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Serving: United States

Trading a potential drought

Getty Images 6-17-21 corn in drought.jpg
Insight to how to handle the volatility

“My corn is burning up!  The plant looks like more like a pineapple than a corn plant.  And it’s not just my corn that looks like this, it’s all over Iowa and the Northern Plains!”

I’ve heard this more than once this week, probably closer to a dozen times. The drought crippling Iowa, North Dakota, South Dakota, and now Minnesota is intense. The images on social media show exactly how stressed the corn crop is in those states.

Corn prices are currently in a holding pattern.

It is going to be HOT for much of the Midwest this weekend. There is a chance for rain early next week thanks to a tropical storm forming in the Gulf of Mexico. This storm is expected to reach the shores of Louisiana on Saturday. Trade is hopeful that this storm and changing weather fronts will bring much needed moisture into Midwest. It might not be a soaker of the rain to alleviate the drought, but it might be enough to get the crop to survive one more week.

The traders are well aware that if the crop doesn’t receive beneficial rain next week, there is little chance of achieving the national record trendline yield that the USDA is currently touting on the most recent USDA WASDE report (currently pegged at 179.5 bpa, up from 172 last year). 

Comparing drought years

While the entire Midwest is not in a dire drought situation like 2012, looking back at the weekly crop ratings that year may help shed insight as to when the trade might actually get excited about the reality of a less than stellar crop.

As of the most recent crop progress report, the U.S. corn crop overall is rated as 68% good to excellent. That is down from 72% last week. Looking back at this same “crop week” of history back in 2012, the US corn crop was rated as 63% good to excellent. In 2012 the national corn crop ratings then continued to deteriorate quickly.  In the following weeks, weekly crop ratings cascaded lower: 56% good to excellent, then 48%, then 40%, then 31% as the drought was gripping the heart of the nation.

When did prices finally rally in 2012?

During the last week of June in 2012 is when the crop rating fell below 50% good to excellent, coming in at 48%. And THAT is when the corn price finally started to rally. The price of December 2012 corn futures started that last week of June at $5.70-1/4, and heading into Fourth of July weekend closed at $6.74-1/2. A $1.00 rally over two weeks. Same type of price volatility we are seeing today.

Another similarity besides drought:

Currently old crop ending stocks for corn is historically tight, coming in at 1.107 billion bushels, with a stocks to use ratio of 7.4%. At this same time frame in 2012, old crop ending stocks were also tight. The June 2012 USDA report had the 2011/12 ending stocks pegged at 851 million bushels. An increase was noted on the July report as 2011/12 ending stocks came in at 903 million bushels.

In early June of 2012, new crop 2012-13 ending stocks were expected to grow due to larger planted acres on the June Planted Acreage report. While the acres did increase on that June report, the drought slashed ending stocks.  In 2012, yield potential hit the skids fast.  On the July 2012 USDA report, yield was slashed to 146 bpa, down from 166 bpa on the June report.

As stated before, this is not a drought year like 2012, however, it’s definitely not a perfect growing season.  Corn prices will have serious volatility heading into month end as trade watches rain totals, weekly crop progress ratings, and the June 30th report consisting of both Quarterly Stocks and Planted Acres.

Continue to focus on cash sales, and make sure you have a good handle on the crop insurance you purchased this year. If you are of a bullish tone, consider fixed risk strategies like buying call options or  bull call spreads, (where you buy an at the money call, and sell an out of the money call). If you are concerned that prices may fall lower, then start looking at buying puts, or  bear put spreads (also a fixed risk position where you buy an at the money put, and sell an out of the money put).

History would suggest that the coming weeks will have substantial price volatility for grain futures. Which way prices trade largely depends on Mother Nature and the USDA.

 

Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm   and [email protected]

 

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation

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