As the forecast remains wet and cold for much of the Midwest, the market is finally starting to take note. Planting progress was reported at 15% on Monday, which was the same as it was this week last year (the 5 year average is 27%). Last year, the Midwest had a window of exceptional weather from now until the end of May to catch up getting the crop planted. We tend to have short memories and I think the funds have been focusing too much on what happened last year. Guys in the Midwest have not been able to get the fall fieldwork done so there is still a long way to go before we get this crop in the ground, and the current weather and forecasted weather does look conducive over the next several weeks. The University of Illinois published a paper today looking at analogous wet planting years and deviation from trend yield. They believe that we should already be using a sub 170 bushel yield. As long as the weather forecasts continue trending in the same direction, corn looks to have put in a near term floor. However, if the weather starts to warm up and forecasts show drier, there is still some downside. We have a lot riding on the weather forecasts now…
The question we need to answer now is when to start scaling in sales and how aggressively. It is too easy to get caught up in the strength when the board finally starts rallying and wait too long to start selling. Noone wants to be the one who sells too early and misses out on the rally. Before we get too bulled up on a planting delay we need to remember the things that can limit this rally. There is a lot of old crop and new crop corn to sell. Midwest farmers are sitting on a pile of corn and have almost no new crop booked. Cash is tight in all farm households right now and they will need the cash. South American corn crop forecasts continue to grow. They are going to add an estimated 800 million bushels to the world balance sheet this year above what they produced last year. Even in the wet analogous years we are looking at, there was a break in the board once the crop was planted. Fund money seems to buy into “rain makes grain” more so than “plant in the mud, the crop’s a dud.”
Ideally we would like to buy some calls while the market is down and then we can sell aggressively on a planting delay rally knowing that if it keeps rallying our calls will let us participate in the upside. However, with the downside risk we have if the weather clears up I do not see spending the money on a call right now. We need to aggressively price new crop when we get Dec futures close to $4 and then look to buy calls if the market breaks after the crop is in the ground. $4 December futures should net us close to $5 cash corn so once we have some corn priced at profitable levels, then we can make a better case for spending money on calls if the opportunity presents itself.
We are going to be aggressive sellers of December corn above $4, no matter how bullish we get between now and then. We need to have sales on at profitable levels no matter how high we think it might go!
All the weather that is friendly for corn right now is bearish for soybeans. Right now, the market assumes whatever does not get planted in corn, will go to beans adding to an already burdensome balance sheet. Exports have been lackluster as China has seemingly stopped making even good faith purchases from the US. This can be taken as a good sign or a bad sign. If we are indeed close to a deal it may be a good sign as they are waiting until the deal has been completed to show their hand. It can be a bad sign if they are using it for leverage. Many analysts are writing that we are finally imminently close to a deal, but the market is not going to listen to rumors anymore. We have heard rumors too many times, we need to see an actual firm announcement from both sides. The Chinese delegation is coming to the US next week after the US wrapped up what they called “successful talks” in China this week. Beans need a deal!
Wheat has finally found some support after making new lows, again. We have seen benign weather around the world and the wheat tour finding yields much higher than last year and delivery in wheat all adding to pressure to the downside. There is some debate about acreage though as spring wheat planting is facing the same delays as corn and with prices so low some marginal winter wheat will most likely be destroyed. However, until we get a spark from weather somewhere the market does not seem to be taking note yet. The crop in the Southeast is coming along nicely, what few acres are out there. Basis will be very strong.
Cotton has been the lone bright spot until this week. Cotton has been trending down on adequate moisture in Texas and the Delta. Exports were strong but not enough to help cotton turn the tide this week. Outside markets have been friendly for cotton as crude has been working higher and world economic indicators continue to improve. Cotton needs to see a trade deal completed with China for long term support.