Markets unPACKed: Limit Up Days in Grain & the Hedgers’ Perspective
Limit Up Days in Grain & the Hedgers’ Perspective
We have seen extraordinary price action in corn. As of Thursday, May 22, the front months were limit up and as of the morning of this writing, Monday, April 26, we are back up 20 cents in the July contract, to 653. The May contract will expire on Friday, with option expiration last week, but reached the limit up Monday morning to 680.5. Quick fundamentals around corn last week included increased export projection of corn from China. The USDA’s China attaché increased their export projections for 20/21 to 28 million tonnes, an increase of 17%. Per the USDA, China has already booked 23.3 million tonnes from the U.S., not including any bookings to unknown destinations that could have gone to China, or other corn exports from other countries. However, the USDA office in China Is projecting just 15 million tonnes of export to China for 2022, as China will have rebuilt much of its corn stocks this year.
Outside of China, we are seeing Southern Brazil in extremely dry conditions. This Monday morning Brazilian weather is still looking dry in south-central Brazil with no rain over the weekend. Argentina is also considering an export tax on grains as inflation has been rampant. Argentina is the third-largest corn exporter in the world. Soybeans and wheat are along for the ride, though dryness in parts of the Midwest is of definite concern. Spring wheat areas of the US are still extremely dry after months of drought conditions.
Now, it is important to understand the spreads with commercial hedging. Right now, the spreads between the July contract and the December contract in corn is a 90-cent spread inverted. Meaning the front months (July) are more expensive than the back months (Dec). The record for the biggest old-crop (front month)-to-new-crop (back month) inversion — $1.93 1/2 per bushel — was set on July 5, 2013, when the country was pretty much panicking about running out of corn after the 2012 drought. Seems this increased demand market, Brazil dryness, U.S. dryness is lifting prices. Back month prices will either meet front months if weather concerns persist, or front months will sag to back months if corn planting goes well, looks good, and Brazil crop is ok.
To quickly recap, spreads matter to coops because typically the further out months are more expensive as they factor in the cost of carry: the cost of transporting and storing grain. Futures show what the market is willing to pay to carry grain…and right now that is not much compared to the price to sell it now! When the spreads are inverted, the market is screaming to sell the grain now, a.k.a., higher demand! This is not incentivizing grain merchandisers to call farmers and take in their grain, only to store it and be paid less than selling it. But currently, U.S. producers are planting, and the Southern hemisphere is about to sell their grain, so the picture is wild.
Another area of discussion was ‘what is the farmer going to do?’ We mentioned that they are planting right now and most have sold their grain they had from harvest 2020 since we have seen bullish prices for six months now. The farmer needs to rethink how they will get the best short futures price to hedge their physical while not getting annoyed that they may not sell at the top of the market. Typically, they start selling futures from April through August, so they have sold enough futures in time for harvest. Producers do not mind capturing the average price of the futures market, but this year that lackluster strategy is not going to work. They need to enter into this market from multiple angles (options trading, OTC structure trading, selling futures on certain days, etc.) to make this market work for them ahead of harvest.
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