The AgMarket.net team expected the USDA to revise the US corn crop upward in November’s WASDE report, but we were surprised by how aggressive the upward revision was. The average U.S. yield rose 1.9 bushels to 174.9 bushels, the fourth-highest national yield ever, but is still below trend. Almost all primary yields in corn-growing states were increased compared to the previous month, with the exception of Nebraska and Kansas, which were revised down slightly. Record high yields are estimated in seven states, including Indiana, Ohio, New York, South Carolina, Georgia, Tennessee and Alabama.
The USDA revised the demand side of the U.S. balance sheet to offset some of the increase in production. Exports rose to 2.075 billion bushels from 2.025 the previous month, also a surprise. Most industry participants expected export demand to be flat or lower due to disappointing sales outside Mexico, which is driving sales this marketing year, leading to better sales optics. Ethanol demand increased by 25 million to 5.325 billion bushels compared to the previous month, while feed and residual consumption also increased by 50 million bushels. The net effect of these adjustments is that projected ending stocks will be 2.156 billion bushels – 45 million bushels above last month’s estimates and will end up at the highest level in five years if they come to fruition. We believe there is a high probability that the demand portion of the balance sheet is most likely overstated, which could result in higher ending inventories in upcoming reports.
Producers storing unsold bushels should be aware that there is a risk of price declines due to these large projected carryovers. After many years of a bull market, this marketing year feels like we have moved into a bear market.
Marketing risks
The market currently pays you about $0.15 to store corn from December to March.
You pay $0.23 to store it in May and $0.32 to store the corn until July, which compares to selling the grain straight from the field at a time that is traditionally one of the worst selling times of the year is, is undoubtedly attractive. Unfortunately, if a producer does nothing to secure this carryover, he could be faced with a costly storage bill and corn prices that are not at the level he was at when he put the corn in the bin unless it is too a surprising increase in demand or a decrease in demand comes the way the world delivers.
The reason for this is that in bear markets, the spot futures price tends to fall to where their previous front-month contract fell off the board. The September 2023 futures contract closed at $4.62 ¾ in September, with a contract low of $4.55 ¾ reached on the same day. Without significant surprises on either side of the supply or demand balance, the price of corn will fall to the same price level in December. Once the corn contract is delivered in December or sooner.
The pattern of the spot price falling to where the previous spot price went out of control could continue into the summer. This means that if you don’t lock in that carry, you could get the same futures price during the delivery period in the July contract as you would when settling the September contract, but that’s not the only risk.
In addition to the possibility of carry disappearing, there is also the cost of storing grain due to the high interest rate period we are currently in. The current interest cost of storing grain on the farm is estimated at 3 1/2 cents per year. So the interest of storing grain until next summer will easily cost you $0.24 in interest costs.
The only way to reduce the interest cost of storing grain on the farm is not to store it. Producers should consider storage costs when deciding how long to keep grain on the farm. Historically, keeping grain out of the market improves the basis as the market tries to tempt you to put it on the market. The question to ask yourself this year is whether the base improvement will be enough to offset the storage costs. If you don’t believe the basis will improve enough to offset storage costs, consider moving the grain and keeping ownership on paper via futures or options strategies.
To mitigate the risk of giving up carry, consider selling futures for the delivery you expect to bring the grain to market. Use May futures to lock in carry for a May delivery period. If you want to give yourself some flexibility, consider put options to lock in carry but leave some upside potential open.
If you have any questions or would like specific recommendations for your operation, please do not hesitate to contact me directly at 815-665-0461 or a member of the AgMarket.Net team at 844-4AGMRKT.
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