corn options

corn options

June 26th, 2014

Iowa farmer Julius Schaaf isn’t waiting for his corn to grow kernels before he sells this year. As last season’s record harvest spurs bulging inventories, he’s playing it safe, even as most growers hold onto their grain.

“We had perfect planting conditions, and everything is in place to produce a big crop,” said Schaaf, 61, who has already sold 70 percent of the grain he plans to produce on 3,800 acres of corn and soybeans near Randolph, Iowa. That compares with the 25 percent he would normally have sold by this time of year. “I feel pretty good with my hedge positions, because it is evident that prices will take a downturn. With above-average yields, it will be close to break-even.”

A bumper harvest in 2013 means stockpiles in the U.S., the world’s biggest grower, are rising at the fastest pace in nine years, according to traders and analysts surveyed by Bloomberg. Ample rains and warm weather boosted early crop development for this season and allowed farmers to plant more than the government estimated in March, a separate survey showed. Prices will fall about 9.5 percent in six months, Goldman Sachs Group Inc. forecasts.

Corn futures on the Chicago Board of Trade fell 15 percent since the end of April to $4.425 a bushel. The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 1.7 percent, while the MSCI All-Country World index of equities gained 2.9 percent. The Bloomberg Treasury Bond Index advanced 0.7 percent.

Corn Futures: Goldman Forecast

Goldman sees futures at $4 in six months, the bank said in a June 23 report. Bigger crops are helping to keep a lid on global food inflation, with the United Nations reporting a second monthly drop in prices in May. The grain glut is cutting costs for livestock producers and ethanol makers including Poet LLC and Archer-Daniels-Midland Co.

U.S. inventories on June 1 probably jumped 35 percent to 3.723 billion bushels (94.6 million metric tons), the biggest gain since 2005, according to the average of 27 estimates in a Bloomberg survey. Farmers planted 91.71 million acres this spring, a separate survey showed. That’s up from 91.69 million forecast in March by the Department of Agriculture. The agency will update its estimates on June 30.

“We’re going to have a very good crop,” Shonda Warner, the managing partner of Chess Ag Full Harvest Partners in Clarksdale, Mississippi, which oversees about $150 million, said June 20. “We’re getting plenty of rain, and we’re going to have huge inventories.”

Corn Futures: Record Harvest

Iowa farmer Schaaf decided to lock in prices and sell before his plants pollinate, which usually occurs in July and determines the number of viable kernels on each ear. Most growers have not followed Schaaf and are waiting to sell, which could further damp futures as supplies start to flood the market, Roger Fray, the executive vice president for the farmer-owned West Central Cooperative in Ralston, Iowa, said on June 24.

Farmers have sold 8 percent of this year’s crop, compared with about 35 percent on average in the past five years, Fray said. The growers still have about 30 percent of the 2013 crop to sell, the biggest carryover since 2005, when corn prices fell below $2, he said. The U.S. will produce a record 13.935 billion bushels this year, the government predicts.

A lot can still go wrong. The pollination phase in July is the most vulnerable period in the growing cycle, and too much heat or dry weather can shrivel crops and cut yields. In June 2012, the USDA was forecasting a record domestic crop and surging global inventories. Instead, Midwest fields were parched during the next two months by the worst drought since the 1930s, and prices touched an all-time high of $8.49 on Aug. 10, 2012.

Corn Futures: Resilient Demand

Resilient demand will make up for the bigger supplies, and futures will average $4.87 next quarter, Christopher Narayanan, the head of agricultural research at Societe Generale SA in New York, said in a June 24 report. Record cattle and hog prices will prompt ranchers to increase production and use more grain in feed rations. U.S. ethanol output rose 3 percent to 972,000 barrels a day in the week ended June 13, the most since the data from the Energy Information Administration begins in 2010.

“Corn demand is strong because beef, pork and chicken producers are all making money,” Jerry Gidel, the chief feed-grains analyst for Rice Dairy LLC in Chicago, said on June 24. “Ethanol production is rising because it’s cheap relative to gasoline.”

Corn Futures: China Imports

While domestic consumption gains, China has been rejecting U.S. shipments that contain an unapproved genetically modified strain of corn since October, limiting the outlook for exports. In the season that ended last year, the Asian nation was the third-biggest importer of U.S. supplies, trailing Japan and Mexico, government data show. American export sales to all buyers reached 109,000 tons in the week ended June 12, the lowest since August, according to the USDA.

Chinese buying is also forecast to fall as the country’s production climbs 2.1 percent to an all-time high of 223 million tons, the National Grain & Oils Information Center said June 24. Farmers will also grow more from Europe to Argentina, sending global reserves to a 15-year high, the USDA forecast June 11.

“Most commercial grain companies are not planning on exporting corn to China until the ban is lifted,” Brian Schouvieller, senior vice president for CHS Inc. in Inver Grove Heights, Minnesota, said June 24. “We are going to have a big global crop, and that means the market will be more focused on abundant supplies, not demand.”

- Jeff Wilson in Chicago at Bloomberg.