Posted on August, 22, 2024 at 08:51 pm
At the beginning of each marketing year, we spend a lot of time debating what the next marketing year will bring. As market analysts we use a few different strategies to help us provide a general assessment of where we think the markets can go. One of my favorites is the High-Low model that is put together after the first of the new calendar year.
This model separates the marketing year into two groups:
For corn: years that have a larger production than same year usage and years that have smaller production.
For soybeans: world supply numbers compared to world usage, which are then broken down into marketing years with or without a South American production problem.
The data is separated by the amount of variation from Jan. 1 for the average price between January and December. The reason I like this strategy is that if gives us simple “goal posts” for the year. We can consider what typically happens to price when the supply and demand of the product is similar.
It seems like a lot of work to collect all the data, put it in spreadsheets, find the mean of the price movement, and spit out boundaries for the year if all you want to do is know where the markets can go.
Even though that can be enough at times, I like to place short call options at the high end of the range established and short puts at the low end of the range. This helps me finance the floor, or put option, that I really want. This gives me flexibility and comfort knowing some of my unpriced bushels are protected.
I discuss forecasting because this is the time of year that we get inundated with yield projections from crop tours across the Corn Belt. Early results of yield estimates could be considered disappointing. The market has reacted to months of near-perfect weather, breaking to lows not seen since the fall of 2020 in both corn and soybeans.
Personally, I’m not jumping to conclusions that we have been mislead by the numeration of the multiple crop estimating systems in use today. Whether we are looking at satellite imagery or simply watching weather forecast and crop conditions ratings to spell out what could possibly be waiting for us, I feel there is enough evidence the crop will be substantial.
Additionally, our team also put the weekly condition ratings provided by the USDA to valuable use. We simply look at each marketing week, analyze the four to five weeks closest to the ratings for that week, and then assign a value to each of the four available conditions. The team then looks at these analog years to assess the deviation from trendline yield.
Using this approach, we saw the national corn and soybean yield trend to a new high for the year this week.
Corn was 1.4% above trendline at 184.1bushels per acre, a bushel above the USDA estimate.
Soybeans were pegged at 53.6, which is 4.1% above trend and .4 bushels above USDA.
For a closer look at the methodology and individual state calculations, click here: Corn Conditions Index vs Yield Report
Obviously, no perfect way exists to predict, guess, estimate or forecast grain markets or production. But this study offers data for careful consideration. Of course, having the information is one thing, being able to apply the appropriate strategies to what you perceive to be true becomes useful. I encourage you to find someone you trust that provides thoughtful insight that allows you to make an educated decision.
Source: Farm Progress
