Steve Kell is an Ontario crop farmer and grain merchant for Parrish & Heimbecker
From January to March, the debate is around planting intentions for the coming year. If farmers don’t intend to plant enough acres, then there is certainly no chance of reaching the desired level of production. From here, the market trades around planting progress.
We all understand that crops, which are planted early and under good conditions, tend to have higher yields. Crops that get mudded in late tend to perform poorly. Through June and July, weather plays a key role in grain prices, because smaller plants are more susceptible to environmental pressures. The final big hurdle in corn production is pollination, where the plant establishes cob size at which point the number of environmental variables that could lower yield becomes fairly small. By the second week of August there’s very little mystery left in the potential size of the year’s corn crop, and the markets are able to focus on finding a price which effectively rations out the upcoming year’s supply over the available demand.
There are people who will read this and say that the crop isn’t assured until it is in the bin. That is a true statement on an individual farm level but not in terms of continental corn production. We could experience issues that impact relatively small areas of corn production, like an early frost, or an ice and wind storm, but while those can be devastating if you’re in an unfortunate location, those events don’t occur on a scale that would have an impact on North America’s aggregate corn supply.
The reality at this point is that we know that the 2015 average corn yield is going to be about 166 to 168 bushels per acre, and it’s time to update our marketing strategies to have price expectations in line with that size of supply.
A curious thing about the way in which the United States Department of Agriculture (USDA) has handled its corn projections in 2015 is that in response to the drought in the western half of North America, and the unusually wet conditions in a large portion of the eastern part of the continent, the USDA has been reducing harvested acreage instead of lowering average yield, (as if to say that we simply didn’t harvest the low spots in fields where the crop drowned out, as opposed to saying that we had a reduced yield on the entire production).
The optics of the mathematical calculations aside, the USDA’s best guess is a corn harvest of slightly more than 81 million acres, for a total of 13.5 billion bushels. The good news in a 13.5-billion-bushel corn crop is that it is smaller than the previous year’s record production, but when you add a 1.8-billion bushel carryout to the 2015 production, the total North American corn supply for 2015- 2016 will be more than 15 billion bushels — and current price levels are only stimulated a little over 13 billion bushels of demand.
The first thing that we know with some certainty is that with the current expectation of supply, prices for the 2015 corn crop cannot remain higher than they were for the 2014 crop. Price regulates demand, and we will certainly require at least as much corn demand for the year ahead as we have for the previous year. So the market will be unable to sustain higher prices (in U.S. values) than we have experienced in the past crop year. There’s good potential that a lower Canadian dollar could create higher cash prices for Canadian farmers in the year ahead, but unless problems develop with the 2016 corn crop, there’s little cause to expect big price gains in U.S. corn values.
The go-forward strategy for growers is relatively simple: U.S. corn futures are going to trade in a similar to slightly lower price range than they did for the 2014 crop. Any news events that push futures prices into the top end of that range are a signal to make some sales. Since we have the 2014 crop’s futures prices fresh in mind, it’s not going to be too difficult to remember when we’re in the top end of that range. The second factor to guide producers in marketing 2015 crop corn is that when stocks are in good supply, forward prices are always higher than the spot cash market (the futures are in “carry”).
If you are comfortable with the currency market, then making forward sales months before the delivery period is a reliable way to optimize returns.
