November 28, 2022
Last week I outlined how recent USDA data suggested crops look profitable for 2023. This week I’ll break down my outlook for next year’s corn and soybeans markets, including selling targets for spring and summer rallies and risks from either pricing too early – or not at all.
My two models for picking these targets use different methodologies. The model based on projected supply and demand fundaments picks a range that represents the top 2% to 16% of the daily prices for the marketing year.
The other method took looks at rallies during the spring and summer/fall selling windows. The target for March-May compares rallies to USDA’s first monthly forecast for new crop supply and demand published in May each year. Since those numbers are still nearly six months away, this formula currently plugs in data from USDA’s long-term baseline tables published earlier in November. These estimates are updated in May with planting intentions from the government’s end of March survey. Smaller stocks tend to produce bigger spring rallies to buy acres, and vice versa.
Summer and fall rallies typically are weather-driven, so this system compares rallies to whether actual yields are better or worse than the trend, or normal yield. The targets currently assume yields are equal to the trend, because even in normal years futures prices can gyrate on weather scares.
Here’s what the numbers are saying about your marketing plans for 2023.
Are corn highs in?
USDA’s baseline showed corn inventories rising by 540 million bushels to 1.722 billion at the end of the 2023 crop marketing year Aug. 31, 2024. That would send average cash prices received by farmers down more than $1, though at $5.70 a bushel they would still be profitable if yields hold up. Under this scenario, my forecast selling range would be $5.90 to $6.60 for December 2023 futures, which fought before Thanksgiving to stay above $6.
USDA’s early baseline used yields of 181.5 bushels per acre and planted acreage of 92 million. The government’s yield modifies the statistical trend by assuming. average growing season weather. Using just the trend with no weather adjustment lowers the yield to 177.6 bpa, reducing supplies by nearly 300 million bushels. This would cut carryout, raising the selling target range to $6.20 to $6.90.
History suggests strong profit potential could lure more acres to corn. If that happens and seedings increase to 94 million. Coupled with USDA’s larger yield assumption, a big crop could lift carryout near 2 billion bushels, lowering the price targets for selling to $5.70 to $6.35.
The low end of all three forecasts is below the high close established already on Oct. 1 of $6.36. That fall high is important because historically the October-December high it’s a benchmark for predicting rallies this far from the actual growing season.
Based on USDA’s baseline forecast for a 2023 stocks-to-use ratio of 11.7%, futures project a rally of around 10% off the fall high to $6.97. While pretty much the same stocks to use ratio produced bigger spring rallies in 2021 and 2022, the market may be getting accustomed to these levels, which could limit volatility.
If the lower trend yield is plugged into this analysis, the target bumps up to $7.09, while the big crop scenario limits the range to $6.76.
In any case, potential for rallies into spring is the norm, according to the seasonal trends chart for December futures. Currently, December 20233 futures are following the average path of easing prices into December. After that futures on average rally into May, and even in years of production normally stage some type of move during the summer. The June-December delivery target would be $7.45, even with normal yields, based on a 15% rally off the fall 2022 high.
USDA’s recently updated cost of production puts corn’s breakeven price at $4.82 with normal yields. The updated “what if” sensitivity analysis for doing nothing and waiting for rallies still gives corn a good shot at profits unless prices fall and yields swell above average. Corn Table 1 shows profit or loss per acre at different combinations of yields and harvest futures, and most of the ink is black.
Soybeans have room to rally
November 2023 soybean futures have been stuck in a trading range all fall, but that’s par for the course. Futures tend to rally on average through the spring and into June, even in years of normal production. And in bullish years gains can keep going, sometimes into the end of summer or beyond.
Both forecasting methods show potential for soybean rallies, though profit margins overall aren’t as impressive for the oilseed as they are for corn.
USDA’s baseline forecast record production of nearly 4.5 billion bushels assuming planted acreage of 87 million and yields of 52 bpa. The government’s estimates see strong demand offsetting the big crop, causing only a small increase in 2023 crop carryout. Based on the projected 5.5% stocks to use ratio, my fundamental model projects selling targets in a range from $14.65 to $15.75.
Using a slightly larger yield without weather adjustments of 52.5 bpa and weaker demand would increase carryout 110 million bushels above USDA’s baseline. Selling ranges would drop to $13.55 to $14.60.
The seasonal windows model suggests even greater potential for rallies based on the Mid-November through December high close, which currently stands at $13.97. USDA’s 5% stocks to use ratio produces a rally a target of $16.15, some 15.5% above the fall high.
And even if yields are normal, summer/fall rallies could translate into 16.6% of the fall high, or $16.30.
Those rallies might help hedgers sleep better at night. While current prices are profitable, the soybean sensitivity analysis shows more red ink than corn, especially as prices and yields fall. Hedging a 16% soybean rally would provide a comfortable cushion against sharply lower yields, assuming 80% Revenue Protection crop insurance and ARC-County farm program participation.
Start your engines
The outlook is hopeful, but waiting has risk. As the charts demonstrate, in some years rallies fall flat, and that’s particularly true for the March-May windows. Summer rallies can also be fleeting, and hard to sell emotionally.
This year there are additional wild cards that could come into play. Lagging Chinese growth due to COVID lockdowns could hurt demand for soybeans, especially if an increasingly hardline government decides to use food as a weapon in trade and diplomacy. End of the three-year La Nina cooling of the equatorial Pacific could help yields in the U.S., but the weather phenomena’s curtain call appears to be stressing crops in Argentina and perhaps Australia. Fertilizer supplies and impacts from the war in Ukraine also remain uncertain ahead of a long winter, while rising interest rates, inflation and recession fears in the U.S. could drain enthusiasm from big speculators and institutional investors.
So, while it’s too soon to cut bait on 2023, it may be time to do some fishing.
Knorr writes from Chicago, Ill. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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