We anticipate there will still be shocks to the system on old crop stocks, likely to come from lower than normal efficiency in ethanol production and more demand for feed. As we progress into spring, the focus will shift toward potential new crop production and away from the old crop balance sheet.
At the end of March, USDA will release a Planting Intentions report which will show the intended acres for Corn, Soybeans & Spring Wheat for the 2020/21 production year. About a month and a half later, USDA will release the first official 2020/21 balance sheet via the May WASDE report. This report will use the acres from the Planting Intentions report and will apply a TREND LINE yield to those acres.
Two things for certain
We know two things for certain; trend line yield for corn in 2019/20 was 176 bpa and trend line yield goes up every year. USDA has been raising trend line yield by roughly 1.2% year-over-year since they adopted their most recent methodology; this suggests trend line yield this year could be 178-plus.
The USDA Ag Outlook Forum just used 94 million acres with a trend line yield of 178.5. In order to keep potential carryout from ballooning to over 3 billion bushels, they increased demand in every category available. The total usage was 670 million bushels more than what they showed for the current 2019/20 balance sheet.
We discussed in this blog a few weeks ago the tendency for new crop corn to reach levels sub $3.80 sometime in spring, prior to a cycle higher on concerns during the growing season. Three of the last five years have seen the December Corn contract make a low in spring in the low to mid $3.60s before the eventual summer rally.
As you likely remember, the May 2019 low for Dec ’19 corn was 363’6. But let’s also look at the relationship between Dec ’19 Corn and July ’20 Corn as the futures market was dropping. The spread from Dec ’19 to July ’20 widened out substantially once the March Planting Intentions and Quarterly Stocks report was released.
The spread built a “carry” of over 30’0 cents as the market priced in the spring lows; this told any producer that was hedged to roll their hedge from December to July to capture the 30’0+ cents available to pay to store the crop in THEIR OWN BINS.
When we entered the bull market, December futures rallied nearly $1.10 while the spread rallied to the point where the “carry” in the market from Dec ’19 to July ’20 was only 2’0 cents; this told the producer to roll those July sales back in to December because the market was no longer paying to store the crop and wanted it out of the field. But when USDA in August showed a yield number that was larger than trade expectations, the spread again built a “carry” of 30’0 as futures dropped to their contract lows in September. This was the second opportunity to roll sales made in the December contract out to the July contract to capture the “carry’ to pay to store grain.
What does this all mean to you?
We believe as the information cycles toward new crop and the market fully digests the ramifications of a trend line yield on 94 million acres of planted corn, the futures market for Dec ’20 is likely to drop like it has the past several years and make a low sometime this spring. We believe that as the futures drop, the spread will widen, and we will again see the “carry” from Dec ’20 to July ’21 move to 30’0 or more.
Let’s not forget that in 2018 the CME group decided to increase storage rates for corn and soybeans from 5 cents per month to 8 cents per month. This took effect after the expiration of the Dec ’19 corn and Nov ’19 soybean contracts. As we move forward, these increased storage rates should help spreads price in more “carry.”
Let’s walk through one last thought process from a marketing perspective. Let’s say that you have proactively sold corn for the 2020/21 production year at $4.20 basis the July ’21 contract on an HTA. If you roll that sale into December ’20 at -15’0, you are now sold in the Dec ’20 contract at $4.05. Let’s then assume the spread widens out to -30’0 as discussed, and you roll the sale back out to July ’21, now a $4.35 sale. Let’s say the market gets bullish again this summer, the spread again narrows to -15’0 and you roll the sale back to December ’20, now a $4.20 sale. Then come fall the spread moves back to -30’0 because we have an adequate crop and you roll the sale one last time to July ’21 which is now a $4.50 sale.
Just by monitoring the spread between Dec ’20 and July ’21, we have hypothetically taken an initial sale from $4.20 basis July ’21 to a final sale of $4.50 basis July ’21 without ever lifting the hedge or buying options.
Lastly, it is likely cheaper to do all of this in a brokerage account versus the costs an elevator will charge to roll an HTA back and forth, but that is a different discussion for a different day.
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