A widely popular Wall Street commodity newsletter called the Gartman Report made a really interesting observation about the corn market this week. It said:
“Finally, we note that the news in the corn market is egregiously and universally bearish with the crop size rising and exports tending to wane; however, it is interesting that amidst all of this manifestly bearish news the corn market has refused to break to new lows and has held quite well. This we find interesting”
The New York analysts are absolutely correct that the 2013 corn crop is massive and the disappearance is insufficient to make the commodity scarce. What they have failed to identify is the farmer’s steadfast reluctance to sell. Corn prices have leveled out not because there isn’t any corn, but because there isn’t any corn for sale.
I can fully appreciate producers’ inclination to store as much corn as possible and to not sell it until the price rallies. It is an entirely logical plan, but collectively it turns into an exercise in self-sabotage. In years where a substantial amount of crop is tucked away into storage, the market rarely rallies enough afterward to pay for the cost of putting the inventory away. Essentially what happens is that producers run out of money and patience at about the same speed as the end users need grain, and the supply pipeline never gets into a position where price has to rally in order to ration demand or pull supply forward into the market.
There are actually a couple of opportunities to market corn at returns better than the prices are today. The first of these is the big premiums that can be locked in by selling corn into the deferred delivery periods. In grain market slang, it is referred to as “carry.” In practical terms it means that the market has no fear of being able to buy corn now, but it will pay a little extra for the assurance of supply in the future. Between the higher Chicago futures in each 2013 crop delivery month going forward, and a steadily increasing basis, a producer can lock in sales for next spring and summer at values $15 to $20 per tonne greater than the values are today. Storage returns in the range of $3.50 to $4.00 per tonne per month clearly exceed the cost of building storage and using the capital to fill it. With a bankable return for storage available in the market, growers who are storing corn at home should take a very serious look at locking in that storage return on 25% to 50% of the bushels which they are tucking away.
There is also a reasonable likelihood that corn planting for the 2014 crop will be 5 to 6 million acres smaller than it was in 2013, and with the reality of lowered production will come the shift towards higher prices. Seasonally, the market starts to factor in new crop planting intentions in January through February, and the speculation firms up to become fact by the end of March. We saw a classic example of this effect in the winter and spring of 2013, when the market’s attention shifted from the drought reduced scarcity of the 2012 crop to the lowering of values for 2013 based on the larger than expected planting intentions. Although we should have reasonable confidence that the market’s fortunes will turn its attentions to the 2014 production, we should not hang our entire marketing plan on the potential winter reversal. To use a poker analogy: when the best cards in your hand are half of a pair of sixes, you shouldn’t go all in. The race to buy acres back into corn should create an opportunity to make some incremental sales, and to set the stage for 2014 new crop, but it isn’t apt to become the dawn of a new era of high prices. Plan on making the second incremental slice of corn sales on the spring acreage rally, and save the last portion of risk for the summer weather of 2014.