Monday Will Bring Market-Shaping Reports on US Corn Crop

06/27/2014 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

On Monday, MoneyShow's Jim Jubak wants you to watch for reaction from Deere, MacDonald's, and Potash.

Grain markets are getting set for two big crop reports from the US Department of Agriculture on Monday, June 30.

The two reports are expected to confirm projections that this year's corn crop will set a new record with this year's fall harvest. Add in estimates showing that China, the world's second largest corn grower, will also reap a record harvest and that Brazil and Ukraine are also looking at very good harvests this year and markets are likely to see continued downward pressure on corn pries. (The United States, Brazil, and Ukraine are the top three corn exporters in the world.)

Corn for December delivery is currently priced near $4.40 a bushel. Two years ago, extreme heat during the pollination period devastated the corn crop and prices rose to $8 a bushel.

The Monday reports will give the latest number of acres planted to specific crops and existing stocks of grain. Crop conditions in the Midwest are now close to ideal with more moisture in soils and very few areas (just 6% in Iowa, for example) reporting drought conditions. (In Iowa, 57% of the state was reporting drought conditions three months ago.) The USDA has rated almost 75% of the corn crop “good” or “excellent.” That's the best condition at this time of year since 1999.

In the short-term, the report on grain stockpiles has the most potential to move grain prices. If US stockpiles are high and growing—a good possibility since China has started to cancel import orders—then farmers and grain middleman who have kept corn in storage waiting for higher prices may decide to give up and sell. That would bump prices down even further. (The report would have a similar effect on hedge funds that are long corn. Right now, the market shows a net long position of 137,280 contracts. If Monday's reports make it seem much less likely that corn price will move higher, I'd expect net selling of these long contracts.)

What are the important effects if you aren't a commodity trader?

First, lower corn prices mean less commodity inflation for food companies ranging from meat producers to McDonald's (MCD) and Chipotle Mexican Grill (CMG).

Second, we're starting to get to the tipping point, where lower prices per bushel offset higher yields per acre. At $4.40 a bushel, above-average yields per acre produce above average farm incomes—that would be good news for companies such as Deere (DE) and Potash of Saskatchewan (POT) that sell equipment and fertilizer, respectively, to farmers. A corn price of $4.20 a bushel, combined with above-average yields per acre, however, would result in farm income slightly below the average from 1996 to 2005, University of Illinois Extension agricultural economist Gary Schnitkey told Agriculture.com . Anything below $4.20 would result in farm income falling significantly below average. To get to the 2013 level of farm income ($135,000 average per farm), Schnitkey calculates, would require $4.80 a bushel for corn and $11.50 a bushel for soybeans—plus above-average yields per acre.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.

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