Jon Scheve with weekly market commentary made on August, 25 2023
The recent Pro Farmer Tour estimated a national yield of 172. This is up 4 bushels per acres from last year’s prediction. However, in 7 of the last 11 years, the Pro Farmer’s corn yield estimate was between 2 and 6 bushels below the final USDA yield estimate.
The market seems to be trading something closer to the August USDA production estimate. Weather data to this point throughout the corn belt, along with satellite imagery, and computer modelling is indicating that yields are likely still in the upper 170’s.
Even if the yield is reduced to the value Pro Farmers Tour predicted US export pace is dramatically behind what is needed to reach the USDA’s target. It is beginning to seem unlikely that carryout will drop below 2 billion bushels in the coming year. That could make price rallies difficult until something changes.
Market Action – 2022 Corn Futures Sales
As I shared the past two weeks, I marketed my corn this year by first setting my basis and then working the spread markets. Finally, I set the futures.
This is very different than how I usually market my grain. Long time readers know that I usually set my futures first, then capture market carry premium, and then set my basis. However, this only works when the US carryout is large, and the market is incentivizing people to store grain until later in the year when supply is needed. This is called a “carry market” when corn prices are worth more in later months.
However, when the market is in an inverse the best strategy is to reverse the order. Inverse markets want cash grain now, not later. These types of markets are uncommon as there have only been 5 notable inverse corn markets since 1996.
In an inverse the market will penalize those holding grain through the spreads between futures contracts. Thus, if one has a short futures position and tries to roll that forward because one has not set basis there will be an expense. Conversely, long positions in that situation are rewarded. So, if one believes that futures still have upside potential, and the market is in an inverse the way to remain hedged is to set basis with a flat price cash trade and then buy back and be long futures in a hedge account. With that long futures position in place, it can then be rolled forward into the inverse on the futures spread for a profit and eventually one can sell the futures at some point later in time.
Previously Shared - Corn Futures Background and Recap
My first and only futures sale before harvest was made in spring 2022 on 10% of my production for $6.40 on December ’22 futures. Spring 2022 was very dry, and I was concerned there could be drought conditions like 2012. Plus, the war in Ukraine had started two months prior. With so much uncertainty, I was hesitant to sell any more. I bought $6.80 puts for 40 cents, eventually rolling the puts down for a net cost of $0 to have $6.10 puts for free, which expired worthless the day after Thanksgiving.
From this point on I was left with 90% of my old crop corn unpriced and exposed to market risk. I offset some of that risk by pricing all my 2022 beans and protecting my 2023 beans this past December. Then in February I protected over 80% of my 2023 corn production as well. This meant I basically only had 1 of the 4 crops left open to risk.
Why Did I Protect All the Other Crops Except for the 2022 Corn?
While I saw a lot of risk in three of the crops, my 2022 corn position seemed to have the most upside potential. Since I use all my crops as hedges against each other, I picked the crop with the most risk to reward ratio to remain open. Reasons I thought old crop corn would rally:
Bean futures had held up well in late winter and early spring despite the threat of Brazil’s beans being imported to the US which I thought could keep corn prices supported.
Historical data from inverse corn years indicated old crop corn prices could likely remain strong until July.
While the weather for Brazil’s second crop remained uncertain, historically during La Nina years Brazil’s second corn crop underperformed normal yields 80% of the time.
There was a high chance Brazil would have drought conditions like they had the year before. In early 2023 Argentina was facing the worst drought in 60 years, so it was likely Brazil would have drought conditions too.
Corn had rallied to very high levels the previous two springs compared to fall values, so I expected the possibility of that occurring again.
The southwest US was extremely dry, and the hard red wheat crop looked likely to be hit hard. I expected wheat prices to rally and possibly pull corn futures higher as well.
April through June is the US’s key corn export season, so demand should be highest then.
Corn had been range-bound from harvest into late winter.
The weather markets would likely begin in early spring while at the same time the export pace should begin to heat up.
Historically, harvest time is not a good time to set futures values. Even in years when harvest prices are good, rallies usually follow in the spring.
The USDA stocks report in January and March indicated the western corn belt was extremely low on corn and the stocks to use ratio would be tight by historical standards.
The war in Ukraine and the Black Sea grain deal always seemed like a powder keg ready to blow.
What Happened?
Despite La Nina, Brazil’s weather defied the odds and their second corn crop was well above trendline yields. Brazilian farmers produced enough corn to make up for the issues in Ukraine, and this extra supply competed heavily with US corn and limited export opportunities. As exports here slowed, carryout in the US increased and prevented prices from going higher.
It turned out that leaving ANY crop unprotected to the downside after late winter was the wrong decision, so I am glad I had at least 3 of the 4 crops protected the way I did.
When Did You Finally Sell Your 2022 Corn Futures?
I was waiting for corn to rally above $7 futures after Christmas. While it was looking less likely to happen as each month past, I focused on that historically corn prices tend to trend higher in May and June. The chart below illustrates this with a 15-year average corn price chart (blue line) and the 5-year average (green line). May and June looked like the best chance for higher prices.
I originally planned to sell 10% of my corn each week from mid-May through late June, hoping it would coincide with a market rally. Unfortunately, the market tanked in May, so I pushed my offers into June and planned to sell 20% per week until I was done, or $6.40 per bushel, whichever came first. I sold:
20% on June 8th - $6.08
20% on June 12th - $6.20
30% on June 16th - $6.40
With the 10% I sold last year these sales took me to 80% sold where I paused my sales. The reason I did this is because I still had two option strategies working that could execute sales by the end of June. One option did execute on June 23rd and forced a sale at $6.10 on 10% of my crop. The other 10% under an options strategy did not execute leaving me with 10% unpriced. I held the last 10% until June 29th when I finally sold the balance of my production at $5.81 after watching the market collapse 90 cents in a week as weather forecasts began to change. The following chart shows the July futures contract in green with my sales in red.
My average futures value for the year was $6.21. Plus, as I have said in previous newsletters, I also made a lot of options trades throughout the year that increased my total final average sales by 21 cents overall. That means my final futures value was $6.42 against the July futures. Then when I add my basis and spread profits of +62 cents against the July futures, picked up on my farm, my final cash value for my 2022 corn was $7.04. Next week I will compare my corn and beans cash value to the cash values traded in my area before and after harvest, plus my final thoughts on the 2022 marketing year.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com