May 11, 2020
Many market analysts are joining hands predicting a 4 billion bu. corn carry over and $2.50 corn is in your future.
That is obviously possible, but only if a series of extremes happen. We still trade economic value. The laws of supply and demand will continue to dominate.
Look at energy markets. Low prices have attracted new demand to the U.S. as ships have sailed carrying U.S. crude to China.
Of course, demand will not fully recover until we are all driving again, but I know a few teenagers who CAN’T WAIT to get back out, burn some gas money and fly on their own again.
And low prices are cutting supply dramatically. Last week’s report for U.S. oil rigs fell another 34 for a total working rigs at 374 versus 988 last year. That is down 614 rigs in one year, just in the United States. But remember, the raw supply of oil is still out there -- just like everything else.
Demand beaten to death
Corn demand has been beaten to death due to lack of driving and ethanol buildup. Approximately 40% of ethanol plants have been cut. But demand for gas is not going to get worse. It is already upticking and there is really no more downside exposure.
Feed use is also very strong and we believe is much higher than USDA has plugged in. Some of that is holding livestock until slaughter plants re-open, some is because test weights, some due to shifts in feed use back to corn from wheat.
Two weeks ago, all I was taking was liquidation and sell orders. This week, end users have started buying again which tells us retail food outlets recognize inputs are very cheap and are thus locking in hedges.
China bought 686,000 metric tons of corn and is rumored to have bought 200,000 to 400,000 more for nearly 1.0 million metric tons. We also see a few elevators and processors reaching for grain. Last week the average cash price sold by farmers that we are able to monitor was 7 cents above posted bid.
This demonstrates you can have a large supply of raw material but if it is not moving and prices are so cheap that you are stimulating demand, then you are finding economic value and prices don’t need to go lower.
This is hard to write, knowing the next article you read will be more bearish than the one from last week. That is human nature. Every time we take out chart support you hear about the next reason markets will go down further. But the odds of a further price decline at this time of year are very low. Approximately all of the summer highs are put in between late May and September. But 40% of those highs are put in during June. So, play the odds.
We would agree with everyone that corn will see $2.50. Heck maybe even $1.80 if we get everything planted, have record yields, China deal blows up and we have to re-halt economic activity. But look at this chart. Chinese corn futures are hitting last summer’s highs. That is the same as $4 on a U.S. corn chart.
As long as the trader who is buying our corn can purchase U.S. corn on contract lows and 20 year lows and then can re-sell domestically at contract highs, then we are at value. So, our value is not just about U.S. supply.
We are not bullish, but that could change. How? China keeps buying, we plant 2-3 million fewer acres of corn, and drop 4 bu. per acre national yield. Then everything will change.
In that case any sale you make this year will be too cheap and you will be upset. That is why we are using this seasonal weakness to buy some calls. We have clients doing a few different things as no one client is alike. One idea is a simple mix of buying September and/or Dec calls for 11-16 cents. Another idea is vertical call spreads. Neither of these incur a margin call. For some clients who are not opposed to more exposure, a 3-way option plan for 6-12 cents offers better market response if the market rallies but does have margin exposure in a down market.
We are 30% sold at about $4.05 but reality is that not all our clients follow that advice. So, if you did or did not, that is ok. Everyone needs a plan for this year. We will use these calls to make sales this summer. We will make our recommendation to our clients in our weekly video update and will map out the math on how these options work as a tool against sales so that if we do see a shift in more demand and maybe some yield issues, we will not be upset with any sale we make.
Keep your chin up as my folks would always say. Life will always give you opportunities.
Contact Biedermann at [email protected], or directly at 815-404-1917
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