along with a 2.5 bushel drop in yield, but no adjustments to USDA’s demand forecast (this is bunk, however, because anything that greatly curtails production will also have a damping effect on demand). The other column is my guess. I think USDA is greatly over-estimating feed demand if ethanol is going to recover anywhere near their projections (which I also fear are too optimistic), because there will be a resurgence in DDG availability. USDA is currently projecting 5.7Bbu of feed demand for the current crop year, which is by far the largest since the pre-ethanol era, then an increase to 6.05Bbu for next year. I’m going to pencil in 5.7Bbu of feed demand for NEXT year; greater consumption might occur, but I think it will be on the back of considerably lower prices than even what we have today.
As you can see from Table 2 (above), it will take an unprecedented hit to the current new-crop balance sheet assumptions to achieve stocks tighter than 15% of use next year. The following chart (Figure 1) shows the trailing price series for the DEC’20 corn futures, along with the accumulated averaging contract price. The curves are projected forward through harvest by creating an index of price changes for all years since 1990 that have had stocks/use >15% (of which there have been 12).
The upper curve shows the maximum price change that was achieved over all 12 years. The center line is the average accumulated price change, and the bottom curve is the maximum price decline. I added a max gain line that doesn’t include 2001, because that year seemed to be an outlier (but I can’t remember why…). Over all of the selected years, the harvest price was never higher than where we closed last Friday. Based on the max gain lines, I think there is potential to see a quick spike in prices if we do see an unexpectedly large acreage cut on June 30th. Finally, while nobody wants to see it, there’s just as much chance that we visit the Max Decline line.
Based on these data, I would guess the final DEC futures price for the averaging contract will be (yawn) 3.40, and the final SEP futures price will be 3.30. If there is going to be a surprise rally, it is likely to begin upon the June 30th stocks and planted acres report; by that point it will be too late for the averaging contract to capture any upside. Given the current, pathetic price levels, it may be prudent to spend at least a little bit on upside price insurance for the next month.
An August at-the-money call costs just over a dime. If the the June 30th report turns out to be a snoozefest, you may be able to get half of it back if you liquidate it right away. However, while I just wrote a blog post explaining why I didn’t feel a managed-money short-covering futures blowup was a foregone conclusion, there is nothing that would preclude a violent, face-ripping rally if the paradigm changes in the next couple of weeks. Therefore, maybe a bit of insurance would be worthwhile. I am already quite heavily sold of both old- and new-crop, so I expect that I will cover a portion of my sales before June 30th. If you’re a Cogdill Farm Supply grain customer and want to buy some upside price insurance to cover sales you already have on with us (including the averaging contract), please give me a call right away!
The BullSheet 