Grain farming can be a tough business. If weather during the growing season is favorable, prices normally are low. If weather is unfavorable, prices are high but you have nothing to sell. While it's a terrible thing to say, one of the easiest ways to win big financially in grain farming is to have the weather disaster strike somewhere else.
This year the disaster struck in the East, primarily from eastern Indiana to the coast. Although most of these states aren't considered the Corn Belt, the drought is so widespread, with total losses in many counties, that the impact on this year's corn and soybean crop will be significant.
Ironically, this drought comes just as policymakers are trying to figure out how to overhaul the farm program so we don't end up with a soybean carryover that's bigger than that of corn.
Market conditions have changed so significantly in such a short period that, unfortunately, we likely won't see any significant changes in the current ag policy structure - even though they're still needed.
How severe is this drought? The numbers tell most of the story. Going into July, USDA was forecasting a national average soybean yield of 40 bu/acre. That would result in a 2.935 billion-bushel crop, compared to last year's 2.757 billion. It also would result in a stocks-to-use ratio of 21.5%, and USDA was pegging the average price for the year at between $3.90 and $4.70.
But now we're estimating that the national average yield probably won't be above 37 bu/acre. That pegs the crop at 2.712 billion bushels, and we may be on the optimistic side! More importantly, carryover supplies should drop to 420 million bushels vs. a previous estimate near 600 million. While still a large number, it's manageable. It also could add $1/bu to prices. This year's average price of beans at the farm should be around $5.
What it all means. First, my sympathies go out to all producers who are suffering significant losses as a result of this drought. No matter what happens to prices, if you don't have anything to sell, $7 soybeans are no better than $5 soybeans. For those who'll have grain to sell this coming year, the drought changes pricing patterns and thusmarketing plans considerably.
In my August article, which was written long before this drought occurred, I indicated that growers should collect LDPs early and sell soybeans late. Traditionally, in years of large crops, markets bottom early and peak late in the marketing season. But the changing weather patterns have reversed this year's crop from one of record magnitude to what will now be termed a "short crop." Short crops behave altogether differently. They peak early and bottom late.
This is likely to be a marketing year when highs for the entire season could occur during harvest. Remember, supply-driven bull news is quickly discounted into market prices because such news can be readily seen. Thus the old saying, "Short crops peak early and have a long tail."
Marketing plans for our clients now become somewhat simplified. As I write this, we've already collected $1.04/bu on the entire crop in hedge profits. It's possible that new-crop soybeans in the November contract could rally to $6 or higher on this move. I don't know what the price might be, but I do believe it's going to occur before Thanksgiving.
If it's $6/bu added back onto previous hedge profits, suddenly we have this year's crop sold at over $7 without any LDPs! Maybe it will work like last year - forward contract for March delivery, wait for the market to drop and then collect the LDPs.
In any case, we always like to have two marketing plans. We use Plan A when everything goes as expected and Plan B when a dramatic change in the fundamentals forces a change in our approach. That's where we are now - we've just switched to Plan B. Expect an early top.
Parting thoughts. One of the most negative aspects of this new bull market is that it is occurring when South American farmers are making planting decisions. Strong prices will not discourage acreage in South America. On the other hand, you can write down that you just saw the lowest prices of soybeans and corn that you're going to see for the foreseeable future. The long-term bear market that started in June 1996 is finally over!