Watching those Bullish Futures Spreads: A Reckoning is On the Way


I have a myriad of chores to do to get ready to plant crops in 2012.  My operation is not very complicated; it relies on my own energy and management direction.  I always like to wait until the 1st warm days of early spring to drag so my equipment out to sea where I left off last year.  A few years ago I even started writing a journal on suggestions for next year.  It was a great idea, every spring I read through it to see what needs to be done.

Now some of you might think me writing in a journal and depositing that journal in my pickup truck has more to do with me growing older.  I will admit there is something to that.  I also find the voice memo function on my cell phone a wonderful way to remember management issues.  However, so far I have resisted the attempt to call home just to put my management suggestions on my answering machine.

As spring gets closer I need to do some preventative maintenance on my corn planter.  My corn planter has been modified through the years and I think it is just about time to look at some of the shafts, sprockets and who knows what else. I plant into a stale seedbed and I have modified my planter to get that done.  When I start planting this year, I’ll be part of the great corn rush of 2012.  I am comparing it to the gold rush of 1849.

I say that because our American friends are poised to plant the biggest corn crop on record. For instance this week the USDA has announced some preliminary numbers on US corn production in 2012 and they are pegging corn acreage at 94 million acres and soybean acreage at 75 million acres.  With corn prices much healthier last year and our American friends planting 91.9 million acres, I’m having a bit of a hard time seeing why we want to plant more corn.  However, I am in the minority in the room when talking about that.  It seems the whole American Corn Belt including Ontario is poised to plant corn like no tomorrow.

Seed corn salespeople have told me that their seed corn sales are up 20% from last year.  In Ontario we had 1.875 million acres of corn in 2011.  So my rough figuring is telling me that we are set for about 2.3 million acres of corn in Ontario this year.  The Ontario numbers might be skewed somewhat because of the very poor wheat acreage that was planted last fall.  Still, that is a lot of corn for Ontario and end-users seem not to be willing to step up and bid for it.  New crop basis levels reflect that reality.

So there is a big difference between new crop and old crop corn fundamentals.  The market can see that a big crop is in the offing while at the same time old crop corn is disappearing.  There will be a reckoning and it is likely to come once planters start rolling.  Fickle weather will redefine volatility this spring.

Soybeans are a bit of a different animal.    Soybean stocks are not necessarily tight with the stocks to use ratio at 9.1%.  The big news in soybeans is a continuing deterioration of the South American crop.  What was a 75 MMT soybean crop in Brazil is now sub 70MMT.  The Argentinian crop, which had earlier been pegged at about 52 MMT, is now closer to 46MMT.  That has effectively buoyed soybean prices and has pushed the corn soybean ratio away from heavily favored corn.  Until the full effect of the drought in South America is known, the soybean picture will be increasingly murky.

The question is what happens next?  We know that seasonality generally has the corn and soybean market gaining as we move from February and March.  We also know that our noncommercial speculator friends love to get in on a good thing.  We also know that they have been mainly bystanders compared to the heyday last summer.  One of the biggest clues are futures spreads in both corn and soybeans which are weakening, signaling a much more bullish tone in those markets.  This tells us that commercial end-users are actually getting concerned about old crop supplies into summer.  So price spikes may be in the cards.

What’s it all mean?  It means there’s still wind in grain’s sails.  There are even thoughts that Brazil will have to import corn because their crop is so poor.  Still, as we look into March, we’re punching at phantoms.  There is still a lot we don’t know; there is a whole growing season ahead and a reckoning of the fundamentals if on tap.  This is 2012.  Yes, it is a new day.  The road ahead in the grains will surely not be for the feint hearted.

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