As producers sit to put pencil to planting intentions for 2019, many are wondering where to pencil in corn prices. One analyst describes the corn market as torn, meaning it could either go much higher, or it could find even more pressure than it’s experiencing now.
The next growing season hinges on the corn balance sheet. According to USDA’s November World Agriculture Supply and Demand Estimates report, global corn carryout for 2018/2019 will total 334.18 million metric tons (MMT). While that seems really bearish for corn, it’s important to understand that USDA moved the carryout number from its October estimate of 185.93 MMT based on a surprise census survey from China which indicates that over the past few years that country produced 20 to 30 MMT more corn than USDA previously estimated. China does not publish their grain stocks, so USDA and other analysts rely on surveys like the one included in the November WASDE report to know how much grain the country has on hand.
“Essentially, what we did is we added the very large number to the world balance sheet, almost doubling world corn ending stocks from what we believed it to be just last month,” explains Kent Beadle, director of risk consulting services for CHS. “Throughout the whole summer, we've had a very, very tight world stocks to use and now that's going to look a lot different.”
While ending stocks no longer look tight on paper, it’s important to understand that a kernel of corn that’s in China is not likely to leave.
“It's been very long time since the Chinese were actually active in the export market,” Beadle says. “It's in China, and it's locked in China, and all we have to verify is that this is what they say they have.”
When you remove the corn that is in China from the total, the global carryout number is at a historically tight level, says Naomi Blohm of Stewart-Peterson.
“Currently, the U.S. market is assuming that there will be a substantial increase in U.S. planted corn acres for 2019, which is why the corn price continues to be stuck in a narrow trading range,” she explains. “The potential for more corn acres means more supply which would alleviate the tight global carryout.”
The dynamic Blohm describes is why Mike North of Commodity Risk Management Group describes the corn market as ‘torn.’
“If the corn market goes too high, it attracts more acres, builds a bigger supply and takes away the very issue that gives it lift,” he says.
In 2007 farmers largely abandoned their crop rotations to chase ethanol-driven corn demand and there was a 14 million acre increase in corn acres from one year to the next. According to North, the soybean market is providing producers some incentive to shift acres from soybeans to corn in 2019 as well. Although, the swing probably won’t be that big.
“I would expect a big growth in corn acres, because people will be running away from soybeans,” he says, adding that soybean acres have grown significantly in the past few years. “So the rotation on a national level is going to look probably a little bit more like it did five years ago.”
Next year’s soybean prices are likely to be just over $9. North says those prices combined with terrible basis creates a completely different outlook than what producers saw last fall.
“Can I justify $8.50 or less for soybeans when I have a $4 futures price out there for corn, which I might be able to still swing a basis of 30 cents on?” North questions.
On the other hand, if we see a corn price that's too low, you won’t attract the number of acres that we need to get our balance sheet back to where it needs to be, North explains.
“Corn is going to be very torn as we go through the winter, especially to find that proper point of balance in price, to attract just enough acres, but not too many,” he says.
Should demand remain strong and acreage not explode Blohm says we could “finally see upward price movement.”
Still, the University of Missouri Food and Agricultural Policy Research Institute doesn’t expect either a huge increase in acreage or a huge increase in price. They expect planted acres to increase from 89.1 million to 91.1 million and expect on-farm prices to increase from $3.62 to $3.83 per bushel.
Wildcards For Corn
According to North, the balance sheet protects corn from moving lower on many factors, but there are two wildcards still on the table.
All eyes are on South America when it comes to global corn supplies.
“With world corn demand expanding, the market is depending on a rebound in South American production,” explains Brian Basting of Advance Trading. “A recovery in output could send the market lower, while another shortfall might provide market support.”
One of the biggest policy wins for corn farmers in 2018 was the Trump Administration’s move to allow sales of E15 all year. That’s a factor that North says could cause demand explosion in a few years.
“I think over the next one to two years, E15 growth could be much larger than people have given it credit for,” North says. “Some of the private blenders groups, like a KwikTrip or Caseys that are offering this. They're putting it in and doing some different marketing. So instead of calling it E15 they're calling it OctanePlus.”
More stories from the 2019 Outlook series:
Bull-Bear Outlook 2019: Headwinds Ahead For Grain Marketing Plans
Bull-Bear Outlook 2019: A New Reality For Grain Markets