This week we tackle the dynamics of the corn and sorghum markets. What are the trends to look for? What are the risks for price and yield?
2/16, 3/2* 2022 – Profitability Spreadsheet Conferences, Lubbock, TX., *Plainview, TX.
2/23, 3/9/2022 – North Region Production Education Online
2/28/2022 – Spring Ag Conference, Armstrong County
3/1-2/2022 – High Plains Dairy Conference
3/2/2022 – Spring Ag Seminar, Clay County
3/15/2022 – ARC/PLC Signup Deadline
What We’re Reading
Producers with crop insurance to receive premium benefit for cover crops – Morning Ag Clips
Court returns gray wolf to endangered species list – Feedstuffs
Frustration growing over EPA’s pesticide actions – Feedstuffs
Net Zero Plans of the Biggest Global Companies do Not Add Up to Net Zero – Bloomberg
High Plains Dairy Conference set March 1-2 in Amarillo – AgriLife Today
Market concerns equal good commodity crop prices – AgriLife Today
Corn and Sorghum Market Update
Wheat prices continue to show significant volatility and remain higher than in recent years (Graph 1). Locally, the weather and low-level ending stocks are driving the wheat market today. Worldwide, higher consumption levels, overall higher commodity prices, and geopolitical turbulences might also affect the market. Producers are still facing higher production costs that have reduced their margins and increased their breakeven prices and risk to unprecedented levels. Further, the probability of triggering PLC or ARC payments is very low this year. A good risk management plan is essential!
La Niña Weather Event
As Pancho mentioned last week the La Nina weather event is playing a significant role in the market this year, particularly for planting decisions on the Texas High Plains. The U.S. Drought Monitor shows 88 percent of Texas in some stage of drought, with the bulk of the High Plains and Rolling Plains in D3. Short subsoil moisture will be a factor at planting, and low yields locally for grains has the potential to impact basis.
Oceanic Nino Index (ONI)
On the demand side, corn use is expected to remain relatively flat to pressured slightly downward. Corn for feed, the largest use category, is forecast slightly lower and corn for fuel is forecast flat to slightly up.
U.S. Corn Use, 2-9-2022. USDA – WASDE
The U.S. Energy Information Administration’s report of ethanol production, which is strongly correlated to fuel use, shows that ethanol production is up year over year. Production is right in line with pre-pandemic production levels. This is a bullish indicator for price in the short term, however, long term the trend toward more fuel efficient vehicles and electronic cars suggest that fuel use will trend downward.
U.S. Ethanol Production. U.S. Energy Information Administration
Feed and residual use per grain consuming animal unit is forecast down year over year, a bearish indicator for price. The trend in grain consumed per animal unit has become relatively flat over time, however with the number of grain consuming animal units in the U.S. is declining. Beef cattle account for a little more than a third of the grain consuming animal units in the U.S. and we have moved into the cyclical decline of the beef cattle herd. USDA’s cattle inventory report estimated a 2% decline in cattle numbers over 2021. With beef cattle’s outsized share of animal units, the cyclical move toward fewer animals will remain a bearish signal for the next few years.
Feed and Residual Use/GCAU
Over the last year exports were a bright spot. U.S. export demand for corn was up approximately 55% over the previous market year. Short crops in South America created a dearth of corn worldwide, providing support for U.S. corn export needs. However, in the upcoming year the La Nina that is creating short moisture for the High Pains is expected to improve conditions for South American production.
Though in the short term export competition appears to be a pressure point for prices, in the long term continued population growth will serve to increase export demand. Not only is population growing worldwide, as more people move into middle class incomes they demand more protein, which increases the demand for grain, which the U.S. has a relative competitive advantage in producing.
Top 4 Export Competitors
Accounting for all demand and supply, ending stocks are forecast up 395 million bushels, and as a result days of use on hand is expected to grow to 47 days, above the 40 days usually used as a measure of low corn ending stocks that induce out of normal prices. That being said, the forecast of new crop prices is set at $4.80/bu. Accounting for a $0.50 cent basis on the High Plains, that would suggest a $5.30/bu. price.
Corn Balance Sheet
CMEs Dec corn contract is currently in the neighborhood of $5.90/bu. This suggests a substantial price risk between now and harvest, i.e. a current overvaluation for corn according to USDA. This makes risk management in the upcoming year vital, and likely important to take advantage of earlier rather than later. Seasonal moves alone suggest downward pressure is present in the market.
CME Corn Dec Contract. Source: CME Group.
Corn and sorghum move in tandem, price-wise, with corn directing the bulk of price movements. Typically, we see a premium for corn in relation to sorghum. However, over the past year sorghum has traded at a premium relative to corn. That trend has extended through the present, and in the input market we are currently facing, sorghum as a low input alternative remains a profitable planting choice.
U.S. Average Price Received by Farmers, Corn & Sorghum, 1989-2021
Much of the support for sorghum price is the result of Chinese buying. The projected marketing year total for sorghum exports is 320 million bushels. Cumulative net sales have far outpaced the rate necessary to reach that target, with 75% of sales to Chinese buyers. These large export numbers are supporting prices, however the risk lies in Chinese decision making. If China were to exit the market we could see a significant downside move on the part of sorghum.
U.S. Grain Sorghum Export Sales Commitments, 21/22
Expected ARC-PLC Payments.
March 15 is the deadline to signup for ARC or PLC. The choice of ‘higher payout’ is difficult this year, largely because it seems like neither program is likely to pay.
The Reference Price for PLC for corn is $3.70/bu. and the Reference Price for sorghum is $3.95/bu. With season average farm price forecasts for corn at $4.80/bu. and for sorghum at $5.45/bu., it is unlikely that a PLC payment will trigger.
Benchmark revenues are a function of yield as well as price. The five year Olympic average price for corn is set at $3.70/bu. and the five year Olympic average price for sorghum is set at $3.40/bu. Without regional catastrophic yield loss, it is unlikely that revenue will fall below the threshold necessary to trigger an ARC payment.
For more help on identifying your optimal program choice, visit AFPC’s ARC/PLC decision tool.
What can we expect for next season?
Prices are relatively high compared to previous years, which is always cause for thanks. However, that makes the choice to market and manage risk all the more important this year. Seasonality alone would suggest that prices fall after planting. The risks present to price (and yield) are also likely further into the year, not a presence in the market right now. This is a year to optimize insurance and market crops early.