Follow the Signals

In our last issue, elevator owner Mike was reassuring his son Jason that even in severe drought years such as 2012 there are ways to make money. Mike reminded Jason to “remember Granddad’s words: Don’t panic; learn to respect market signals.”

Crops are small and demand must be curtailed. Market signals in 2012 crop are already loud and clear: Corn almost doubled in price since the fall of 2011; soybeans went more than twice as high, almost to $18. Futures spreads in corn and soybeans range from minimal carries to steep inverses to encourage movement. Corn basis remains near record-high levels in many markets with harvest nearly 25% complete, but is record cheap along the lower Mississippi River. The 2012 crop demands a new playbook to understand these signals!

Demand must fall in all sectors. Ethanol production from corn is forecast to decline by 10%, possibly more, and feed consumption of corn and DDGs will decline as well. Soybean crush will drop by a record 12% to a 17-year low 1.5 billion bushels, which then cuts soymeal production by 5.5 million tons. The United States just doesn’t have the soybeans to crush — unless they’re imported from South America next summer.

The first half of the soybean crop year will show heavy disappearance, followed by a steep decline. Soymeal users already find it nearly impossible to purchase meal past winter from some sellers, and only at extraordinarily high basis from others.

Soybean exports will fall 305M bushels to a seven-year low 1.1B bushels, yet export sales were already a record high 762M bushels by early September — mostly for shipment by late winter. This could mean near record-high weekly soybean exports until South America’s harvest begins about halfway through the U.S. crop year. By then U.S. exportable inventories could be nearly depleted anyway.

Regional dislocations will be pronounced at times due to the varied impact of the drought. The Midsouth and Delta states are already struggling with space; corn basis plummeted to -100 Dec in September on the combination of low water on the Mississippi, slow corn exports, and the usual reluctance of exporters to fill vessels using only new-crop southern corn. At the same time, northern ethanol plants were bidding record premiums and finding little for sale.

Iowa’s entire soybean production is the lowest in a decade and less than Iowa typically crushes each year. Yet Arkansas, Louisiana and Mississippi will each harvest record soybean production, and Arkansas is wrapping up a record corn harvest, with Louisiana and Mississippi at their second largest corn crops ever. Iowa’s corn crop is 400M bushels short of typical disappearance, but Minnesota’s corn crop is slightly above usage of recent years. These anomalies mean sellers need to watch markets outside their usual territory to find the best deals.

Jason’s granddad was right: Listen to market signals. The 2012 U.S. corn crop is 1.1B bushels below last year’s disappearance on corn and 500M bushels below on soybeans. But even so, the market doesn’t need all of the bushels in the first month or two of the crop year. When local supplies are sufficient and farm/elevator selling fills the pipeline, carries will build through nearby basis weakening or deferred basis rising. The huge Delta corn crop pushed basis in September to -100 Dec along the river; yet bids for December remained around -0- Dec for a basis return of $1/bushel for three months for folks who could buy and hold the corn. Some of the cheap corn moved north to elevators that wouldn’t otherwise fill this fall. Follow the signals!

Conversely, when nearby local supply or movement is not sufficient, basis will rise to draw out hedged inventory and then DP inventory, from local elevators. Deferred basis will tend to remain weaker in these cases, to discourage holding.