Adverse panorama facing corn producers

Our producers could be facing an adverse scenario in which production costs remain high and sales prices fall, making their profit margins small.

If something is clear, it is that the behavior of corn prices on the Chicago futures exchange last week specifically reflects the nervousness and volatility that has prevailed in the market for several years now, where we opened with strong losses. in the Monday session, remaining at levels of 261.21 dollars/ton for the July 2023 term, that is, with a loss of 1.39%, to finally close last Friday with a lean weekly advance of 0.33%, settling at 262.09 dollars/ ton.

The factors for the price of corn to fall were announcements of a climate with better rains for South America, particularly Argentina, which could help the crop to have a good recovery in yields, as some hedge funds (speculators), go out to liquidate positions that had increased as a result of the data published by the United States Department of Agriculture in its report on monthly supply and demand published on January 12, which would have added buying positions in 55,000 contracts equivalent to buying 6.9 million tons of grain in this period. Actually there was no more.

However, corn producers face an adverse outlook for this year, due to various factors:

1.- The prospect of an economic slowdown that could generate less demand for North American corn, causing an increase in its inventories and consequently a fall in prices.

In fact, and despite the fact that last week the USDA reported a solid report on corn exports in which 910,000 tons of grain were sold abroad, of which Mexico was the main buyer with 407,000, the reality is that the North American corn export sales are 45% below the previous year, and last year was the 11th. consecutive week in which ethanol production is below the previous year.

2.- High production costs, where although it is true that the price of fertilizers has had a sharp drop, after reaching record levels last year as a result of the Russian invasion of Ukraine and the high cost of ammonia production due to the rise in the price of natural gas, today, natural gas has already fallen more than 300% from the maximum levels reached; However, the War continues, and it does not have when to end, which could eventually impact the price of fertilizers again. Additionally, the rise in interest rates as a measure to control inflationary pressures has had an important impact on the financial cost that producers have to cover to receive financing. On Wednesday, February 1, the Fed will be announcing the increase in its reference rate with a 98.4% probability that it will be a quarter point, to place it in a range between 4.50 and 4.75 percent. To this should be added the cost of fuel, gasoline and diesel, which remain high.

3.- Exchange rate where we have seen the dollar weaken in anticipation of an economic slowdown in the United States, and consequently a strong peso, which, although it could give producers a break in terms of the cost of some inputs that are quoted in dollars, also means a lower sale price, since the price of grains, including those produced in Mexico, are quoted in dollars.

4.- Inverted market, which means in human language that the future price for July in Chicago (262.09 dollars/ton) is below that of March (268.89 dollars/ton), which means a clear interpretation of the market, which prices tend to fall.

With all of the above, our corn producers could be facing an adverse scenario in which production costs remain high and sales prices drop, making their profit margins very small or non-existent.

Once again, the recommendation for our producers: manage your risks.

aga@gamaa.com.mx