-We are putting in an order to sell 25% of expected 2019 corn production at $4.00 vs December
-We are putting in an order to sell 20% of expected 2019 soybean production at $9.50 vs November
Corn recommendation: Sell 25% of expected 2019 production at $4.00 vs December
The last month has been brutal for the ag markets. We spent all winter confident in a corn rally since even after a record crop we were going to trim the domestic and the world balance sheet. However, after some concerns early in their growing season, South American weather held to near perfect for the second half and the size of all the crops rebounded significantly from last years drought. We have not seen a single port or trucker strike either. Some analysts project South America to add as much as 1.2 billion bushels to the world balance sheet. On the domestic front, USDA added almost 300 million bushels back to the balance sheet on the March stocks report. So in one month we went from tight world and domestic stocks of corn to having a decent buffer in stocks of corn. We only needed one of the many cited factors (higher demand in old crop, South America weather hiccup, trade deal, increased ethanol usage) to go our way this winter to get a bounce and unfortunately everything so far has worked against us. Now it is almost May and the number of things that can push this market higher has been reduced.
Seasonally, the market usually rallies this time of year. Often there are concerns about getting the crop in the ground or getting the rain it needs to get going. This year has been record wet and there still remain many questions about getting the crop planted. The market has not panicked yet partly because of the domestic stocks added by USDA in March and world stocks from the good South American weather. We planted at a record pace last year starting in early May, now we have a buffer in old crop so the market is not overly concerned yet. The biggest thing we have on our side is the record fund short in corn (and it has gotten even bigger in the last week). Many market participants reference last year as an example of how much faster we can plant the crop now with big modern equipment. The University of Illinois released a study today where they hypothesize the planting pace has not gotten that much faster over time, as the effect of bigger equipment is partially offset by there being less of them as farm size has increased. They believe the reason we were able to plant so quickly last year is that there were over 20 days in a row suitable for field work during May in parts of the corn belt, which was unprecedented in their dataset going back to the late 1970s.
Whatever we get to spook the funds, we need to be ready to price corn. There is a lot of old crop corn in the country left to price and a lot of new crop that needs to be priced, therefore there will be a lot of sellers when the funds start buying. We are recommending putting a new crop order to hedge 25% of expected production at $4.00 vs December. This is revised down from our earlier objective of 4.10-4.12. We have to clean up old crop when the funds start lengthening their positions, whether that is in the 3.60 or 3.70 range vs May. When the funds exit, we need to be out as well.
Soybean recommendation: Sell 20% of expected production at $9.50 vs November
Soybeans have held on remarkably well until this week. We got further rumors of trade talks that were said to be the “end stages” of talks, but the market no longer seems to be interested in rumors. Reactions to rumors become more muted as South American crop estimates grow and prices for South American origin beans slide. Now that part of the South American crop has come to market, we have lost some of our advantage of exports. We had our first order on 2019 beans at $10 and wrote at the time we didn’t know what would push us that high but we had two growing seasons to get through. Now we have most of the South American growing season behind us with projections of record crops, and the US has plenty of subsoil moisture to make a bean crop as well as a much wider planting window than corn in the Midwest. We may need to sell 2019 beans more than once this year, meaning hedge beans at $9.50 with the intention to buy back the hedges if we drop below a certain point. We will get a bounce on a trade deal, we need to be ready to sell it. The funds are getting short soybeans as well as corn, but do not have the record position in beans that they do in corn. They will still have to cover those positions at some point.
US wheat acres are down significantly and the crop has faced significant challenges, but ratings are better than last year. World stocks have been the main reason for the price drop as Russian exports continue and there do not seem to be any significant weather threats to their crop yet. The US is competitive on price but freight has pushed us out of some of the global tenders recently. Exports were decent but not enough to set the world on fire. Early planted wheat in our area looks good for the most part but there are not enough acres. The flour mills have made preparations by putting on rail but they still need whatever local crop we do harvest. Basis will be strong and there will be significant premiums for quality!
Cotton has been a rare bright spot in the ag markets. Exports remain strong as it appears China is going to be rebuilding their stocks rather than drawing down reserves. Cotton could have more short term benefit from a deal with China. Positive economic indicators in China and the US, as well as a rally in crude, have also helped cotton. We are heading into another delivery cycle in cotton though which have not been kind to the cotton market. If you have old crop left to clean up, I would be thinking hard about doing it now unless you are prepared to carry it until summer. Planting progress showed no surprises.