TFM Perspective 5-7-2021


Corn: A Cash-Led Rally – Why?

As one analyst recently described the rally in the corn market, “it has been breathtaking.” The rally is historic, as prices have doubled in less than a year. Strong cash, a reflection of resilient demand, smaller supply, or both has led the price charge higher. Another variable is money flow. Recent reports indicate that managed money, usually viewed as speculative investments, are as long in the corn market as they have ever been. The most reasonable reason for the rally is due to lack of supply. The rising implication is that the crops in recent years have been overestimated. As end users search for supplies, they are challenged to find it readily available.

Let’s circle back to 2019 when during late May and early June. Corn planting progress was at a historically low level. Cold temperatures and much above-normal precipitation created massive flooding throughout the Midwest. This had farmers prevent-plant a record number of acres. Then the skies parted, and farmers aggressively planted where they could after the first week of June. Many suggested their motivation was to collect an insurance indemnity, expecting much higher fall prices. As summer wore on and the weather moderated, crop estimates indicated that yields (while not record) were trending well above 170 bushels an acre. Farmers were holding their breath, hoping for the best, yet not believing the forecasts. Expectations were that the final January Supply and Demand Report would finally show the world that yield was somewhere closer to 165 bushels an acre – those expectations were wrong. The USDA stuck with their estimates and indicated slightly under 168 bushels an acre. Some private satellite imagery firms were closer to a range of 160-162 bushels and acre.

More importantly, in 2019, never had the entire Midwest struggled with quality issues that were not reflected in USDA estimates. Light test weight corn was a significant issue.  Calculating a lower test weight makes the argument much easier as to why the total number of bushels projected on carryout from last July dropped from 3.2 billion to now under 1.4 billion. Simply put, it looks like there was too much of a robust forecast for the 2019 production in both yield and quality. Fast forward to 2020: a dry August coupled with a derecho in Iowa had many farmers indicating their yield was less than they expected before harvest. In most years, farmers will probably tell you their yield was better than they expected before harvest, as they tend to be conservative on their estimates. That was not the case for last year’s crop. Lower yield estimates throughout fall tightened supply in a time where worldwide demand was strengthening.

Rising energy prices, shuttering of ethanol plants, and strong export activity ensued, and prices moved significantly higher into fall and winter. Worries about the South American crop also provided support. Yet, it is the cash market that has been telling the marketplace something different for well over a year. The futures market has been playing catch-up. Historically, strong basis levels suggest that demand has been better than perceived and that supply has been smaller.  On March 31, more fuel was added to the bullish fire, as both lower acreage and stocks had prices soaring. Farmers selling has slowed, in part because they have already sold corn and they do not want to miss out on further rally potential. Speculative buying has poured in, creating a rapid advance, reaching over $7.00. Prices have doubled in less than two years, without a significant weather market.

If history tells us anything, it is that change is always occurring. While the market did not rally in 2019 or 2020 for various reasons, all the bullish factors caught up to the market this year. A trough of nearly seven years of low prices created a solid worldwide demand base. The key for marketing in this volatile price environment is to remain balanced with marketing. When making sales, consider re-ownership through fixed risk all options, and puts to establish a price floor. Used properly, puts can leave unpriced inventory (whether in the field or bin) to appreciate if prices continue higher. Talk to a trusted advisor about these tools to understand the risks and rewards before you enter into them. We have often said bullish markets can be most stressful. Good sales one week may not look so good the next. There is always room to criticize what you do. To help control emotion, remain disciplined and strategic.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Bryan Doherty

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