May 10th is the May supply and demand report. It is the first look at the new crop estimates and can be full of surprises. The Prospective Plantings Report said we should expect 95.9 million acres of corn, 55.9 million acres of wheat, and 73.9 million acres of soybeans, but that isn’t necessarily what USDA will print in the report. The strong early planting pace could lead USDA to increase the corn acreage estimate, the late March surge in Minneapolis wheat may have attracted Spring Wheat acres, and the spread between soybeans and corn may result in some switching, along with more double crop acres. There are obviously a number of variables at work, so it is hard to guess which ones USDA will pay attention to, so my guess is at they will make very few acreage changes until the June Planted Acreage report.
As for the yield, there is plenty of fear out there that USDA will add to their already inflated trend line estimate of 164 bu/ac due to the fast planting pace. There really isn’t a correlation between early planting pace and final yield, but USDA has a tendency to make these adjustments anyway. It really wouldn’t be a surprise to see them use 166. For wheat they will use 44.6 bu/ac and for the soybeans they will use 44.
The wheat tour suggested that the Kansas yield could be record high at 49.1 bu/ac, but I seriously doubt that will happen. There will be plenty of wheat in Kansas, but there is a large area in the western part of the state that will be a drag on the yield. The tours guess was a 400 million crop, but I think 370 is more realistic.
Trend: Short Term Up – Long Term Down
Sentiment: Basis is exploding
End users in Illinois are now paying as much as 60 over the July contract. When interior basis levels reach that level it is either because there is little corn to be found or the futures market is much, much, too low. With the basis so strong, the May contract has been forced to a record wide spread level versus the July contract in order to avoid forced deliveries. At Friday’s settlement the May was 42 cents over the July and traded wider than that during the day.
With all this spread activity and basis strength it is very disappointing that the July futures haven’t performed better. The market had a strong rebound from Friday’s lows and only lost 5 cents for the week, but with the cash market so strong, I expect to see more strength.
The old crop charts do look promising after Friday’s reversal higher and I still expect to see the July market move to $6.50 soon. The December contract, however, is a different story. The December fell to new multi-month lows this week and traders are very worried about what USDA may come up with for a production estimate. Some guesses are as high as 14.9 billion bushels, which would roughly equate to 97 million acres and a 168 yield. Until the report has passed, it will be difficult for the December contract to move higher.
Action: Bull spread the corn.
Trend: Short Term Down – Long Term Down
Sentiment: Too much wheat
The wheat was the downside leader this week. The July KW lost 32 cents for the week and is now less than 7 cents above the July corn. I won’t be surprised to see that spread at zero or less in the very near future.
It should be no surprise that the charts look very bearish. There really isn’t any support under this market until the $6.00 area and the only real hope for strength in the wheat is strength in the corn. The wheat is a feed grain at this point and newly harvested wheat should quickly replace corn in the feed mix, at least temporarily.
Action: The best course of action at this point is to sell call premium. Since there is a chance that the corn drags the wheat higher, selling futures at this level might not work, but the chances of an extended rally going into harvest are very slim.