CFGAG News and Views     vol. 14         September 1, 2010

"There is a risk of loss when trading futures and options. The thoughts and opinions expressed in this article are those of the author, and while believed to be correct, are not guaranteed as to the accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading."
Another HOT One!
With one of the warmest months of August in the books, and the corn market pushing up against the highs made last winter, we are now getting early harvest results before September even gets here. Seems like only a year ago, we had corn still trying to pollinate around Labor day weekend, and we did. Last year corn harvest did not begin on this farm until November, and the moisture was still above 25%. LP gas bills were in the tens of thousands, and harvest was finished around snow storms. Today, it looks like harvest activity will be well over half done before the next newsletter is printed out. With the corn market trading at $4.45 in the December contract this week, as harvest begins, many are asking "how much higher can we go?"
The answer is, as always, nobody knows. There are many analysts that claim we are on our way to $5.00 or more because yields are coming in lower than expected. There are others that say demand will be greater because of the Russian drought, and carryout will be well below a billion bushels. The following list summarizes the questions I have about the market going forward.
1) Will overall national yield be less than, greater than, or equal to 165 bpa.
2) Export sales have been quite strong the past few weeks: A sign of more things to come, or front loading to be first in line just in case?
3) Will the Government extend the tax credits for ethanol? Will they ever increase the blending rate?
4) Can we rally corn much further with crude oil now trading below $72/barrel?
5) At what price do we start rationing supply? Do we need to?
6) What is basis and the cash market telling us?
7) What can cause the managed money (speculators) to liquidate some very large long positions?
As for yields, it would appear to me that this year the "worst will be harvested first". We know of many areas that struggled with too much water early, and then very little later on. Corn has been pushed with plenty of heat units all year, and the jury is still out on what effect this will have on final yield. One note of caution from my own observations over the past 5 years or so: we have been underestimating yields the majority of this time. Why? Increased plant populations, better farming practices, more irrigation, conservation tillage, and better genetics. It will be very interesting to see how the last one holds up to overall heat unit accumulation in such a short time. Last year, we had low test weights and lots of water damage, disease and insect pressure, and still came in just shy of 165. What will we have this year with better test weight? Again, we dont know, but watch those yield and test weight numbers as the results come in. Again, its not what comes out in a particular area, but the overall average.
Export sales have been excellent, as we can all see by the weekly numbers, but what about shipments? It looks like we will close the present marketing year about 130 mb short of the USDA target. Will "adjustments" account for this, or will it be added to the carryout. I am a bit suspicious of the current sales pace, as it does appear to be "front loaded". This would not be surprising as importers do not want to be the last in line "in case" yields and supply are less than previously thought. And as for the Government, speculating on what, if any, action they may take seems like a dart toss. It would appear that they are too busy worrying about throwing mud on the other guy than developing policy. I wont bet either way.
My real concern for higher prices in the future is the energy complex, and the already large spec long postions. Unless crude oil can rally, or there is a lot more spec money looking for a place to invest, I am not convinced that we have run into a short term wall here. Since the crash in 2008, the corn market has traded between $3.00 and $4.50. Crude oil is roughly half the price it reached before the crash. Do we have the backdrop to take corn on up without the energies? We have to remember one very important thing here: if a user of our product is not making money, how long will he keep buying it?
And finally, what is the cash market and basis telling us? For the most part, basis is wide and probably going to get worse with the early harvest pressue. There are lots of stories about lots of old crop corn, some in bad condition, sitting around waiting to be blended. Then it has to find a home, at a price. If I was using a lot of corn right now, the next 30-45 days should offer the best buying opportunity from a basis standpoint. We will be taking huge amounts of grain out of the field very shortly, and I wonder if the elevators are ready. We have talked at length in the past about preparing for harvest, having bushels you cant or dont want to store priced or arrangements made for. Make sure you have enough protection on bushels you need to sell in case we see some large scale liquidation from the specs. There is no guarantee that these prices will hold up, no matter what the guy, (or girl) says on the T.V. market show, as they will not write you a check to cover the difference if they are wrong. It is our responsibility to protect the value of what we produce, not theirs. Make sure you dont get caught in that trap of waiting for something somebody says may happen, and lose out on some nice profits for you labor this year.
The last word for the day is profit. I doubt that there are many producers that cannot make money with the prices offered, unless totally wiped out with floods or drought, and for those I hope you have at least some level of insurance. Take a look at the board, and ask yourself what these prices mean in terms of dollars per acre, and what net farm income looks like here. Then ask yourself what would make you feel worse....selling and the market goes higher? or not selling and seeing it fall. The September 10 report on production and supply/demand will be much anticipated, and if we are still at these price levels a few days before, ask that question again. Call us for updates and strategy to protect your desired income level as it pertains to your farm. And have a safe and enjoyable harvest this year, its what you work all year for!
Mike Daube