Corn - Part VI
March 05, 2010
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Name: Mark Soderberg
Company: Archer Financial Services
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Years Trading: 19
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Corn - Part VI
By Mark Soderberg, Archer Financial Services
As of my last article, in early Dec-09, my recommended sales level for the 2009 corn crop was at 75% with an average price of $4.30 basis the Mch-10 futures. At that time, I had also recommended that producers sell another 10% of your production if Mch-10 futures had reached $4.20 prior to the USDA production report in Jan-10. I had also advised producers to begin marketing of the 2010 corn crop by selling 10%, if Dec-10 futures had reached $4.40. Both of these price targets had been reached. This brought cumulative sales for the 2009 corn crop to 85% at an average price of $4.28 ¾ basis the Mch-10 futures. Since the Mch-10 corn contract is now in delivery, most of my clients have rolled these hedges forward to the May-10 contract at a spread of $.11 ½. For simplicity I'll assume that sales for the 2009 corn crop are at 85% at an average price of $4.40 basis the May-10 contract. 2010 sales remain at 10% at an average price of $4.40 basis the Dec-10 contract. At this point I think it would be a good time to reexamine the fundamental factors which are driving corn prices and to review our marketing plan going forward.
As of my last writing in Dec-09, the USDA was forecasting the 2009 corn crop at 12.921 bil. bu. with an average yield of 162.9 bpa. The demand for the 2009/10 marketing year was forecasted at 12.930 bil. bu. leaving ending stocks at a comfortable 1.675 bil. bu. Since then much of the fundamental news has been bearish. In the Jan-10 USDA report production was increased 230 mil. bu. to 13.151 bil. bu. with an average yield of 165.2 bpa, well above both mine and the market's expectations. Offsetting the production increase, however has been a 185 mil. bu. increase in demand leaving ending stocks at a still comfortable 1.719 bil. bu. Since Dec-09 feed usage has been increased 150 mil. bu., demand for the production of ethanol has been increased by 100 mil. bu., while exports have been cut 50 mil. bu. and other use has been cut by 15 mil. bu. In addition to the production increase in the US, weather conditions in South America have been near ideal. Since Dec-09 the USDA's corn production forecast for Argentina has been raised from 14 mmt to 17.2 mmt. At present most private production forecasts for both Brazil and Argentina are higher than the current USDA projections. As a result I'd expect future reductions to the USDA export forecast given the stiff competition in global trade. Another bearish feature since early December has been the direction of the US dollar. After making new cyclical lows in late Nov-09, the US Dollar index has rebounded and recently traded up to new 8 month highs as the market begins to sense higher interest rates in the US as the economy slowly regains strength.
Following the Jan-10 USDA report my initial thoughts were that spot corn prices would slip into a $3.40 - $3.70 trading range leading up to the stocks and prospective plantings report at the end of Mch-10. While grinding lower the last 3 weeks of January, May-10 corn prices appear to have put in a near term low in early Feb-10, just below the $3.60 level. Since then prices have rebounded over $.30 off their lows and as of this writing have settled in near the $3.85 level. Contributing to the large sell-off in January was massive liquidation by the NC traders. As of Jan 12th, the day of the USDA report, the NC traders were net long just over 185,000 contracts of corn. By mid February the NC traders had sold 190,000 contracts, liquidating their long position and building a modest short position. Since the early Feb-10 lows were made, the NC traders have positioned themselves with a modest long position of just under 20,000 contracts. Partially offsetting the NC traders selling has been buying by the index funds during their much anticipated portfolio rebalancing in early January. At present the index funds are long nearly 450,000 contracts of corn, up roughly 70,000 since the end of 2009.
