BROOKINGS, S.D. -- Last fall's record-large 13.925-billion-bushel corn crop drove prices down and helped restore profitability and optimism to the cattle feeding sector at the beginning of the year.
"From the pre-harvest high of $5.17 per bushel, March 2014 corn futures dropped to $4.08 per bushel on Jan. 10. Not only did that result in feeder cattle prices at record-high levels, but cattle feeding margins also moved back into the black in the first quarter of 2014 after nearly three years of deep losses," says Darrell Mark, adjunct professor of economics at South Dakota State University.
"In many respects, that drop in corn prices in the fourth quarter of 2013 renewed cattle feeders' hope of positive feeding margins for the year to come," he says.
But he adds that contrary to the hopes of cattle feeders and many grain market analysts' expectations, the corn market has staged a fairly impressive rally, rising about 80 cents per bushel since early January.
Driving the market
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A number of factors contributed to this spring's somewhat unexpected corn price increase, Mark says. He explains that the situation in Ukraine created uncertainty about grain exports from the Black Sea region, causing world buyers to look to the U.S. to fill orders.
The rally in the soybean market, caused by strong exports, also buoyed the corn market. Good ethanol processing margins and increasing livestock numbers provided additional domestic demand support.
"Now, as focus begins to shift to the 2014 corn crop, drought conditions are expanding in the western Corn Belt, and much of the country remains colder than normal, which might delay corn planting," he says. "Further, corn growers indicated that they intend to reduce corn planted acreage by almost 4 percent from last year, according to (U.S. Department of Agriculture's) Prospective Plantings report. If realized, that would put 2014 planted acreage at 91.691 million acres -- the smallest corn acreage since 2010."
These bullish factors have driven corn prices higher at a time when many cattle feeders and other corn buyers didn't have procurement hedges in place. Now, after an 80 cent per bushel rally, he says an appropriate question to consider is; "Should some type of hedge or risk management strategy be used to protect against further corn price increases?"
"While the bullish factors are valid in that they raise expectations for higher prices, it is also important to consider the bearish argument," he says.
According to USDA, March 1 corn stocks totaled 7.01 billion bushels, which is 30 percent higher than a year ago, indicating there are substantially more available supplies this spring. But the majority of the increase in corn stocks is being held by growers in on-farm storage, which was 45 percent higher than a year ago.
On the new crop side, it is still quite possible to have a large, maybe record, number of bushels produced, despite the decline in planted acres in 2014.
"While production risks abound and will be much of the trade's focus in the upcoming months, at this point there is little to suggest that a national trendline yield of around 165 bushels per acre isn't still possible," Mark says. "That means a 13.9 billion bushel crop could still be harvested this year, which is near 2013 production."
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Procurement tips
While locking in the next two to three months of corn feed needs with cash forward contracts is a reasonable strategy, buyers do not need to be in a hurry to lock in flat prices at this point. Mark says because so much corn is being held in on-farm storage, a lot of corn needs to be sold and shipped yet as farmers clean out storage in preparation for the 2014 crop.
"As that cash movement occurs, basis is likely to weaken considerably," he says. "Therefore, a futures or options strategy that protects against higher price levels, while leaving the long hedger open to the weaker basis may be preferable."
He adds that, in contrast to recent years, physical procurement of corn in the next few months shouldn't be much of a concern. "Unless the possibility of significant damage to new-crop corn production becomes a reality this summer, corn prices could ultimately decrease by mid-summer, following additional strength early in the growing season," he says.
Should that occur, Mark says a maximum price strategy using call options would provide the protection against higher prices and the flexibility to realize lower prices.
"Whether or not an individual cattle feeder needs corn price protection depends upon their feeding budgets, physical supply of corn and other factors," Mark says. "But, it does appear that in the next couple of months, the corn market will be more risky than what we expected it to be last winter."
