TOP FARMER WEEKLY PERSPECTIVE 09/09/2022 BY BRYAN DOHERTY
Expect Basis to Again Lead Futures
The cash prices for corn, for the fourth year in a row, will likely lead prices higher. Tight supply into the beginning of the growing season and a less-than-ideal crop will keep the supply side of the balance sheet tight. Though we cannot guarantee what will happen this year, cash prices have tended to lead futures higher since 2019, when the crop was planted record late due to a cold and wet spring. Yield was down and, more importantly, test weight and quality were challenged throughout the entire Midwest. The early winter of 2020 saw strong basis developing in pockets. This trend has continued today, as challenges with the growing season and need for supply continue to surface. Most recently, drought and heat conditions in the South (Texas) are reflected in cash, which is priced at record-high levels, as end users look to fill needs for the winter ahead.
Currently, this year’s corn crop is rated one of the lower in the last 20 years, with 54% considered either good or excellent. That compares to 60% a year ago. The poor to very poor categories combine for 19% (approximately 1 out of every 5 fields). Last year, the final yield estimate was 177 bushels per acre. The current USDA estimate is 175.4 bpa. Private estimates are lower, with the most recent Pro Farmer and DTN Digital tours around 168 bpa. High corn prices this spring suggest farmers are carrying little supply into this year. Expect that, once harvest winds down, cash prices will need to firm in order to encourage producers to sell. It is unlikely that energy prices will soften much, as consumers continue to drive in a post-COVID era. This implies ethanol demand remains strong. Both the cattle and hog herds have contracted and have probably reached their lowest levels of size, as higher prices for meats, dairy, and poultry have now created an environment to maintain herd size or even grow. Exports can and do fluctuate from year to year. Currently, Brazil is picking up additional business against the United States. However, when prices are high (as they are now), end users tend to buy as needed. The current export pace has slowed since mid-summer, which is not a surprise. A less-than-ideal Northern Hemisphere crop (due to adverse weather in the U.S.), Europe, China, and short supply out of war-torn Ukraine all indicate U.S. exports will remain active.
So, what does all this mean for corn producers? There are generally two reasons one might consider storage: 1) you expect basis improvement; 2) you expect higher prices; or both. If an attractive basis for fall delivery is being offered, you might consider selling off the field. Then, if wanting to remain an owner, buy futures or call options, depending on your timetable and risk tolerance. If expecting basis to improve later, then storage is perhaps your alternative to fall sales. A lack of carry suggests end users are willing to pay more now than later to lock up supplies. The world supply of corn is on the decline with hopes that the 2022 growing season would increase supplies. It has not. The year 2023 is a critical year, and volatility in prices could be very high. Strive to create a balanced strategy to manage your marketing. If selling, we recommend you remain an owner. If storing, we recommend you consider the use of sell stops in futures or puts to establish a floor. It is potentially easy to make a bullish argument for prices, yet this is almost always the case when supplies are short. At some point, end users or speculators just don’t step up. If enough time passes, perceived supply increases may keep buyers only buying what they need, which can create an environment of sideways prices. The bottom line is to be prepared for most anything. Now is the time to check offerings for fall basis and create your marketing strategies. Always learn about your risks and rewards before entering any position.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
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.