So once again we are at the point where we must ask "where do prices go from here?" My sense is that corn will remain in a sideways trading pattern between now and the end of Mch-10. By mid-March we'll have a better handle on the actual size of the 2009 corn crop. In next week's report the USDA indicated they may change the 2009 production estimate following a resurvey of producers in a number of midwestern states due to fall harvest delays. Expectations are for production to be trimmed 25 – 50 mil. bu. By the end of March it's my sense that the markets attention will begin to focus on 2010 crop prospects with the Mch 31st planting intentions report and weather forecasts for the early parts of the planting season. Early ideas are for corn acres to be up 2 - 4 mil. over last year. However, recent long range weather forecasts suggest an overall cooler and wetter pattern is likely to persist in the midwest thru April. Combine that with the large area of the midwest still covered with snow it's difficult to envision a quick start to this year's planting season. Between now and the end of March, I sense that May-10 futures will trade in a $3.60 - $4.00 range. The upside should be capped by producer selling, while the downside should be limited by end-user buying and producers being less likely to sell. I also sense that there is a growing concern over the quality of last years corn crop. Given the high moisture and low test weight of a higher than normal percentage of last year's crop, I'm sensing that the good quality #2 yellow corn will command a premium price, therefore helping to support futures. I'd expect Dec-10 futures to remain in a $3.85 - $4.40 range between now and the end of March. Longer term weather will likely determine if prices breakout of these ranges to the upside or the downside.
Given my outlook, I'd recommend farmers who are 85% sold on the 2009 corn crop to remain patient and look to sell the remaining 15% at $4.75 basis the July-10 futures on some sort of weather threat during the planting or growing season. Look to roll your hedges in the May-10 contract to the July-10 contract when July is $.11 ½ over the May as full carry calculates out to near $.12. As far as a marketing strategy for your 2010 corn, I'll repeat the same advice I gave a little over a year ago when I wrote my first corn marketing article for the 2009 crop. That advice was that producers need to have a real good handle on your production costs, both on an acreage basis, and as yields become more certain, on a bushel basis. As the market provides opportunities for you to lock in acceptable profit margins you need to find the discipline to pull the trigger and make forward sales or to lock in future hedges. The best news to date for the 2010 crop is that production costs should ultimately be much lower than they were in 2009. In discussions with my clients, I'm hearing costs ranging from just over $3 on the low side, to $3.70 - $3.80 on the high side. On average $3.50 appears to be a good midpoint. Even with a wide basis the 10% hedge at $4.40 in the Dec-10 contract should cover C.O.P. and provide a decent return. Going forward before the Mch 31st planting intentions report, I'd recommend making another 5% sale at the $4.30 level, and another 15% sale at $4.45 basis the Dec-10 contract. If both sales targets were triggered we'd be 30% sold at an average price of just over $4.40 heading into the planting season. Hold off on making further sales until after the report.
Chart provided by APEX
Chart provided by APEX
The last suggestion I'll make is also a repeat of advice I gave last year. That is, I feel it is crucial for a US farmer to know as much as possible about a counter-party's financial health when making forward sales. Every agri-business segment has felt the affect of the economic recession in the past 18 months. Several agri-businesses were forced into bancruptcy. As a result many producers that had made forward cash sales at attractive prices found out they were no longer valid at there original terms, or worse, not valid at all. It appears the global economy has rebounded, however fears of a double dip recession are certainly valid. I recommend you try not to make all of your forward sales to one source. Open a futures hedge account where there is no counter-party risk. Performance of all trades is guaranteed by the clearing corporation. Make sure your banker is aware of your marketing plan and is on board with your potential cash needs. Do not be afraid of the margin calls when hedging. Selling the first 10% of your crop at break-even or above your cost of production and having the market move up another $.30 per bushel is a good problem. Always remember there is not a broker or marketing advisor out there, me included, that knows the highs or lows for any given marketing year. The key to long term success and survival is simply selling your crops for more than it costs you to produce.
If you would like more information about this article or have any questions, please send an email to mark.soderberg@archerfinancials.com or call 1.877.690.7303.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
About the Author
Upon graduating from the University of Wisconsin - Whitewater, Mark Soderberg moved to Chicago and began his career in the futures industry with the Agricultural Hedging Group at Merrill Lynch in 1990. In 1997, Mark earned a Master’s of Science in Financial Markets & Trading from the Illinois Institute of Technology. In 2000 his team moved to Prudential Bache Commodities. Throughout his career he has serviced a wide array of agri-business including farmers, grain elevators, poultry, cattle, and hogs feeders, seed companies, food manufacturers, and ethanol plants. Mark’s goal has been to help clients identify and quantify their risk exposures, help determine risk management objectives, and develop strategies consistent with their risk tolerances to help attain their objectives. In February 2009 , he joined the Archer Financial Services team. Mark resides in the southwest suburbs of Chicago where he enjoys his free time with his wife Tracy and 3 children. Mark Soderberg
Archer Financial Services
Ag Risk Specialist
1.800.933.3996
mark.soderberg@archerfinancials.com
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