This week December corn futures have traded 80 cents off their September lows and 60 cents off their October lows. It's harvest season in the Midwest and producers are expected to reap a record high national average corn yield, resulting in the second largest crop ever. Wait a minute...what ever happened to the idea of selling corn just before harvest and then covering those shorts at profitable levels on the harvest lows? But where are the harvest lows? Is $3.10, the October low which occurred before harvest even started the harvest low?
My one-word answer to the question above is....yes. It's my opinion the lows for December corn futures are already in place, as represented by the September low. Also, I'm not expecting the October lows to be taken out when harvest eventually gets underway. The low price achieved during harvest will depend upon how high prices go this month. My upside target for December corn in the current move is within the range of $3.90 to $4.05. Because price forecasting and predicting market moves is a very "inexact science," I'll start unwinding length on any trade above $3.90 and if prices eventually reach $4.05, I'll have liquidated all length and also established short hedged and speculative positions.
The USDA, in their recent supply/demand report, projected the national average corn yield at 164.2 bushels per acre, which would be a record high yield, surpassing the 2004 crop yield of 162.4. The crop was further projected to be 13.0 billion bushels in size, the second large crop on record. For comparison, last year's corn crop achieved a national average yield of 153.9 bushels per acre. This year's crop is an excellent crop, no doubt about it. However, it appears this might go down as "the biggest crop than could have been." A wet spring season contributed to a late planted crop. A very cool summer then, in combination with the late planting dates, has resulted in a crop very late to mature. In fact, as of October 12, only 74% of the corn crop was mature compared to 92% on a 5-year average. In Illinois, the second largest corn producing state, only 56% of the crop was mature as of October 12, compared to the 5-year average for Illinois of 97%. Two other key corn producing states lagging behind in crop maturity are Indiana (69% mature) and Minnesota (71% mature). I'm estimating that about half of Illinois has already been hit with a killing frost, which has likely ended the growing season for as much as three fourths of the Illinois corn crop. Indiana, thus far, has escaped a killer frost but most of Minnesota has experienced a killing frost. How much of the crop has been lost to frost will be difficult, if not impossible to quantify in the weeks ahead. One can only guess. Estimates typically range from 100 million to 300 million bushels. While this represents a very small loss compared to 13 billion bushels, the major issue facing this crop is poor harvest conditions. The corn crop is less that 20% harvested as of October 12th. This year, virtually every bushel harvested will have to be dried (through a grain dryer) making harvest progress a slow and painful process. Drying high moisture corn tends to create back logs at grain elevators. The general quality of the crop comes into question as well. Many times the average test weight of high moisture corn, after being dried is disappointing, resulting in smaller yields than expected.
Pipeline supplies have been depleted resulting in a scramble among end users for the first new crop supplies coming off the combine. The board, however, is encouraging producers to store the crop, making the origination of bushels even more challenging for the processors, ethanol producers and corn exporters. Corn ending stocks for this summer were projected at 1.674 billion bushels. Total use this year is projected at just over 13 billion bushels or just over 1.0 billion per month. Harvest is a full thirty days behind schedule, meaning the corn pipeline has been virtually depleted of supplies. This "situation" has been responsible for much of rally in corn prices over the last two weeks. As stated above, eventually harvest will progress and the pipeline needs will be more than adequate. However, until that time, end users will have to be aggressive and competitive in order to get their hands on corn. Repeating, it's my best guess that corn prices will breach $4.00 during this process.
If you need help in developing and executing a marketing strategy for your corn crop, or if you're a speculator looking for conservative trading opportunities, please send me an email or give me a call at Dennis.smith@archerfinancials.com or 1.877.377.7905.
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