Can corn market think for itself? Fundamentals say prices should be higher By Bryce Knorr, senior grain market analyst When supply and demand talk, markets are supposed to listen. But sometimes it can take forever for the message to get through. Like the telephone game kids liked to play before they all got cell phones, a lot can get lost in translation, too. This can be frustrating for anyone who depends on the price set by the market and wonders why it s not doing what it s supposed to. That s the state of things for corn growers headed into the harvest of 2018. Barring a bearish production estimate from USDA Sept. 12, supplies should continue to ratchet lower in the year ahead, after dropping more than 12% over the past 12 months. When all is said and done, carryout could be down another 18% by the end of the 2018 marketing year. And, while prices may seem lousy, they ve actually improved over the past two years as well. The Aug. 31, 2016 low on the nearby chart came in at $3.01, the lowest since 2009. A year ago the end of August low was $3.285. This year the August low held around a dime above the July low of $3.3225. The 2018 high took out the 2017 high, so that s progress of a sort. But patience, lots of it, was needed the past two years. Eventually, however, the market paid off. In 2016 nearby futures rallied 93.5 cents off August lows on the nearby chart. The move this past year topped out with an increase of 84 cents. In each of the past two years, supplies turned out tighter than USDA forecast in August. Fundamentals ultimately prevailed. To be sure, the top of the market wasn t great. But it was much better than first impressions. This year the path picture is clouded by turmoil in other markets. China s tariffs cast a shadow over corn, even though it s not really impacted directly much. And worries over crumbling emerging markets may keep speculators and investors from wanting to own corn and other commodities unless fundamentals are so strong being long seems mandatory. For corn, the fundamentals are improving, but not good enough to rip the market free on its own. Lower global production and rising demand should support exports in the coming year. But U.S. growers have never sold 2.5 billion bushels of corn to overseas customers in a single marketing year and seem unlikely to over the next 12 months. Feed and ethanol usage should show modest improvement, but also aren t growing rapidly. This makes the size of the crop crucial to lowering projections of carryout further. The average guess from analysts ahead of the Sept. 12 report is for yields of 177.6 bushels per acre, compared to the 178.4 record USDA found in August. I m a little lower at 176.5, based on readings from weather models, crop ratings and the Vegetation Health Index, which range from 175.7 to 177.4 bpa. Even if supply and demand don t change much, an argument can be made that prices should be higher. The midpoint of USDA s price range from August is $3.60, 20 cents higher than the 2017 crop is expected to earn. But traditional pricing modest point to an average cash price of $3.76 or higher. And when compared to world supply and demand, the math says prices should be higher still. But that s theory. Farmers must deal with the reality of the market, whatever it is. Right now that means weak basis, though bids outside the export pipeline are in some cases better than a year ago. Farmers with on-farm storage and hedges using futures or HTAs can take advantage of carry running close to levels from a year ago and roll to deferred contracts while waiting for basis to strengthen.
Otherwise, selling $3.91 July HTAs or futures won t earn most a profit. The market offered $4.45 July this summer, but rebound rallies in the month or two after harvest usually don t come close to matching this level a 10 to 20-cent rally typically is it. Longer-term, the market could get back there. But holding that long means risking reversion to the bearish pattern seen most years, when futures grind lower into spring. Start running the numbers now to see how much you can weather. Help ultimately could come from December 2019 futures. Our Farm Futures survey found growers ready to increase corn plantings almost 2% next spring to 90.8 million. But an incentive may be needed to make that happen, over and above lousy soybean prices.
Corn Supply & Demand USDA Bryce's Forecast 2018 Average 2018 Big Crop 2019 Area 2017 2018 2017 Planted 90,167 89,128 90,703 89,128 89,128 90,835 Harvested 82,703 81,770 82,703 81,897 81,897 83,459 Yield 176.6 178.4 176.6 176.5 178.4 174.1 Beginning stocks 2,293 2,027 2,293 2,078 2,078 1,706 Production 14,604 14,586 14,605 14,456 14,608 14,534 Imports 40 50 37 37 37 57 Supply, total 16,937 16,664 16,935 16,570 16,723 16,297 Feed and residual 5,450 5,525 5,384 5,440 5,499 5,485 Food, seed and ind. 7,061 7,105 7,073 7,144 7,144 7,215 Domestic, total 12,511 12,630 12,457 12,583 12,642 12,700 Exports 2,400 2,350 2,400 2,320 2,375 2,186 Use, total 14,911 14,980 14,857 14,904 15,017 14,886 Ending stocks 2,027 1,684 2,078 1,666 1,706 1,412 Ave. cash price $3.40 $3.60 $3.58 $3.76 $3.72 $4.35 Stocks to use 13.6% 11.2% 14.0% 11.2% 11.4% 9.5% Ave. nearby futures $3.64 $3.73 $4.06 $4.02 $4.53 Top Third $3.77 $4.27 $4.22 $4.57 of Price Range to $4.11 to $4.64 to $4.58 to $4.96
