Don’t Let Pricing Opportunities Get Away Corn, Bean Upside Potential

By Phyliss Nystrom

Leading into spring, volatility is the name of the game in the grain markets.  Examples: July corn gained 47 ¼ cents and December corn gained 42 cents in the time span of Jan 2 to Feb 27. In soybeans, the July gained $1.36 in that timeframe and November beans increased 97 ¾ cents.

While these increases are extremely impressive, the carryout estimates for this year continue to fall for corn and remain stable for soybeans, although that’s questioned by many, according to recent USDA reports. We’ll look first at corn numbers and opportunities and then at the beans.

The USDA estimated corn carryout this year at 901 million bushels in the February supply/demand report. At the USDA February Outlook Conference, they forecast the ending corn stocks for 2004/05 at 821 million bushels. Just eye-balling these numbers, you can see we have no room for a weather problem this year.

USDA is forecasting 2004/05 corn acreage at 80.5 million acres, up 1.75 million from this year. Using harvested acres at 73.2 million and a trendline yield of 142.2 bu/ac, the USDA comes up with a crop projected this fall at 10.41 billion bushels.

Ethanol has become such a significant portion of U.S. corn use that the USDA is adding a separate line on the balance sheet for ethanol usage, breaking it out of the Food, Seed, and Industrial line.  Ethanol use for 2004/05 is initially pegged at 1.3 billion bushels. Monthly production numbers continue to set records as new facilities come on line. This trend will/should continue as more facilities are completed. In related news, there were rumors out of China recently that they may mandate 10% ethanol in petro- fuels. If confirmed, this would turn China into an importer of corn sooner rather than later.

World coarse grain ending stocks are at their lowest level since the 1995/96 marketing year, and world corn ending stocks, as reported on the February Supply/Demand report, are forecast at the tightest level since 1975. For recent comparison, ending stocks are roughly 55% of 1998, 121.9 million metric tons versus 67.2 mmt this year; while production in 1998 was 605 mmt and this year is 609 mmt. Rising production and plummeting ending stocks have set the stage for price rationing.

China’s stance as a corn exporter this year and next year is adding to corn bullishness. China’s recent announcement of intending to ship 1.4 million tons of corn March through July was about half of what was expected by the trade. China has signaled they will continue to export corn in the 2004/05 marketing year, but amounts are unconfirmed.

If USDA’s outlook forecast is realized in 2004, the 821 million ending U.S. stocks would be the lowest since the 1995/96 crop year when they hit 426 million bushels, but similar to the 1996/97 stocks of 883 million.

The July corn contract in 1996 hit $5.54 ½ while the July 1997 contract topped out at $3.20 ¾. Technically speaking, drawing a retracement from the July 1996 high to the low in July 2000, a 38% retracement would put the July 2004 contract at $3.19 ½. A 50% retracement would be $3.64 ¼. Without any lasting problem, I feel the first target is around $3.20 in the July corn, but with a surprise – whether it is less Chinese exports, less U.S. acres, or a weather problem anywhere – the $3.65 is not out of the question.

Prudent risk management, however, says we must also evaluate our downside risk. Take advantage of pricing opportunities this spring, and realize the lower seasonal tendency of the corn market as the growing season approaches harvest.

Double-digit bean prices?
The soybean carryout for this year seems to be stuck at 125 million bushels. This number is suspicious according to many in the trade with exports and crush margins remaining at high numbers. The recent USDA Outlook Conference estimates 2004/05 soybean ending stocks at 210 million bushels. Bean acreage is predicted at a record 74.5 million acres, up about 1 million acres from last year. The USDA used harvested acres of 73.2 million acres and 40 bu/ac, equating a crop of 2.93 billion bushels. The USDA seems to be very optimistic on the coming bean yield, since it is 2.5 bu/ac higher than the nine-year average.

South American weather at this writing is a mixed bag. Northern Brazil is wet while southern Brazil and Argentina are dry. At this point better weather may still alleviate some of the losses, but adding bushels may be difficult. Most estimates are now pegging Brazil’s bean crop from 54 to 57 million tons as compared to the February USDA estimate of 61 million tons.

Beans trade two weather markets now – ours and South America’s. With extremely tight U.S. ending stocks predicted, our weather will be especially critical this spring and summer in the attempt to add to ending stocks.

The bird flu scare here in the U.S. seems to have subsided without any damage to soybean and meal prices. U.S. crushing margins continue to be profitable. Monthly crush numbers have been better than the trade has anticipated. The latest January crush figure was 145.9 million bushels versus estimates of 143 million bushels.

South American beans and meal are close to working into the U.S. In some cases meal seems to pencil into the West Coast, depending on freight estimates. However, this year’s typically nightmarish logistical problems may be compounded by the GMO issue at the port of Paranagua, Brazil’s busiest port. The state of Parana intends to keep the port GMO- free, which would force supplies to make their way through other, less efficient ports.

The next target levels for soybeans are 10.99 ½ set in June of 1988 and then 12.90 reached in June of 1973. Attainable? Never say never in the current situation – China continues to buy (their crush margins are improving after being in negative territory), South American supplies aren’t getting any bigger, and the U.S. crop, not even in the ground yet, will be sensitive to potential weather problems.

Maintaining some sort of risk management with this year’s high market volatility is imperative! There are several avenues available to protect the excellent new crop prices. The first way would be to simply sell a percentage of 2004’s expected production on a flat price contract. If today’s sales were your worst ones of the year, you should be happy. Other strategies would be to use a combination of futures, options, and flat price sales. This could be accomplished by using a straight hedge (sell futures) to lock in the futures price and buy a call to participate in a rally.

Buying a put option only would set a price floor, and leave your upside unlimited. Adding another layer of strategy would be to sell cash, buy a near the money call, and sell an out of the money call. This sets a floor but also limits gains. A combination of strategies for a percentage (possibly 20% to 30% on your new crop at this point) would help spread out your risk and opportunity.

Everyone has a different sense of risk, so I would urge you to speak with your broker or elevator about the best avenue for your operation. Do that at the very least – it would be unfortunate to miss out on good pricing opportunities this spring for remaining old crop and a portion of your new crop. 

Nystrom is a commodity analysis with Country Hedging, ph 800-243-3432, email: pnystrom@countryhedging.com , web site www.countryhedging.com.This information is believed to be reliable, but is not guaranteed as to accuracy or completeness and is for information purposes only. There is a risk of loss when trading commodity futures and options.