Friday, March 1, 2013

Extremes - newsletter article coming out later this month

Below is a newsletter article that will go out in our newsletter coming out in March.


Our grain markets have always been full of extremes and those extremes are the nature of the business that we live in.  Calm and boring isn’t usually associated with futures markets or grain markets.

The question is what are some of the extremes we have seen recently and what are some of the possible extremes that we will see in the coming months and coming marketing year.

The biggest thing that we likely see over the next several months is crop size and crop size projections; with corn being king that will likely be the biggest thing watched.  Soybeans and wheat might have different fundamentals but the corn fundamentals likely act as a trump card for the funds.  So what extremes could we see in corn production?

First off we remember that last year that the drought caused our corn yield to be in the low 120’s for the US on average.  This year early projections have yields pegged at 150-170.  Acres are pegged any place between 95-100 million acres.

I could go over lots of different arguments for various reasons for the yields and acres to be much higher or lower.  Anything from the lack of subsoil to the marginal acres.  But I am not going to try and out guess mother nature.  But rather I want to look at the extreme possibilities that we could see next year.

For round numbers let’s say we have 90 million acres harvested with a yield range of 120-170 bushels.  That gives us a production range of 10.8 billion bushels to 15.3 billion bushels.  I can tell you this it would take plenty of black swan events to happen for us to hit the low end of the range and prices not go up and up tremendously.  On the same token; it would also take a near miracle for prices to not go down should we hit the top side of that range.  Those type of production numbers tell us we could see a carryout any place between 500 million bushels (maybe less) or something as high as 3-4 billion bushels; which should translate into corn prices as high as $8-10 a bushel or as low as $2-3 a bushel.  Now if that is not an extreme range I don’t know what is.

So now we have just a stupid wild extreme range; but also realistic range of what mother nature could throw our way.  The next question might be; well what side of that range do you think we will end up with?  The honest answer is it all comes down to mother nature and I don’t know too many that are always accurate on weather.  So the answer becomes realize what the extremes potentially are and be prepared ahead of time.  Be pro-active in marketing which doesn’t mean one has to sell everything; but rather one wants to have a pro-active plan that helps diversify some of your risk. 

That is where your Midwest Cooperatives grain department can help you.  We can help you write up a marketing plan that helps get one comfortable via trying to make good business decisions that take some of our extremes out.  If you want more information or help writing up a marketing plan please give us a call.

The other thing I want to remind everyone about is the fact that we are offering free delayed price for corn, spring wheat, soybeans, and winter wheat.  But I also want to make sure everyone knows part of the reason that elevators and end users offer free delayed price.  First off is to handle the bushels.  But the second and more important reason is that free delayed price is typically offered when basis is attractive; meaning the elevators and end users might want to short the basis because it is good.  So that also means that producers should be looking at locking in basis.  Bottom line is that anytime free DP is being offered until new crop it is a signal to consider locking in basis; just as a huge DP cost at harvest is a sign that basis likely improves in the future. 

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