Acreage Battles and Weather Scares May Bring Pricing Opportunities
Be prepared to act by knowing what you can safely sell ahead
By: Brian Wiggins
As spring advances in the northern hemisphere, the grain markets shift their focus. While attention was previously on the amount of supply we had from the last crop and the balance of demand, now the market will try to position and outguess farmer decisions. Traders also sharpen their pencils on what demand will look like for the next year.
With that, let’s review information that has hit the market and what is to come. On March 31, the USDA Prospective Plantings report was released. Different reports use various methodologies, and this report primarily relies on farmer surveys. This is a probability survey that includes a sample of approximately 73,000 farm operators. Each report released also includes the release of the methodology used, if anyone wonders where they get the numbers. Reports also are reviewed for reasonableness and consistency.
In the grain buying world, you will hear a lot about seasonality in futures. A common one we use is the phrase “pre-plant through pollination” regarding corn, “acreage battle,” or “weather scare.” Each of these invites potential risk premium to be built into the market. Early in the season, the market takes its individual expectation of acres and trade is built around that in balance with other market factors. When USDA releases its broad survey-based approach, the market can and will react to the number based upon what it perceives to be the need for the market to balance itself out for supply and demand.
Looking at the plantings report, corn acres were significantly lower than the market had expected. Soybeans were higher. In general, the market had perceived that corn acres should have been higher, and bean acres did not need to grow that much to balance the supply equation. So, in turn, the price discovery mechanism reacted, with corn wanting to lead that pack higher while soybeans reacted negatively. The function of the market at that point was to incentivize corn acres relative to the report and disincentivize beans relative to the report.
Then, as the corn market continued to move higher in trend, soybeans started to follow. Herein lies some of the concept of acreage battle. Neither corn nor soybeans are in dominant excess supply. The goal of the market continues to be to rationalize the balance of available acres and the price point in which available supply matches demand. If supply cannot be realized, the purpose of the market is to ration demand. Soybeans have demonstrated that they do not want to lose too many acres relative to corn, only that they wanted to take a little bit of the back seat on acres.
Moving forward into the growing season and planters start to roll, we will see weekly planting progress and crop condition reports. The market does not have magic dates on the calendar, but as the days click by, the slower the relative progress the more likely the market will be to add risk premium to prices. Conversely, if the pace goes ahead of “normal,” then the market tends to relax risk premium.
The market does recognize this major fact, particularly in corn. The largest multiple on corn production is yield – less so acres. That is why the market will fuss for two months on how many acres will get planted, but ultimately squeezing the yield out of acres available is the key factor. Historically, this is why the larger weather scare markets are in June and July. Every industry person will soon try to be a weather forecaster.
Low price environments have unique challenges to marketing crops and higher prices present a whole new set of challenges. Let’s go back to the discussion on “weather scares.” The same thing that drives weather markets to add risk premium is also what puts resistance in a farmer’s mind to sell additional production. It is the question of, “What if I don’t raise it?” Our encouragement is for every farmer to have a frank discussion with their grain buyer about what cancellation procedures would likely be if they did not produce the number of bushels they forward sold and were unable to deliver. In revenue protection crop insurance, the harvest price option gives you the higher of the spring or harvest price to calculate your guarantee. The guaranteed bushels do not change. This helps provide defense against a rising price environment and potentially overselling production, which gives you more flexibility in your marketing.
Have a discussion with your ADM Grain representative or your Crop Risk Services crop insurance agent about how your sales may impact your final outcomes. The ADM crop insurance worksheet also helps with this scenario and can be found here.
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