Most of us have seen in the media the wave after wave of storm cells pummeling the Midwest in late-spring/early-summer. As the citizens of places like Joplin, MO and New Orleans, LA can attest, these storms have wreaked havoc in one way or another across a broad spectrum of the central United States.
In the financial media, exceptional rain totals in several grain producing states have brought concerns about planting delays. Because wheat is planted earlier and soybeans can be planted later, the direct focus of traders has been corn.
Corn prices were up 19% through May, most of that coming off of weather concerns over the past 60 days.
An inordinate amount of spring rain has hampered corn planting in some Midwest regions. Ironically, this is exactly what could bring corn prices down as summer begins.
It is true that corn planting is behind this year. As of the May 22 USDA planting progress report, planting was only 11% complete in Ohio vs. a 20-year average of 80%. In Indiana, planting was 49% complete vs. 76% on average for this time of year. These were the numbers that grabbed the headlines.
What doesn't grab headlines is that grain prices often rally in April and May off of any type of weather concerns during planting season. Be wary of price rallies when the reason is "too much rain." Remember the age old wisdom from the trading elders of yesteryear: Rain makes Grain.
A good spring soaking is just what crops need to start the growing season in ideal soil conditions. More importantly, corn was a winner in this year's acreage battles. There are four million acres more corn being planted this year in the United States, a 4.4% increase that is expected to yield about 8% more corn from U.S. fields in 2011 over 2010.
Despite media hype, planting progress in the United States was about 79% complete near the end of May vs. 84% on average. With modern farming equipment, this is margin that can be made up quickly. Planting in Iowa and Illinois, two of the three largest corn growing states, are right at the averages (Iowa is 98% complete). It is only the Eastern part of the belt that will need to make up the ground.
There certainly still is potential for some corn acreage to be shifted into soybeans. But these should be in isolated areas and not involve a significant amount of acreage.
Corn prices rallied nearly 60% last year to account for tight global stocks heading into 2011. This was one reason why corn attracted additional acreage this year. However, the market now has priced that lower supply and added an additional risk premium as anxiety about planting season grew. As the seasonal chart shows below, prices tend to deduct this risk premium once the crop is "in the ground."
We expect that the 2011 corn crop will be safely in the ground sometime in June.
Corn prices have rallied substantially in April and May as wetter-than-normal weather has delayed planting. We feel that the price rally will run into headwinds in June for the following reasons:
- While slightly behind, corn planting progress is still within normal ranges. With a favorable weather forecast next week, it is possible, if not likely, that the full planting schedule will be completed by mid-June.
- Corn prices already have rallied nearly 20% in 2011 after a 60% rally in 2010. Much of the 2011 rally has been due to planting anxieties. These anxieties should begin to ease within the next few weeks, and if so, prices should follow. The seasonal chart of corn prices (above) illustrates this historical tendency.
- Farmers are expected to plant 4 million "extra" acres of corn this year. Even a slight acreage shift to soybeans still will leave corn with more acreage than 2010.
We now are advising clients to begin initiating call sales as premiums are now at inflated levels. Deep out of the money calls are now available as there are plenty of speculative weather players still in this market. We see a mild to moderate correction in corn prices ahead which should be more than enough to deflate the weather premium now priced into the calls. December contracts offer our preferred time to distance ratio.
James Cordier is the founder of Liberty Trading Group/OptionSellers.com, an investment firm specializing in writing commodities options. Michael Gross is an analyst with Liberty Trading Group / OptionSellers.com. Mr. Cordier and Mr. Gross authored The Complete Guide to Option Selling 2nd Edition (McGraw-Hill 2009).