Kub's Den

And now it's fall. This hardly feels accurate, considering how mild and pleasant the September weather has been (for those of us who haven't been overwhelmed by flooding). Yet, the calendar assures me it's true as Monday was the first official day of fall. That means it's time to think about pumpkin spice flavors, Halloween decorations and row-crop harvest.

It's already starting in some places. Texas and Oklahoma are in the process of harvesting their sorghum, and 7% of U.S. corn was already harvested as of Sunday night, with significant progress made in states like North Carolina (81%) and Kentucky (44%). Even a few Corn Belt states, like Illinois (2%), Indiana (3%), and Nebraska (3%) have made a symbolic start on corn harvest. Of course, none of these numbers account for the unusually large proportion of the 2019 crop that have already been chopped for silage -- acres that won't ultimately get counted as "corn for grain/harvested acreage" in the USDA's supply and demand tables.

At this time of year, grain farmers are likely too busy harvesting 2019's real, actual grain to devote much thought to marketing 2020's theoretical future grain. Nevertheless, I've been watching with a certain mix of admiration and dread how the "new" new-crop futures contract (i.e. the next new crop) for December 2020 corn has managed to float above the $4.00 price level through almost all of this summer. In fact, the trading range for that next new-crop contract has been surprisingly tight between June 21 and Sept. 23, with its highest daily close at $4.22 3/4 on July 12 and its lowest daily close at $3.96 3/4 on Sept. 6.

This is a pretty typical price level for corn trading this far in the future, before the market pays it much attention and before much guessing has started about the supply and demand conditions in that upcoming marketing year. I looked through the past six years of data to compare the "summer before" trading ranges for previous new-crop corn futures contracts. For instance, prices for the December 2019 contract between June 21 and Sept. 22, 2018, (last summer) displayed a similarly tight range about 10 cents lower than this summer's opportunities: between $3.84 and $4.12. Prices for the December 2018 contract between June 20 and Sept. 22, 2017, were also quite comparable, with daily closes ranging between $3.87 and $4.28.

Open interest and daily trading volume in the December 2020 futures contract right now -- 15 months out from its expiration date -- is low, but not so low that it would be hard to find a bid or to make it especially dangerous to place a market order. (Open interest in December 2020 corn is about 110,000 contracts, 12% of the 880,000 contracts currently open in the December 2019 contract.)

In most of those recent past years, there was little motivation to sell grain 15 months out on the calendar. Usually in the fall of the year, we're focused on the immediate abundance of grain, and we think: "You never know, there may be a big rally between now and next year's December."

I believe that scenario may have flipped on us -- there's serious potential for a harvest rally if disappointing yield reports come in, especially in certain regions of the Corn Belt. The market may start thinking more about scarcity than abundance. And, with regard to next marketing year, we ought to ponder: "You know, if we ever really do produce a nationwide 177-bushel-per-acre crop on 90-plus million acres, that would be profoundly bearish to those December 2020 prices."

Once this harvest is over and the futures market starts to focus on South America's winter and North America's upcoming spring, I worry that the $4.00 level currently available for 2020 futures hedging could easily slip away. In the meantime, however, the entire corn futures market does tend to move together. If the December 2019 contract were to stage a 30- or 40-cent rally during harvest, then it would be typical to see the calendar spreads mostly maintained, and the December 2020 contract might follow along with a simultaneous 20-cent rally. Be prepared.

They say hindsight is 20/20 and heaven only knows what influences, challenges and adventures will happen between now and the actual 2020 corn harvest. It's the fear of the unknown that generally discourages farmers from pre-harvest hedging at all, to say nothing of pre-harvest hedging two harvests in advance. Nevertheless, I believe this is a unique time, with a unique opportunity to think about profitable prices a little farther out than usual.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

There is a substantial risk of loss when trading commodity futures and options, and it's not suitable for all investors. The opinions expressed here are for educational purposes only and are not to be taken as a recommendation to buy or sell commodity futures or options.

(BE/CZ )

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