For those following the marketing advice in my series of corn articles, sales for the 2009 corn crop had reached 50% at an average price of $4.29 basis the Dec-09 futures, as of my last article in early Oct-09.  At that time, I had also recommended that producers sell another 10% of your production if Dec-09 futures reached $3.75 and another 15% if Dec-09 futures reached $3.95.  Both of these targets have been reached bringing cumulative sales to 75% with an average price of $4.15 basis the Dec-09 contract.  Since Dec-09 futures are now in delivery, most of my clients have rolled their hedges forward to the Mch-10 contract.  These hedges were rolled at a premium of between $.15 - $.16 over the Dec-09 futures.  For simplicity we’ll assume the hedges were moved to Mch-10 futures at a $.15 premium bringing the average hedge price to $4.30 basis the Mch-10 futures.  At this point I think it would be a good time to reexamine the fundamental factors which are driving corn prices and to review our marketing plan going forward.

As of my last writing the USDA, in their Sept-09 report, was forecasting the 2009 corn crop at 12.955 bil. bu. with an average yield of 161.9 bpa.  The demand for the 2009/10 marketing year was forecasted at 13.025 bil. bu. leaving ending stocks at a comfortable 1.635 bil. bu.  Since then the fundamentals have not changed very much.  Production has been trimmed by 34 mil. bu. to 12.921 bil. bu.  The lower production was a result of harvested acres being reduced by 700,000, while the average yield was increased to 162.9 bpa.  Offsetting the lower production was demand being trimmed by 95 mil. bu. to 12.930 bil. bu. leaving ending stocks at 1.675 bil. bu.  Domestic demand actually increased with feed use up 50 mil. bu. and food, seed, and industrial use raised by 5 mil. bu.  However, export demand has been trimmed by 150 mil. bu. 

Despite the fact that fundamentals are little different, over the past two months, corn prices have traded in a range that is higher than what many analysts had expected.  Generally, Mch-10 futures have chopped around in a range between  $3.80 - $4.20.  I’d attribute this higher trading range to three factors.  The first being the long, drawn out harvest experienced with this year’s corn crop.  Given the wet spring and early planting delays, combined with a very damp, cloudy month of October, farmers were just not able to harvest corn in timely manner this fall.  As of Dec 6th there was still over 1.5 bil. bu. or 12% of this year’s crop in the fields.  My sense is that the market is expecting a modest downward revision to production in next month’s USDA report as a result of the harvest delays.  The second factor that I think allowed corn to trade at a higher price range this fall was the lack of aggressive farmer selling this harvest season.  Given the poor quality of this year’s crop, with the lighter test weights and high moisture, farmers incurred higher drying costs and bigger discounts than they had expected.  As a result, farmers appeared more willing to hold this year’s harvest awaiting higher prices to offset these costs and discounts.  The third factor which helped support a higher trading range was the continued aggressive buying by the speculative traders.  Since early Oct-09, the index funds have bought just over 30,000 contracts, while the NC traders have bought just over 100,000 contracts.  As a result, the combined long position of these speculative traders is just over 540,000 contracts.  This sum accounts for just over 44% of the futures and options open interest, which is the highest percentage since the CFTC began breaking out the index traders in the commitment of traders report in 2006.  In addition, it is widely believed that early next month another wave of buying by the index traders will support prices as they reallocate their portfolios to higher exposures to corn. 

So once again we are at the point where we must ask “where do prices go from here?”  My sense is that corn will remain in a sideways trading pattern until we know more about this year’s crop.  Mch-10 futures are likely to remain in the $3.80 - $4.20 trading range.  The final production report from the USDA will be released in early Jan-10.  Given that as of this writing, nearly 10% of the crop remains in the fields, and with a major winter storm dropping several inches of snow accompanied with strong gusty winds, my sense is that next month’s report will surely lower the production forecast.  Recall that in Oct-09 I wrote that final yields would remain somewhere between 160 – 163 bpa.  I still feel that this will be the case.  My best guess is that the final yield will be near 161.5 with production of 12.8 billion bushels, down 120 million from the USDA’s Nov-09 estimate.  Offsetting the lower production however, will be lower demand estimates as exports remain well below the pace needed to reach the current forecast of 2.050 bil. bu.  In the end I suspect carry over stocks from the 2009 harvest will be between 1.55 – 1.6 bil. bushels after the Jan-10 production report. 

Other factors to monitor up to and beyond the USDA report are crop developments in South America.  To date conditions are generally favorable, as the market is beginning to discount a significant improvement from last year’s crop.  US equity markets are continuing to suggest an improvement in economic conditions.  Both the Dow Jones Industrial Average and the S & P 500 index have recently established new highs for 2009, up over 60% from the Mch-09 lows.  In addition, the most recent employment report showed much fewer jobs were lost in Nov-09 than had been expected.  As a result however, the US Dollar index has risen to 4 week highs as the market begins to discount prospects for higher interest rates next year.  Longer term the market will monitor news from the EPA regarding the ethanol industry’s request to increase the amount of ethanol blended with gasoline from 10% to 15%.  Recently the EPA postponed their decision in order to gather more test results on what impact the higher blends would have on older engines.  A final decision is expected before mid-2010.  A ruling by the EPA in favor of the ethanol industry would be a bullish feature for corn prices in 2010 and beyond.

Given my outlook I’d recommend farmers who are 75% sold to sell another 10% of their 2009 crop if Mch-10 corn trades to $4.20.  If the market doesn’t provide this opportunity, remain at 75% sold thru the Jan-10 USDA report.  Although I generally expect Mch corn to remain in the $3.80 - $4.20 range, there is the possibility that prices could dip below this level, particularly if the large speculative traders decide to liquidate positions ahead of the year end.  If so, use a sell-off down to the $3.50 level to reown 25% of last year’s crop with a limited risk option strategy.  The good news for the corn growers in 2010 is that input costs should be lower than they were for the 2009 crop given the large drop in fertilizer prices in the past 12 – 16 months.  For the 2010 crop I’d recommend producers to begin by selling 10% of their crop in Dec-10 futures at $4.40.  Price an additional 15% if Dec-10 corn trades up to $4.70.  Hold off on additional sales until after the Jan-10 production report.