Farmers and traders worry a lot about supply during the growing season, and rightly so. A drought, or even a flood, can wipe out a year''s production quickly.
But with crops in the U.S. looking mostly good, the market''s attention should turn increasingly to demand. While domestic consumption of corn should be good for the 2014 marketing year that begins Sept. 1, exports are forecast by USDA to fall sharply. While the government may be overstating the case, plenty of farmers from around the world will compete with the U.S. for sales.
Moreover, demand for imported corn is decreasing. One reason is China. U.S. corn growers once had high hopes the world''s largest country would become a major source of new business, just like it is for soybeans. Those hopes were dashed this year, when the country used an unauthorized GMO strain found in some shipments to enact what amounts to an outright ban that expanded to include the once-booming trade in DDGS.he GMO issue will eventually get sorted out, but China''s demand for imported corn may stay weak. It''s not that processors there don''t want to buy from the U.S., or other countries. Government policies keep domestic prices expensive, in part to support farm incomes, because slowing economic growth put more pressure on rural areas. As a result, corn futures in Dalian sell for $3.50 a bushel more than the cost of imported corn from the U.S. Buyers did what they could to circumvent the restrictions, boosting imports of sorghum, for example.
The government has moved to help those processors as well with aid. But resistance to imported corn could persist for the next year, and maybe beyond. Corn yields and acreage were records last year, and production looks set to increase again this year.
The hope has been that strong demand will overpower that production, but so far it hasn''t. In fact, as USDA admitted recently, past projections were overly optimistic about China''s need for imports.
The agency is still forecasting imports to climb long-term. But whether the country returns to international markets any time soon may depend on the outcome of a policy debate. Some want the country to sell off some of its grain reserves. That''s happening with soybeans, where the country is shifting from supporting prices to direct subsidies for farmers. But most of the country''s policy makers still view grain reserves as a state security issue. They want to build more storage to increase reserves, adding 2 billion bushels of additional space in the next year.
A move to fill those bins at least partly with imports could turn the demand picture around dramatically for corn. With a crop of more than 14 billion bushels out in the field. U.S. farmers should hope China has such a change in heart.
Corn prices have made some big moves, both up and down, after USDA''s June 30 acreage and grain stocks reports. Some years the reports cause the changes. Other years, growing season weather is the driver. This year only a major shift from either weather or the reports is likely to reverse the bearish trend.
Farmers used to debate crop conditions at the coffee shop. Now they battle with pictures posted on Twitter. Some growers in Iowa posted pictures of flooded fields. Others portrayed crops in excellent condition. Vegetation maps produced by satellite images show areas of concern in the northwest Corn Belt, but overall the crop looks in good shape as the pollination window approaches.
Growers who forward priced a significant chunk of their expected production and signed up for high levels of Revenue Protection crop insurance have likely locked in a profit, no matter what happens to yields and prices. Those who haven''t who try to sell now are likely doing so barely above the bottom third of the price range for the crop. They need to be evaluating the impact of the new farm program to see if it can offer more safeguards against losses on grain held into 2015.
Soybeans are at a major turning point. Either tight old crop stocks trigger one final burst higher, or they don''t.
If the rally sputters, new crop prices could be at risk big-time. While the crop''s most vulnerable period to weather isn''t until August, only a significant shift hotter and drier may keep farmers from growing a very large crop. Coupled with another big year in Brazil into 2015, and there may be way more beans than the world needs, sending prices towards $10 or lower.
Protecting at least 50% of expected production at $12 or better seems prudent. Those who need more can consider an options spread if they''re comfortable with the risk of selling options. Paying for a November $12 put by selling a $13 call and $11 put provides another $1 of downside protection.
Wheat is starting to show the first glimmers of hope that prices are finally turning a corner. Production problems here in the U.S. include too much rain on already stressed hard red winter wheat fields, as well as reports of scab and vomitoxin in soft red winter wheat. Canadian growers planted less wheat this spring, while El Nino still remains a concern for production in Australia.
Unfortunately, those hoping for higher prices are playing whack-a-mole when it comes to wheat. The crop is grown over such a large area that even when some countries are down, other exporters pop up to take their place. That seems true of Europe and the ''former Soviet Union this year. Though conditions in Europe and Asia aren''t perfect, they''re likely good enough to meet the demands of exporters, especially those who buy according to price, not quality.
While harvest on the southern Plains isn''t over, their safeguards against falling prices in Revenue Protection crop insurance policies end June 30, when price discovery for the policies is over. The insurance won''t pay out on price, and many farmers don''t buy enough protection to cover less than a 30% loss of yields. Stronger basis could protect growers against a further slump in futures, but those with a good market now can consider selling off the combine, staying long with a more limited risk position using futures and options. Covered calls – buying futures and selling a call – might be one alternative, though volume in Kansas City futures is very thin right now.