Marketing Your Corn Part VIII - 2010
By Mark Soderberg, Archer Financial Services

As of my last article, in early June-10, my recommended sales level for the 2009 corn crop was at 85%, with an average price of $4.50 basis the July-10 futures.  At that time I had advised clients to roll any hedges they had remaining in the July-10 contract to Sept-10 when July-10 was $.11 under.  This recommendation was changed to $.09, which was executed in mid June-10.  I had also advised my farmer clients to remain patient and sell the remaining 15% when Sept-10 futures reached $4.25.  To date this level has not been hit; therefore 2009 sales remain at 85%, at roughly $4.58 basis Sept-10 futures.  In early June my recommended sales level for the 2010 crop was 10% at an average price of $4.40 basis the Dec-10 contract.  At that point I had also advised clients to make additional sales of 5% at $3.85, $3.90, $3.95 and $4.15 also basis the Dec-10 contracts.  To date the first three targets have been hit bringing 2010 sales to 25% at an average price of $4.10 basis the Dec-10 contract.  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.

In my last article I stated that corn prices were likely to drift lower, however I felt that July-10 corn would hold above $3.25, and Dec-10 corn would hold above $3.50 heading into the June 30th stocks and acrage report.  While Dec-10 corn did trade down to $3.44 in late June, the exact low in July-10 corn was $3.25.  Since these lows in late June, the fundamental changes to the corn market have been supportive.  In the June 30th stocks and acreage report the USDA shocked the grain industry by forecasting June 1st stocks at only 4.31 bil. bu., 300 mil. bu. below the markets expectations.  In addition the 2010 corn acres were reduced by just over 900,000 to 87.872 mil. acres, nearly 1.5 mil. acres below expectations.  Since early June-10, the 2009/10 corn ending stocks have been reduced by 260 mil. bu. to 1.478 bil. as feed/residual use was raised 150 mil. bu. and corn used in the production of ethanol was raised 100 mil. bu.  My sense is, given this supply shock, the 2009 corn production will be revised lower at the end of Sept-10 to reflect the poor quality and conditions during last year’s harvest.  Given the lower stocks from the 2009 crop and lower acres the 2010 corn balance sheet is considerably tighter than what was expected in early June.  The ending stocks forecast has been slashed 445 mil. bu. to 1.373 bil.  The USDA’s yield forecast remains at 163.5 bpa while demand is still forecast at a record 13.36 bil. bu.  As of this writing corn conditions are above their historical average and at the third highest in the past decade.  As a result, most yield estimates are at or slightly above the current USDA forecast.      

So once again, we are at the point where we must ask “where do prices go from here?”  Since my last article in June, weather in the US has been mostly favorable as evidenced by the good corn crop conditions.  In fact, the biggest risk to date, from a weather perspective, has been too much rain in some areas which will likely result in slightly lower harvested acres.  As of this writing, 38% of the corn crop is silking, well ahead of the historical average.  With very few acres experiencing moisture shortages and no lasting heat in the extended forecast it appears the window for a devastating crop problem is quickly closing.  That said, my guess is a rally above the $4.50 to $4.75 level in Dec-10 corn is highly unlikely.  In addition I think traders and end users will be very reluctant to buy corn aggressively above the $4.25 level as profit margins will begin to diminish unless these higher costs can be passed on to consumers, a scenario I see as unlikely given the frail economy and many economists suggesting a double dip recession is very possible.  If weather and crop conditions improve here forward, I believe it is very likely Dec-10 corn could challenge and possibly trade below the recent lows of $3.44.  I do feel, however, that given the fundamental change to the US corn balance sheet the floor for corn prices has now been raised above the $3 level.  In my estimation the average US corn yield would have to approach 170 bpa (production 13.8 bil. bu.) in order for prices to slip down under $3.40 and possibly approach the $3.25 level.  Obviously other factors beyond US weather will impact prices here forward.  Since early June-10 weather in China has improved crop prospects.  As a result Chinese purchases have slipped.  To date China has commited to purchase 45 mil. bu. of corn for the 09/10 MY while only 10 mil. bu. have actually been shipped.  Drought conditions continue to grip Eastern Europe, as wheat production continues to be slashed.  As a result spot wheat prices have surged nearly $1.50 per bu as they have just made new 12 month highs.  In recent week’s the EPA once again delayed it’s decision on whether to grant the ethanol industries request to raise the level of ethanol blended with unleaded gasoline beyond the current 10% limit.  

Given the current crop conditions and weather outlook, my guess is that corn prices have not yet seen their near term highs.  For farmers that are 85% sold on 2009 crop, lower your offer to sell your remaining 15%, if Sept-10 futures trades up to $4.05.  For farmers that are 25% priced on 2010 corn in the Dec-10 contract at $4.10, keep the order in to sell another 5% at $4.15.  Place new orders to sell 10% at $4.25, another 10% at $4.45, and another 15% at $4.65.  These offers should remain in place through the end of Aug.  If all these sales are executed for the 2010 crop, total sales would have reached 65% at an average price of just over $4.30 basis Dec-10 futures.  Based on my knowledge, this would provide a generous return to farmers over their cost of production.        

Chart Provided by APEX

If you would like more information about this article, please contact Mark at 1.877.690.7303 or send an email to mark.soderberg@archerfinancials.com.

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