The corn market has shrugged off the negative January USDA Report. Traders were surprised earlier this month when December 1 corn stocks were reported to be nearly 250 million bushels above the analysts' expectations. This combined with a less surprising rise in the final production estimate caused corn prices to break nearly $.60 in four days. The implication derived from the increase in December 1 stocks was that first quarter feed usage may be the lowest since 1995. The increase of wheat into rations and the higher production of DDGs may help to explain this decline, but the third consecutive negative stocks report, based on lower feed and residual usage, left many traders and producers questioning the data. The recent $.50 recovery of old crop corn values may lend credence to some of the disbelief. Although declining production estimates for the Argentina corn crop aided the recovery, the main catalyst was a surprising surge in cash prices across the country due to tight pipeline inventories.
According to the December 1, USDA Stocks Report, producers held just under 50% of last year's crop in "on-farm" storage. It appears that much of last year's corn crop was keenly sold on last summer's rally or moved off the combine due to historically high harvest prices. Producer sales tend to pick up after the first of the year. However, three important factors have seemed to mute that farmer movement. As stated earlier, half of last year's crop has already been likely moved into the market place leaving producers to be more cautious of future sales. Second, a bullish January production report may very well have been met with increased farmer sales, but the $.60 break sealed the bin doors tight. Finally, today's producers simply do not have the same cash flow needs of 10-20 years ago. They can afford to be patient and move their inventory on a more opportune schedule. This leaves ethanol producers, as well as exporters, scrambling to shake that cash corn loose. This is a feature that will be an important factor throughout the remainder of the marketing year.
The corn market is entering a very important marketing window for producers. Old crop corn values should continue to be supported on breaks toward $6.00 by solid demand and a potentially declining carryout estimate. It is possible that the recent close in March corn above its 100-day moving average for the first time since last September will open up an additional $.30 of upside to prices. With fewer concerns for the corn crop in the bin, most producers are shifting their focus to marketing the 2012 crop. Many analysts have already been flooding the market with much higher new crop carryover estimates and projecting sharply lower prices for this fall. When using a planted acreage figure near 95 million acres combined with trend line yields, it is easy to see where these projections are derived. The jump in corn acres may seem somewhat easy to explain. However, as evidenced over the past two years, a trend line projection near 162 bushels per acre will prove to be a much bigger challenge. The tight cash market and the potential for lower carryout estimates in upcoming USDA Supply and Demand Reports, provide the possibility for an acute rally to old crop corn values. Although such a rally to March futures will likely result in the spread widening, it still may drag new crop corn values to the $5.85-$6.00 level. This would provide an excellent opportunity for producers to advance 2012 crop sales. In addition, producers could take that opportunity to aggressively lock in a price floor using well out of the money options.
The corn market will likely remain quite volatile throughout at least the first half of this year until it becomes more comfortable that a yield around 160 bushels per acre can be achieved. Producers can use this volatility to aggressively market 2012 crop corn production on rallies, yet transferring that risk back to the cash market on breaks. By setting a price floor using options, it will provide the comfort to step aside on hedges at the bottom end of the expected trading range without entirely exiting the corn coverage. A marketing plan that includes both a longer-term option strategy and a shorter-term pricing strategy can help to reduce some of the emotional decisions that will undoubtedly face corn producers throughout the spring and summer.
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