190 Projected U.S. Corn Yields 185 180 175 170 165 160 5/28 6/11 6/25 7/9 7/23 8/6 8/20 9/3 9/17 10/1 10/15 10/29 11/12 National Model Last year State Model
1000s metric tons 1500000 1400000 1300000 1200000 1100000 1000000 900000 800000 700000 World coarse grain production vs demand Production Total Domestic Consumption 35% 30% 25% 20% 15% 10% 5% 0% World coarse grain stocks to use without china
U.S. Corn Stocks/Use 70 60 50 40 stocks/use 30 20 10 0 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 Corn Demand 16000 14000 12000 Industrial Feed Exports million bushels 10000 8000 6000 4000 2000 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
$2.50 Average Corn Belt Ethanol Plant Margins $2.00 $1.50 $1.00 $0.50 $0.00 $0.50 $1.00 2.95 ETHANOL PRODUCTION GALLONS FROM EACH BUSHEL USED 2.90 2.85 2.80 2.75 2.70 2.65 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18
thousand barrels Monthly U.S. ethanol production and stocks 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000-2012 2013 2014 2015 2016 2017 2018 Source: USEIA, Farm Futures Production Stocks Stocks 25000 WEEKLY ETHANOL PRODUCTION AND STOCKS Production 1150 thousand barrels 24000 23000 22000 21000 20000 19000 18000 17000 9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 5/1/18 7/1/18 1100 1050 1000 950 900 850 800 thousand barrels/day Ending stocks Daily Production
Weekly Export Inspections in million bushels For week of 08/30/18 Average Trade Guess This Week Last Year Rate Needed to Meet USDA Forecast Year-to- Year-to- Date Total Date Total This Year Last Year This Week Last Week WHEAT 14.4 18.0 12-20 10.7 20.8 192 285 CORN 52.5 49.8 35-51 32.6 126.7 2,273 2,242 SOYBEANS 28.3 33.4 25-36 26.2 41.9 2,068 2,126 Source: USDA, Reuters Weekly Export Sales (million bushels) AS OF WEEK ENDING 8/23/18 Wheat Corn Soybeans Old Crop Sales 15.2 6.9 4.1 New Crop Sales 0.0 20.7 21.7 Total Sales 15.2 27.6 25.8 Prior Week 17.0 51.7 23.0 Trade Estimates 12.9 39.4 32.2 Rate to reach USDA Forecast (Old Crop) 17.3 16.5 (53.0) Export Shipments 15.0 52.9 35.8 Rate to reach USDA Forecast 21.3 195.2 71.2 Commitments % of USDA estimate (Old Crop) 47% 99% 100% 5-year average for this week 44% 101% 112% Shipments % of USDA est. 26% 92% 94% 5-year average for this week 22% 93% 107% Source: USDA, Reuters, Farm Futures
Total Corn Sales & Shipments (Year to Date) 3000 2500 2000 1500 1000 500 0 106% 104% 102% 100% 98% 96% 94% 92% 90% 88% Total Commitments % of USDA Forecast 2500 2000 1500 1000 500 0 Corn Shipments (Year to Date) 102.0% 100.0% 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% Total Shipments % of USDA Forecast
New crop sales 600 500 400 300 200 100 0 Total Next Year's Corn Sales (Year to Date) New Crop Sales Final Exports Final exports 3000 2500 2000 1500 1000 500 0 Unshipped Corn Sales 250 200 Million Bushels 150 100 50 0
90,000 Weekly Corn Export Inspections 80,000 Thousand Bushels 70,000 60,000 50,000 40,000 30,000 20,000 10,000 5-Yr. Avg. 2016-17 2017-18 0 S O N D J F M A M J J A Commitment of Traders - Corn 400000 $5.00 net position in contracts 300000 200000 100000 0-100000 -200000 $4.50 $4.00 $3.50 nearby futures -300000 1/15 3/15 5/15 7/15 9/15 11/15 1/16 3/16 5/16 7/16 9/16 11/16 1/17 3/17 5/17 7/17 9/17 11/17 1/18 3/18 5/18 7/18 Source: CFTC $3.00 Index funds Hedge funds Futures
December Corn Bull vs Bear Years 440 420 400 380 360 340 320 300 11/1 1/1 3/1 5/1 7/1 9/1 11/1 320 310 300 290 280 270 260 250 Bull Market 17-Dec Dec-18 Normal Year December Corn Futures Seasonal Trend Start Date +1 Week +2 Weeks +3 Weeks +4 Weeks +5 Weeks +6 Weeks 9/5 9/12 9/19 9/26 10/3 10/10 10/17 Ave. Gain/Loss (1.6) (4.9) (6.2) (9.6) (6.0) (5.5) % Up 17/44 16/44 15/44 19/44 19/44 18/44 % Down 25/44 28/44 29/44 25/44 24/44 25/44 Ave. Gain - Up year 8.1 11.4 15.4 13.2 21.5 26.0 Ave Loss - Down Year (8.3) (14.3) (17.4) (26.9) (28.0) (28.4) Biggest Gain 28.8 39.0 47.5 58.5 112.8 79.8 Biggest Loss (31.3) (67.8) (112.0) (167.5) (155.0) (180.0) This table shows the typical seasonal pattern at weekly intervals from the start date, based on average daily futures prices from 1974-2017. Gains and losses are based on the difference between the closing price on the start date and the closing price on the weekly date shown.
420 July Corn Bull vs Bear Years 410 400 390 380 370 360 350 340 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Bull Market Years July 2019 Normal Year 300 295 290 285 280 275 270 265 260 255