Every new year is an opportunity to wipe the slate clean and look to the future with a fresh eye. Higher and higher land prices indicate that grain production has been a good way to earn a living over the past few years. But as I look forward I have questions.
With a nod to jolly St. Nick, I’m going to double-check my own naughty and nice list from another incredible year in the world of corn and soybeans. In January, I wrote of worry (naughty) and opportunity (nice). Naughty was a market searching for direction in a world with some enormous economic problems. Nice was new-crop grain prices above production costs. Sound familiar? With a new year just weeks away, the same worries and opportunities remain on my list.
USDA reports confirm a poor corn crop. Relative to trend-line yield expectations, I consider 2012 one of the five worst years in the last century. We started the current crop year with the lowest corn supply in a decade. On the demand side, something has to give, and the pace of exports has plummeted. But feed and ethanol demand is surprisingly resilient. The net result is a projection for even tighter ending corn stocks by next summer.
What type of market are we facing? Is the main feature of this market the butt-kicking drought that started the current crop year, or is it the tight stocks that will end it? The answer might help me do a better job in pricing.
Harsh droughts are not fun. And, relative to expected yields, the 2012 corn crop will go down in history as one of the five worst in the last 100 years. Drought-damaged crops and early harvests go hand in hand. Maybe this is for the better – finish harvest quickly and put this year of disappointment in the rearview mirror.
This year has all the signs of producing a corn crop that could fall short of trend-line yields by 20% or more. I call this a butt-kicking drought.
Our last butt-kicking drought occurred in 1988. Yields were about 25% below trend. The drought of 1983 was nearly as severe. Beyond these years, we have to go back to the Dust Bowl. In 1934 and 1936, corn yields fell 30% short of trend.
Last month I explored the hedging practices of merchandisers, exporters and processors, and how it is more than avoiding risk. These are basis traders who employ the purest form of hedging - placing long and short hedges regardless of price expectations or market opinion.
My course on “Agricultural Futures and Options” is 15 weeks of painfully dull lectures. With glassy eyes, my students endure talks on basis and carrying charges, speculation and spreading, balance sheets and options. Of all the topics covered, however, none is more important than hedging with futures contracts.
Change is coming to the Canadian Wheat Board (CWB) and with it, big changes for grain producers and the entire grain-marketing system in Canada. Predicting change is perilous territory. I’ll take a shot.
Last spring, the newly elected government in Canada announced its intention to do away with the Canadian Wheat Board (CWB). Even though the CWB operates as a marketing system for different commodities (wheat and barley) in a different country, this will impact corn and soybean markets. I’ll use the next two columns to tackle this question, starting with a little background and some reflections on my own dealings with the CWB.
Turning the page on a new year should be a time for hope and renewal. But all I got are worries. Here’s one worry: price direction. Do you remember the great September market collapse in grain prices? In hindsight, that was a warning shot across our bow that said “the bull market is over.”
Did somebody change the rules? Look, for example, at corn and soybean prices. Since when do bull markets last a year? And since when do two incredibly strong bull markets repeat just three years apart, as they did in 2007-2008 and 2010-2011? I think somebody is messing with the rules.
For many months, the futures market for corn has been inverted – at times more than $1/bu. – from the July 2011 to December 2011 contracts. An inverse from old-crop to new-crop futures is not rare. They occur in crop years like 2010-2011, when ending stocks at year-end are tight.