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.
In two February issues, I turned my attention to big changes pending at the Canadian Wheat Board. An institution with nearly 100 years of history was upended. Here’s the nice – our grain-producing friends to the north have hardly missed a beat.
In the August issue, the focus was fierce drought. Fierce it remained, leading to one of the five worst years in corn production in the last century (relative to expectations). We need some nice, and the weekly drought monitor clearly shows an easing of drought conditions where the drought of 2012 was harshest: Ohio and Indiana, Illinois and Missouri. But there’s way too much naughty in the latest reports. The deep reddish-brown indicator of exceptional drought has exploded and migrated West, threatening the HRW wheat crop. Nebraska, South Dakota and Kansas are in a world of hurt. Large parts of Colorado, Oklahoma and Texas – more areas critical to HRW production – are bone-dry. Key corn and soybean sections of Iowa and Minnesota are no better.
The year 2011 was subpar for grain production. 2012 was a butt-kicking drought. Could 2013 be our third straight year of problems in the Corn Belt? Nice would be a sustained month of replenishing rains, but the outlook is nothing but naughty.
In September and October, I wondered what would define the market in the year ahead. For price direction, I saw one naughty choice (drought) and one nice choice (tight stocks). Drought made prices soar to start the current crop year. Since then, the “short crop, long tail” scenario has been spot on. Corn and soybean prices peaked before harvest, when they started to slide lower. The price slide has been gradual in corn and wheat, not so in soybeans.
Then again, this is not 1983 or 1988, when drought struck while our country sat on a comfortable level of grain stocks. A better analogy might be 1995-1996, when a poor crop and strong demand resulted in the tightest carryover of corn stocks on record. The carryout situation projected for 2012-2013 looks a lot more like 1995-1996 than it does 1983-1984 or 1988-1989. Remember, it was not your typical long tail in 1995-1996 – prices peaked in early summer.
Last month I said that I remained a basis bull, and basis for corn and soybeans continues to play nice and inch higher. This bolsters the argument for higher cash prices next spring. But basis is just one part of the cash price, and prices will ultimately follow futures.
Drought be gone. Long tail – slow down! These are lumps of coal in my Christmas stocking. I want only nice opportunities in 2013.