The rally charges on
Corn and soybean prices continue to march higher each passing week. The fuel for the rally has come from both a supply and demand perspective. Crop usage has been strong over the past nine months, despite the challenges presented by COVID-19. Crop supplies, while large, were reduced by weather issues worldwide, mainly drought. And those weather challenges remain in place for both the US and South America. The combination implies tightening future ending stocks, which has led to the surge in prices. Without some break in these demand and supply patterns (and it is raining in central Iowa as I write this), the price rally, especially for new crop futures, has room to continue.
The largest change year over year for crop demand has been from the international sector. Corn and soybean exports started the marketing year in a strong position and have already reached record levels. The big question moving forward will be how many additional old crop sales will we make over the next couple of months, given where prices have already gone. Figure 1 shows corn export sales over the last three marketing years. Corn export sales topped the previous record in late March, with over five months left in the marketing year. While the pace of corn sales has slowed, it is still growing. Based on the sales from the 2018 and 2019 corn crops, the US could add another 150-300 million bushels by fall. Nearby corn futures have broken through the $7 barrier, searching for the price levels to dissipate additional export demand.
A somewhat similar tale is playing out for soybeans. Soybean export sales are at record levels and the market is still picking up a few additional sales. China has been the major driver in the marketplace, but the most recent weekly export sales report highlighted more sales into Japan, Malaysia, Indonesia, and Colombia. Based on the 2018 and 2019 export patterns, there could be an additional sales push of 100-200 million bushels by fall. So the nearby futures have soared past the $16 mark, as export sales have marched on. Advance sales for the 2021 crop have been piling up as well. Old crop supplies are getting scarce, and new crop prospects are worrisome.
While planting progress has been brisk, the concerns about the new crops have less to do about the speed of planting and more to do with the state of the soils in which we are planting. The drought of 2020 has extended into 2021 and has expanded in recent weeks to cover substantial sections of the Corn Belt. Most of the Great Plains states and Iowa have been significantly impacted, with extreme drought conditions covering most of North Dakota and moderate to severe drought running from southeast South Dakota to Ohio. Even the eastern Corn Belt is suffering from abnormally dry conditions. The dry conditions allowed farmers to accelerate planting, but the lack of soil moisture could prove to be a major problem for the new seedlings. Needed rain passed through the heart of the Corn Belt during Mother’s Day weekend, but more rain will be needed (and quickly) to support the emerging crops.
The combined force of continuing old crop sales and drought concerns have ignited a fire in the crop markets. As Figure 4 shows, the price rally started with the derecho last year, steamrolled through harvest, and maintained momentum throughout the winter and early spring. While the markets did pause for breathers briefly in January and March, the price trend has been positive for the past 10 months. And prices, like planting, have accelerated in April and May. The markets have built in substantial weather premiums for the new crops. December corn futures raced by the $6 mark and November soybean futures have topped $14. Crop demands have remained resilient in the midst of this price spike. But that could change quickly, especially given the most recent price surge.
Crop farmers are enjoying the price rise, but should also be preparing for the inevitable pullback. While these markets have the strong forces of the drought and international demand pushing them higher, weather patterns can change quickly, as can the buying patterns of our international customers. In the past, we’ve seen the markets rise this quickly before, only to come crashing down just as fast. The 2008 crop year was a classic example. Corn futures started the year around $4 per bushel, soared to nearly $8 around the 4th of July, only to collapse back to $4 in the middle of harvest. We have replayed the first part of that year. Hopefully, we will not fully complete the rerun. But we should prepare for potential price reductions around harvest.
Figure 5 displays the general patterns for price movements throughout the year, based on roughly 40 years of price data. The seasonal patterns show corn and soybean prices usually peak within the next three months. The average decline in prices from early summer to harvest is roughly 10%. Years like 2008 show that it can be much greater. On the other hand, having either the drought or strong international demand continue through the summer will support higher prices entering harvest time. The 2021 crop year has become a high risk, high potential return year, like several of the years from 2006 to 2013. The seasonal patterns indicate that sales made in the early summer window often turn out well in hindsight, capturing higher average prices over the years. This year, current sales opportunities are offering some of the best returns farmers have seen in nearly a decade and creating chances to turn high potential returns to high realized ones. While we would all like to capture the highest price in the year, most of us miss it while either holding out for more or fearing we’ll hit the sale button too quickly. But given the price levels today, I’m reminded of that old marketing saying, "It’s hard to lose money when you’re making a profit."
Chad E. Hart, extension economist, 515-294-9911, email@example.com