APRIL 17, 2011 DTN
DEMAND DESTRUCTION OR DELAY?
There are lot of things affecting the markets besides weather and the normal S/D fundamental
factors. It seems that the main talk in the trade the last week or so was of trying to predict how
high old crop corn prices have to get to curb demand, this after the spread between old crop
and new crop got to record levels. We have discussed that this is what would be needed to
curb demand or at least put it off until next fall when hopes are that more acres of corn will
mean more production and some relief of stock tightness; all this assuming a normal yield. In
the meantime pricing of December corn higher and soybeans stable to lower, has increased the
incentive to plant more corn at a time when weather again is perceived to not be cooperating,
at least for now. Whether the higher Dec corn is a result of liquidation of the bull spreads or
whether there is outright concern for new crop corn acres is not clear, however if both old and
new crop now start to increase, then one could conclude there is concern that efforts to curb
demand will result in merely rolling some of the exports to fall and to slow some feeding until
new crop harvest.
In all this bull spreading and questioning whether we will run out or not there has not been a
corresponding sense of urgency for the cash market for corn (flat cash price). Perhaps it is
because so much of last year’s corn has already moved into commercial hands. Producers have
rewarded this massive bull market with sales of old crop as prices rose higher and higher. Most
often, it takes getting the physical inventory out of the hands of the producer into the hands of
those who buy corn to make a profit through basis gain and merchandizing. The big basis
narrowing has yet to show up.
In the week or so ago the corn bull spread of buying CN and selling CZ reached a record
$1.32. Since then this spread has been getting trashed including last night as the spread
narrowed another 8 cents losing 30 cents or $1500 per trade for those who trade such things.
The CN/CZ spread last night hadn’t been this narrow since March 31, the USDA stocks report.
That was the USDA stocks report that showed increased usage/decreased stocks that later put
USDA on the hot seat when that implied reduction in carryover was not envisioned by the
USDA. A lot of attention is just now surfacing regarding similarities between 1996 and 2011. I
find it ironic also that such attention was brought to the media front after the bull spread
reached record wide. I would think if there are those out there in trading land that still
subscribe that we need to go back and keep the spread at $1.20 and higher to insure demand
delay or destruction, the opportunity to do so is here? The spread should not narrow much
more and should gain support by those who may have gotten their heads handed to them in
the past week or so. If not, then something is up demand wise that we know not of or that will
be surfacing soon? Some other items I find of interest are:
 Historically when the spread is this wide or even narrower, the incentive for the
importers to reduce or roll forward their needs to fall are evident. Historically the
incentive to do so has done just that at a spread far below 86 cents.
 The profit spread of planting corn vs soybeans has gone out to $200 per acre plus
depending on how you personally run the numbers, regardless of rent. In my personal
situation, I can now plant corn on intended soybean acres---hire it ALL done (plant thru
harvest)---pay for the risk management to lock in the profit--- and never get the bean
head out of the shed, something I have never done!
 The market may be trying to make us understand that a possible loss of a million acres
of corn in the N Plains can be overcome in the Midwest where yields are considerably
more, IF planting there opens up soon for a ten day planting window. We may actually
be surprised this afternoon as to the corn planting progress last week.
 If weather stays wet longer in the N Plains, it may suggest that the N Plains will move to
soybeans solving that acreage dilemma.
 China has all but stopped importing DDGs and is threatening anti-dumping import tax
of 50. This would increase DDG supplies in the US further competing with corn usage.
China is doing its darndest to curb food inflation with all kinds of measure to limit usage
now to the 2009 level. It also increase bank deposit requirement recently taking
essentially over $60 billion out of an overheated market. This action and the fear that
China’s action could create a world setback is now being talked about in the media—the
ability of China to act/react responsibly when it comes to controlling their economy with
an underlying political fear of the repercussions internally, has been a concern for Gulke
Group for some time.
 Further talk and evidence of China canceling or delaying shipment of soybeans weighs
on prices now that it is also evident that the S American crop is not tight in spite of all
the wet harvest rhetoric. Fourteen dollar soybeans does not hinder doing everything
possible to get every soybean out of the field regardless of the quality of the bean. Just
good economics. With China responsible for importing 60% of the world exportable
soybeans, they have producers by the pricing throat. They have been very transparent
that they would do all that is possible to thwart food inflation and thus far they are
acting similar to 2008 in doing so.
 Wheat set back to the March 30-31st price area last Friday where one would think there
would be some kind of support. Winter wheat ratings for KC continue to slip now well
below the 5-yr average while SRW ratings are above the 5 yr average. With KC acres
about 2 ½ times the acres of SRW, it will skew the total ratings more so and we should
expect another drop in overall ratings this afternoon. The hard red spring premium
wheat grown in the N Plains and Canada now seems to be in jeopardy of getting
planting on time. The function of the market is to incentivize through price increases to
see to it that profitability is not an excuse. If weather does not permit timely planting,
then price will ration this product as well. With premium wheat stocks now look to be
dropping further and the soft wheat crop looking good, price differences between
classes of wheat should respond accordingly.
Outside markets are having a larger influence from day-to-day but weather still looms as a
wild card as it always does and likely will be the final determinant to prices. With all the
bullish weather, markets need to get concern quickly it seem, or it would appear that
market perception believes we have begun the process of curbing and delaying demand to
the future similar to what we seem to do with reckoning with and deferring the US debt
situation. Sometimes it is easier to put off doing what is necessary today in hopes that
something miraculously solves the problem. In our case, regarding commodities we cannot
afford a major crop problem by a major producer, or a setback by a major player in the
global economy with energy, food and fiber costing more.
With grain/oilseed prices well above the crop revenue insurance protection, it presents
market risk the level of which most did not envision eight months ago. Times and
conditions what they are, volatility is extreme with handling price risk difficult at best.
We in agriculture are in an economic oasis in a world of despair. With the week starting
off with a positive reaction, it is important to keep that the turn in momentum keeps going.
With weather being a big driver today the timing is right. Failure to hold gains, would be
reason for concern that outside influences are having a opposite effect. Goldman Sachs
found it necessary to recommend taking profits, getting my attention to take action to
protect profits. I didn’t want to be found needing a crop problem to continue supporting
prices at these levels. It is dangerous to expect to continue to profit from someone else’s
production problems. Happy tax day. Jerry Gulke.