September 18, 2023
Farmers and grain traders who complain about USDA reports and wish they’d disappear may get their wish if a government shutdown turns off the lights in Washington come October.
Whether a budget stalemate in Congress would be good or bad for prices is anybody’s guess. It could leave markets with a lack of fresh information to trade other than rumors and gossip. Some traders might cheer anyway after their performance in the wake of last week’s September’s World Agricultural Supply and Demand Estimates.
Successful football teams used to find a winning formula and stick with it year after year. Remember Woody Hayes and “three yards and a cloud of dust” or Bill Belichick and “The Patriot Way?”
No coach these days can simply “rinse and repeat.” Colleges must navigate the transfer portal and Name, Image and Likeness millions, while their NFL counterparts wrestle with the revolving door of free agency or stars who demand trades.
Doing the same thing is no longer a path to victory on the gridiron. Grain traders, including farmers, should take note.
Waiting on fresh data
Traders went into the Sept. 12 reports convinced that lower yields would trigger rallies. Instead, markets sniffed at that bait and said, “not this time,” posting new lows for the fledgling 2023 marketing year.
Despite all the huff and puff about the hottest summer on record, production didn’t suffer as much as bulls expected. That left them to contemplate demand, which isn’t exactly as hot as the mercury was in August.
Without weekly Crop Progress reports and official export data if the USDA shuts down, the market would be stuck with the status quo, for better or worse. Even assuming a stalemate is avoided, the government won’t update its supply and demand forecasts until Oct. 12. By that time, a third or more of the corn crop, and even more soybeans, will be in somebody’s bunker or bin – be it on farm or in a commercial facility – pretty much forcing growers to commit to their storage decisions, betting whether or not they should hold on to the rest of their crops.
Frozen in amber
If USDA’s supply and demand balance sheet is frozen in time, like an insect in amber, this choice boils down to which version of price forecasts to accept: USDA’s or what history suggests could happen. Spoiler alert: The government could be too optimistic with its average price forecasts because they reflect where futures contracts for 2023 crop delivery were trading at the end of August.
Soybeans seem most at risk from a bearish market stampede because big speculators have bullish bets with net long positions, while these hedge funds are already short corn.
Seasonal futures trends also suggest caution, especially for long-term storage into summer 2024. Unless fundamentals change significantly, neither July 2024 corn nor soybean futures is likely on average to rally enough to even earn back the high cost of interest paid by not selling crops at harvest and paying down debt or investing the proceeds. A big basis push would help, but current fundamentals suggest relatively average basis this fall, not a washout that could make cash storage more attractive.
That doesn't mean all is lost. Soybean futures on average in non-bull years tend to bottom in late September or early October, then rally into Veterans’ Day in November when exports are typically strong. But these opportunities are short-lived. By the time the South American harvest picks up steam in the winter, the market can make a new bottom that doesn’t get back to the November peak, before grinding to even lower new lows in summer.
USDA’s average soybean cash price forecast of $12.90 supports rally hopes thanks to tightening carryout projections despite weaker demand triggered by smaller supplies available to end users. Based on this scenario, my pricing model projects a nearby futures selling range of $14.40 to $15.49. November futures traded below $13.35 last week, giving the market, in theory, some $2 to rally.
Or does it? The outlook based on historical performance assuming USDA’s ending stocks takes average cash prices down to $11.50 for the crop, with the futures selling range from $13.40 to $14.41. That would indicate today’s prices might not last long.
December corn matched its August low last week, trying to firm off a test of $4.735. Assuming USDA’s average cash price forecast for the crop of $4.90, the top of my selling range could go up to $6.22. But even if the cash price is lower, the government’s stocks forecast suggests the nearby might take a run at $5.45, above its selling range for the past two months.
World stocks and usage support higher prices. But history appears less sanguine about potential for demand deterioration. If corn reverts to values based on U.S. fundamentals only, weaker demand could mean $5 corn on the board is in the rear-view mirror.
Moreover, even a normal futures rally off lows in the second week of October might not be worth the additional cost of interest incurred by keeping possession of the crop. That would make current prices just about as good as it gets on a net basis.
The trouble is, unlike soybeans, current corn prices are unprofitable for the average grower, even assuming higher normal yields with a third of the crop hedged at $6 and 85% Revenue Protection crop insurance coverage. Circumstances vary wide, but on average, selling current corn markets looks like a stop-gap measure to avoid even bigger losses, unless you expect futures to fall far enough to trigger RP payouts and ultimately ARC farm program benefits.
Strategies based on worst case scenarios of plunging prices might work in the short term for corn, though bear markets don’t seem like a ticket to long-term success. Remember that saying, “be careful what you wish for.”
What could change
Of course, USDA will update both its supply and demand estimates multiple times through January, assuming the lights are on. Before a shutdown begins, the agency reports final ending stocks for the 2022 marketing years, due out at the end of the month, which could affect supply at the start of the season. After that, monthly data could turn 2023 production lower, depending on what happens to yields and acreage. Both corn and soybean yields were reduced in September, so “small crops get smaller” could prove true again.
Harvested acreage, which increased Sept. 12, could end up the other way when all is said and done. And demand might turn out better than forecast, depending on the strength of the global economy, especially China, and yields around the world, shifting price dynamics to those seen in bullish years of rising markets.
Make your choices now, before the calendar does it for you.
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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