Written by Cy Monley and Brett Boyer
Every year at the end of March, the Prospective Plantings report gives a look at acreage forecasts heading into the spring. This year, the market is expecting corn plantings to fall from 94 million acres to about 91 million acres. But what if the Plantings report has a bullish surprise? What would the market do if forecasts come in much lower than expected, and how should your hedging strategy be adjusted?
Let’s say that USDA forecasts only 88 million acres of corn for the 2017 season. That’s a possibility since bean futures have been so strong relative to corn this year – in fact, November beans spent most of the winter at their strongest level vs. corn since the mid-1980s! That’s a pretty strong incentive for farmers to plant soybeans this spring. Meanwhile, global corn production forecasts through the Southern Hemisphere summer have been pretty good, and that has led to a sharp decline in US corn futures during the month of March. December corn has dropped by 20 cents during March as funds have flipped their position from long 80,000 contracts to short 80,000 contracts during that time.
So the market is heading into the report poised to react pretty sharply to the upside if USDA gives the market a bullish surprise. And if plantings are forecasted as low as 88 million acres, without a good-sized drop in usage, then balance sheet analysts will be expecting corn supplies to drop to about 1.5 billion bushels by the end of the next crop year, compared with expectations of a 2.3 billion-bushel carryover this year. Prices have been dropping because global corn carryover forecasts have risen by about 10 MMT – or 350 million bushels – over the past few months. But what if the US crop is suddenly forecasted to drop by 800 million bushels?
That might set off a pretty strong short-covering rally by the funds, and would likely push December corn futures into new calendar year highs, up to about $4.20, as funds would probably implement new long positions. They went from 80,000 long to 80,000 short during March, so their buying following a bullish Prospective Plantings report could easily be close to 200,000 contracts.
Funds may want to buy $4.20 corn on the hopes that it will go to $5.00, but from the perspective of a hedger, we would look at a 40-50 cent rally as an opportunity to lock in profits. Even with a balance sheet that forecasts 88 million acres of corn planted this spring, an expected carryover of 1.5 billion bushels should still peg December corn’s harvest price around $4.00.
While thinking “acres are down, and if weather is bad then prices might go higher” might sound like an attractive reason to either buy corn speculatively or not hedge, there is a more likely result from a bullish Plantings report that could come: farmers just might plant more corn.
“Buying acres” is a real thing. A sharp rally in prices now would increase potential corn profitability and justify farmers expanding their corn acreage this spring. It’s not all that uncommon for actual corn acreage to increase vs. the Prospective Plantings report. Between 2006 and 2009, for example, actual corn acreage came in between 1.3 and 2.4 million acres more than the March 31 forecast. Since 2000, actual corn plantings have been more than 1 million acres above the March 31 forecast six times while never coming in more than 1 million acres below.
So if there’s a rally from a bullish report, there’s a good chance that farmers will react to higher prices with their combines, putting more corn in the ground than they otherwise would. As a hedger you have to be ready to take advantage of what might be a short-lived selling opportunity. The markets change all the time, and prices are set based on perceptions and expectations of what might happen. If there is a rally to $4.20, it’s important to remember that while the emotional response to the market might be to think “maybe it will keep going higher,” the more effective response is: “Do current prices represent an attractive opportunity for me to make profits?”
Keeping these sort of scenarios in mind and asking the questions “What might happen? How would that affect my farm operation? How will I react in those situations?” is what your Silveus Financial broker is there to help you with. Our goal is to keep emotion out of the hedging process, and to keep you focused on your long-term profitability.