From the June 2014 issue of Futures Magazine • Subscribe!

Big crop year expected: Will 2014 deliver?

This is an exciting time of year for the grain markets. Week-to-week changes in potential supply can influence prices sharply. For winter wheat, after weeks of speculation June is the month where the combines roll and the market finally learns the true nature of this year’s crop. June also is a precursor to the main determinant of corn yields: Pollination. In July, a short period across the United States determines more than 50% of the nation’s corn production. With all of this action occurring right now there are many opportunities, and pitfalls, in trading agriculture markets. We will focus on the U.S. situation, because this will be the primary driver of price this summer. Volatility typically is the highest in the summer. Combined with the CME Group’s new daily trading limits in the grains, now up to $1.00 for soybeans, traders need to use correct risk management.

 

Corn (CBOT:CN14)

At this time of year there are actually two separate issues in the trade’s focus. The market is looking at the amount potentially left over from this past fall’s harvest as well as the potential output from the recently planted new crop. The old crop that we are using now is from the fall 2013 harvest. Last year’s strong acreage numbers, even with planting problems, helped offset some disappointment from yields. The demand waiting for this harvest turned out to be much better than expected. What was supposed to be a year of a return to a surplus in supply off the 2012 drought has now been only a return to almost average.

Exporters have been surprised by the strong pent up interest in this year’s crop. It is being offered quite a bit cheaper than the previous two-and-a-half years. This situation was exaggerated in recent months for the United States. World buyers are leaning more heavily on the U.S. crop because of Ukraine’s political issues and Brazil’s refocus this spring on soybean exports (see “Underpromise, overdeliver,” below). As of early May total U.S. sales are 29% higher than the five-year average for the same period. Sales are almost at the U.S. Department of Agriculture’s goal for the entire September to August marketing year. The remainder of the year could run to more moderate levels of 25% under normal. That reflects already weakening interest. We compute a July corn price from that move to $5.50 by itself. 

By the end of June the Environmental Protection Agency (EPA) is expected to release the 2014 Renewable Fuel Standard. This is the well-known “ethanol mandate.” The EPA will be tweaking this year’s blending mandate to ensure that the ethanol mix in the nation’s gasoline does not surpass the practical safety limit of 10% for all cars. Depending on their mandate, the trade will make adjustments for future ethanol demand. 

The biggest category of demand is actually the most opaque. Livestock feeding and residual demand are forecast to increase 22% over last year’s low numbers. Though no one would argue with an increase, due to many factors, many wonder if the size of the increase is correct. This comes when the total livestock population will be down vs. last year. There is the potential for a reduction in this category but possibly not until the July supply/demand report. 

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