First look at WASDE WIZARD ® 2019-20 corn/soybean price outlook after Friday “stock shock” and three possible weather scenarios
There are really only 2 possible explanations for the 138 million bu. surprise in Friday’s Sept. 1 corn stocks report. Either the 2017 crop was bigger than USDA’s final estimate last January or feed usage has been smaller than USDA’s WASDE estimates thus far. Since they don’t go back to change prior year crop size, the October WASDE in all likelihood will trim estimated 2017-18 feed use to account for the jump in beginning stocks for 2018/19.
Price-wise, the stock shock alone will likely trim USDA’s range for average price a nickel at both ends when USDA releases the next WASDE on Oct. 11, according to Wizard model algorithms rooted in past WASDE history. That could vary, of course, depending on other “adjustments” USDA makes regarding yields or usage. (We’ll start seeing pre-report trade estimates for those by the end of next week.)
Looking ahead to 2019-20, Informa Economics created a buzz last week by issuing their first 2019 acreage forecasts for major crops. The highly-regarded Memphis firm sees corn acreage rising by 3.1 million acres, wheat acreage rising by 3 million and cotton acreage rising by 520,000 acres. However, they see soybean acreage falling by a whopping 7.3 million for a combined net decline among these “big 4” crops of 545,000 acres. (We think most of those acres will likely go into sorghum and other crops).
Just returning to “average” yields neutralizes Informa’s higher acreage forecast according to the Wizard model algorithms in Fig. 1 below. Ending stocks in “days’ supply” doesn’t budge and the model churns out a range for average farm price identical to what it predicts USDA will show for 2018-19 average farm price.
Two other important “takeaways” for corn under alternative weather scenarios:
• Due to big starting stocks, adverse weather wouldn’t help much. Notice in column 2 that even if adverse weather and sub-trend yield pulls the crop down by 6% from the trend-yield scenario, the range in avg. farm price rises only 12 cents at each end.
• Another bumper crop scenario shaves 18 cents off season average farm prices.
That may not sound like much, but when prices are already below cost-of-production, losing another 18 cents on a 183-bu. crop is $33 per acre deeper into the red and totally unsustainable for farmers already burning up equity in their bankers’ eyes.
FIG 2 shows Wizard farm price forecasts converted to “futures equivalents” by adjusting for current national average spot basis. For perspective, following Friday’s bearish stocks report, December ’19 corn futures closed at $3.91, still just 11 cents below the “threshold” for what might prove the top 1/3 of next year’s price range with trendline yields, but 8 cents into that top-third and the bumper crop scenario in the last column.
KEY TAKEWAY ON CORN OUTLOOK: Best counsel for sellers is to assume a “trendline” yield and refrain from any 2019 pricing at all until Dec. ‘19 futures at least clear the $4.02 mark and even then only lightly. $4.14 is your threshold for getting more aggressive on pricing 2019 corn on a scale-up pricing plan. Best counsel for buyers? Bear the price risk above $3.69 in Dec. ’19 futures for 2019-20 needs. Begin light, scale-down coverage on weakness below that level.
FIG. 3 SWITCHES TO THE 2019/20 SOYBEAN OUTLOOK. Just as in corn, the September WASDE for 2018 has been adjusted for new, larger beginning stocks for beans. The Wizard model predicts that alone will trim USDA’s average farm price range for 2018-19 by a dime. Next we’ve utilized Informa’s first estimates for 2019 soybean acreage and trendline yield and then used Wizard algorithms to adjust yield and acreage harvested under adverse or excellent weather scenarios as well.
FIG. 4 shows Wizard farm price ranges for beans in “no man’s land” for pricing whether buyer or seller. As in corn, the model converts the farm price forecasts to “futures equivalents” by adjusting for current national average spot basis. For perspective, November ’19 soybean futures closed Friday at $9.12. As shown below, that’s well below the threshold of what might prove the upper third of the range for 2019 soybean futures and thus a good place to start forward pricing if a producer. However, that price is also still well above the threshold of what might prove the lower third of the range for season average price if you’re a buyer. Only under the “adverse” weather scenario are 2019 futures close to the $9.06 threshold to begin covering 2019/20 needs.
KEY TAKEAWAY: Whenever futures are in “no man’s land” price-wise, both buyer and seller should sit tight and bear market risk. Prudent risk management says it’s wiser to do that than to give up the “opportunity cost” of selling in the top third or buying in the bottom third by pricing in no man’s land. Wait for new data or the vagaries of Mother Nature here and abroad to shift the price outlook one way or the other.
Dan Manternach, President
Perfect Fit Presentations, LLC
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