Old Crop Vs New Crop Pricing Are Different Realities

The land is getting very dry for this time of year. I know a few guys who are working on planters this year and are hoping to test them out in a few days. At least it will get the neighbours talking. Agronomists always say plant early. My shtick is how early? Why don’t we plant in March in Ontario. If fact, one of my friends planted a bit several years ago in March to work out his new planter bugs. The quarter acre of corn he planted froze 3 times and ended up with only a 25% stand. I think I’ll plant in April.

It should be a good year, even if the price of UAN nitrogen might scare me. According to our own DTN’s Russ Quinn, UAN28 was 26% higher than last month. At this rate, well, you know, it will be a long year. Ok, I’m kidding, but there is no question, we’re into one of those years with high prices with the resultant farm input inflation. All I’ll say is, we’ve been here before, and it will settle out. However, there is that 2021 crop to plant and we’ll need every available acre in the US to satisfy this market. The pressure is certainly on.

As we move ahead, many market watchers will be attuned to the next big projections from USDA on March 31st. Keep in mind the US has already chimed in a bit and said 92 million acres of corn and 90 million acres of soybeans. That’s a whack more soybeans than the 83.1 planted last year. With US insurance rates at $11.87 for soybeans and $4.58 for corn, the soy/corn ratio is the highest since US crop insurance policies had been developed. At first glance you might think it means more soybeans than corn. However, we know the American farmer likes to grow corn and increasingly many farmers are set up more with on farm corn infrastructure versus soybeans. Needless to say, when the soybean corn ratio is like this, typically US acreage is almost split up evenly.

We’ll see on March 31st. In the last USDA WASDE report the USDA kicked the can down the road. There was little difference from the February report. Corn ending stocks remained at 1.502 billion bushels and soybean ending stocks came in at 120 million bushels. USDA increased the Brazilian soybean crop to 134 MMT. They pegged Argentina soybeans at 47.5 MMT. You can almost feel the wind blowing by the barn. None of this matters much now, as the South American harvest advancing. Recent damp conditions in Brazil have changed and harvest is advancing. Nearby futures are reflecting these changes.

Futures spreads hold the key to changes in the grain futures market. It was brought up to me last week by an Ontario farmer that he didn’t much care to hear about old crop fundamentals, as most farmers have already sold. Needless to say, that isn’t everybody and the market structure within the old crop market and new crop is quite different. Currently the December 2021 March 2022 corn futures spread has a carry of 8 cents. That’s still bullish, but its eroded and has become less good. Its kind of should make you nervous. Farmers will understand.

It makes farmers uneasy in Ontario when they sell old crop corn for $7 a bushel, but at the same time are offered $5.70 for new crop. Keep in mind, there is an inversion in old crop futures spreads and not so in new crop futures. In other words, the two market structures are different, and you have to market accordingly.

It is similar in soybeans. New crop November soybeans area 2 cents more expensive than January 2022 soybeans. That’s still bullish, but not quite like the old crop spread of 12 cents between the May/July 2021 soybeans futures spreads. As per usual, the new crop futures months are much lower reflecting the long-time frame from when the soybeans would be grown, harvested and delivered. In other words, there is a lot of risk ahead, and the market is expecting a good crop this year. However, if that gets thrown into weather purgatory, the spreads will start to flex even further.

Today, grains got whacked pretty good, and there are lots of gnashing of teeth. This morning I was part of US Farm Report, which was supposed to be produced from London Ontario last year at the Grain Farmers of Ontario March classic. However, the pandemic got in the way, so this year it’s being done on a virtual basis. The host asked me as well as the other panelists about “demand destruction”. You’ll remember hearing about that back in 2012 with $8 corn. The whole world liked growing $8 corn, but the problem was, it lost its lustre. Cheap always wins.

It surely is a concern this time as well, despite grain futures prices not being close to record levels, which we last saw in 2012. Of course, record American crops will smooth things out and that should tell you something. As farmers, 2020/21 might be different, but remember, we’ve seen it before. Old crop and new crop prices differences might drive you a bit crazy, but they do represent different market structures where you need to act accordingly. There might be a grand coming together moment comes September 2021, but there may not. Nobody knows, but risk management never gets old. Planting in April is part of that.