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Trading the USDA Crop Report

Master Instructor Blog

A recent Wall Street Journal article profiled a farmer in Louisiana who is switching to corn and soybeans after three generations of growing rice on the family farm. His reasoning was that corn and bean prices are up and rice prices are down so “it just seems so much easier to do the corn and beans.”¹

His timing may not be the best. According to the annual crop report issued by the U.S. Department of Agriculture at the end of March, corn stockpiles are higher than expected and the number of acres planted in corn is the highest since 1936. When the market heard this news, corn futures plunged 5% and they’re down further as of this writing.² It’s the fundamental principle of supply and demand taught at Online Trading Academy: when demand stays the same and supply increases unexpectedly, prices are almost certain to fall.

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On the other hand, taking a longer view, this may be a great buying opportunity in an overall bullish market. While corn stockpiles were up, they’re still down by historic standards: they’re now at the lowest level in 9 years, vs. the lowest level in 15 years as analysts expected. And the USDA number on corn planting was 97.3 million acres, just above estimates of 97.252 million acres. It’s more than the analysts expected, but not very much more.

Meanwhile, what about rice? The USDA says the number of acres in production will decline by 3% this spring, to the lowest level since 1987. Rice production has declined by 28% just since 2010. The United States has traditionally been the largest exporter of rice in the western hemisphere, but already some rice processors and cereal makers are starting to import rice because of declining domestic production. And if the U.S. becomes a net importer instead of exporter of rice, then it becomes vulnerable to the uncertainties of other nations’ economies as well as unsettled world climates which might produce shortages of the world’s most popular grain.

The Wall Street Journal, at the same time it found plenty of farmers who were quitting rice, found a number of traders who think rice prices are headed up, including one who predicted a 17% increase by summer. “We’re really getting to a point where supplies are just too tight to bear,” according to one financial advisor.

If you want to make a bearish or bullish bet on corn, that’s as easy as trading CORN, an EFT that attempts to track daily price changes in the corn futures market. Rice is a little more difficult because there’s no RICE EFT; you’ll have to trade the futures directly. It might also be a good idea to be sure you have an ample supply of Uncle Ben’s in case prices go up in the grocery store.

 

SOURCES:

¹“Farmers Lose Their Taste for Rice”, Wall Street Journal, Commodities Section, 4/1/13

²http://www.reuters.com/article/2013/03/28/markets-grains-idUSL3N0CK89P20130328 “GRAINS-Corn down most in 10 months as stockpile tops estimates”, Reuters newswire, 3/28/13

Disclaimer
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