Posted by: usset001 | June 29, 2011

The 11th Commandment of Grain Marketing

Tomorrow, USDA will release the June acreage report and a quarterly stocks report. This will put the wraps on a volatile June. Now is a good time to look ahead to July, and to reconsider the 11th Commandment of Grain Marketing, “Thou shall not hold unpriced corn or soybeans in storage after July 1.” (June 1 for spring wheat)

What could lead me to make such a strong statement? Summer is the time when two powerful forces come into play that can negatively impact grain prices. The first force is a strong seasonal tendency for futures prices to trend lower from spring to harvest (and it is worth noting that, despite a volatile June, new crop corn futures are currently trading close to the early May levels, but new crop soybean futures are 40 cents lower). The other powerful force is basis, which tends to decline from summer to harvest.

We can agree that this is not your typical year, particularly in the case of corn, where record low ending stocks are projected for year-end. The corn basis is wild and strong, especially in the Eastern Corn Belt, and it may get wilder and stronger in the weeks ahead. Eventually, however, old crop values will align with new crop prospects, and 100 over the nearby futures contract will become 40 cents under the December contract. While there is nothing magical about July 1 as the starting date, historically it has proved to be a pretty fair guesstimate of when the alignment begins.

Speaking of tight ending stocks, the only other year remotely comparable to this year is the 1995/96 crop year. The attached chart shows what happened to cash prices in southwestern Minnesota in 1996. Consider yourself forewarned.

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