Short Crop Pricing?

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.

If drought (and resulting short crop) is the main feature of 2012, then I have five similar years to examine since 1970. Four of the five years are shared by corn and soybeans; 1974, ’80, ’83 and ’88. Year 1993 (too wet and cool) rounds out the top five in corn; 2003 in soybeans. The unwritten definition of a short crop is a crop with average yields more than 10% below trend. I estimate trend with a simple 30-year regression.

The current year will rank as equally severe (corn) or worse (soybeans) as any of these years. In the accompanying tables, I examine the price of the new-crop contract for the year after the short crop (e.g. 2013 vs. 2012), comparing the price on Oct. 1 of the short-crop year to the price on Oct. 1 one year later.

Short crops have long tails: in each year, new-crop futures for the year following the short crop were lower one year later. The conclusion is simple: It’s time to get serious about pricing 2013 corn and soybeans.

Is it really that simple? Let’s examine the current year in a different way. What if the main feature of the 2012 crop year is tight stocks at year end? Ending stocks are projected at less than 7% of usage in corn and just over 4% in soybeans. These figures are among the tightest in the last 40 years – figures that have many users wondering, “Where will I find supplies next summer?”

Since 1970, there have been just eight years like 2012, with ending stocks of corn fewer than 5.5 weeks of usage (1973, ’74, ’75, ’93, ’95, 2003, 2010 and 2011). In all but one year, the cash price in June was higher than harvest. In fact, the average cash price rise into spring was stronger than normal. Ditto for soybeans. There have been just six years like 2012, with fewer than three weeks usage on hand at year-end (1972, ’96, 2003, ’08, ’09 and 2011). The cash price rise from harvest to spring was more than $1 in all but one year.

Is this best characterized as a short crop, or a year of tight ending stocks? Two different market features lead to two different price conclusions. Both scenarios can’t be right!

Or can they? My analysis has lumped together old-crop (2012 cash prices) and new-crop (2013 futures prices) issues. Two different crops make for two different challenges. Old-crop/new-crop futures (Jul’13/Dec’13 corn and Jul’13/Nov’13 soybeans) are trading at large inverses – tight stocks could drive them to record levels. And don’t forget basis. I am a basis bull, particularly in corn. In southern Minnesota and northern Iowa, I expect to see strong “overs” by next spring, possibly 50¢ or more over the Jul’13 corn contract.

Is the main feature of this market drought, or tight stocks? It’s both, and it makes your marketing challenge more difficult.

CBOT December corn futures, short-crop years and the year after, 1970-2012

CBOT November soybean futures, short-crop years and the year after, 1970-2012

(1) Trend yield is based on a simple 30-year regression

(2) Based on the September WASDE estimate of 122.8 bu./acre and a trend yield estimate of 160.0 bu./acre

(3) As of Sept. 20