This week started off with a bang after cold weather over the weekend sparked fears of frost damage with the early planted crop and NOAA’s June forecast guidance showed a very hot and dry June ahead. As I have written over and over, this crop needs very timely rains since there is no subsoil moisture reserves. The market is very sensitive to hot and dry forecasts. A weather market can go both ways as there could be some downside if the models turn wetter (remember last few weeks). The old crop contracts for corn and beans are further from the highs than the new crop contracts but this week has narrowed the gap for all contracts. Corn finished the week up 46 cents on new crop (+38 old) and new crop beans are up 63 cents (+53 old).
First condition ratings came out this week and were above market expectations for corn and beans. These condition ratings were discounted quickly by the trade because they do not take into account any damage caused by the cold weather this weekend. Also early condition ratings have a very low correlation to final yield. 2012 was a very bad drought year but started off with near record condition ratings. The trade is much more interested in the weather forecasts than condition ratings right now.
The University of Illinois Farmdoc had a very interesting article about weather premiums. I will give my brief summary of it but strongly encourage anyone with the inclination to read the whole article here. The article tries to understand and measure what a weather premium is and when it occurs. Janzen compared pricing opportunities from the first week of June through the first week of December (basis December futures). He found that futures price on average were 12% higher in the first week of June than the first week of December. That is the average and does not always occur. We need to understand the differences between different years. Janzen acknowledges there is not always a weather premium in price expectations. For example, in a year like this where there is very tight old crop stocks but the market is expecting much more cushion in the new crop, there may be a discount. In other words, the market is not prepared for any weather hiccups. He found that when weather premiums are offered, they usually peak in June then subside as the weather actually unfolds (a ‘normal’ growing season, there is a scare, the market over reacts and prices subside as the full extent of the damage is known). He found the biggest price changes (up or down) occur in July and August. I read into this that if the market is forced to react to something that happens in July or August, it is bad for the crop as there is not as much growing season to recover.
My take away from the article is that there is not much of a weather premium priced into the new crop contracts at this point in the growing season. Prices are high, but new crop is lower relative to old crop and also not much higher than USDA’s projected $5.70 cash price on the May WASDE.
USDA June WASDE comes out next Thursday (June 10th). China has not bought anything new this week but old crop exports were exceptional this week and they have already committed to a total of 593 million bushels of the corn that is in the field, which is by far a record. It seems to me USDA is going to have to raise export demand. Ethanol plants are making money at $7+, feeders are making money, no demand is slowing down on corn. The big report is still the final acreage and stocks on June 30th. Until then, weather is going to set the tone.
Soybean basis has leveled off the last few weeks and has finally weakened in the last few weeks. Feedmills in North Carolina can never shut down as long as there are animals to feed. They run all year long. Crush plants typically take some downtime for maintenance and can extend or shorten that time depending on the market. When they get enough beans committed and have new crop in their sights they can start slowing down old crop usage. Basis is still very strong in our markets, but it does not seem to be getting any stronger. New crop early premiums will still be very strong.
What To Do
We can hedge new crop beans back above $14 and corn is knocking at $6. Just about everyone in the Southeast has gotten some rain now and should be feeling much better about their crops. Hopefully 25% of your expected production got bigger this week! Get some sales on at $14 beans and $6 corn. Even if we go higher than that, there is nothing wrong with sales at those levels.
Flour mills are wondering what to do. Even with triple digit basis to a flour mill it is still not a easy decision when you can get $7.50+ for feed wheat and no discounts. If you can use the space to make your life easier for corn and bean harvest, you can sell your wheat and have it all shipped before the corn starts to dry down. AND get a good price! If you have the space to do it and once we know the quality, you can hang on to some and see what the flour mills are going to have to pay in the fall once all the wheat is gone. Either way you should win! That is a much more fun decision to have than what we have faced the last few years.
Several people have told me they feel like they are losing something to ship to the feed channel after investing in the chemicals and trips across the field to make the wheat milling quality. I understand that, but lets look at a purely return on investment point of view. All the investment you put in your wheat added to your quality but also to your pounds. You are selling pounds to either the flour mill or the feed mill. You are going to get paid for your investment. And your extra effort gave you the option to go to a flour mill if that was a better option. Next year flour wheat may be your only option! Keep up the good work!
After being left out the last few weeks, cotton finally joined the party. There is too much rain in Texas and in the Delta and parts of Georgia are missing out. Parts of the Delta are behind on planting and cotton could lose even more acres to soybeans. I look for cotton to try to make a move to put a 9 in front of it. It may be after the acreage report, but i am not scared to wait on cotton.