The market got its first taste of just how big of a U.S. corn crop farmers may be producing. At 3.3 billion bushels, that’s the largest stocks since the 1980s. University of Missouri economist Seth Meyer says Tuesday’s report wasn’t a shock to the market.
“The crop production numbers were not a surprise, as historically, unless there is significant evidence to the contrary, like last year. They take prospective plantings from March, and they’re ‘weather-adjusted yields,’ so the production side should have been exactly as folks expected,” he says.
Chip Nellinger, Blue Reef Agri-Marketing, says USDA’s May WASDE report was a relief, as the market got some answers. He says the market now knows where the initial demand and carryout projections are for new crop.
“The market will use variables like how fast the rest of the crop gets planted, growing season weather, pollination and grain-fill conditions and future demand information to gauge possible ending stocks changes going forward and thus price adjustments,” Nellinger says.
While the supply situation seems to be growing, one key piece of the puzzle is demand, according to Brian Splitt, AgMarket.net. He says the May WASDE report gave the market one very important reminder: demand has to be consistent in order to keep a bad situation from getting worse.
“We’ll see how old crop demand trends into the end of the marketing year, and recent export demand has been picking up some of the slack for corn for ethanol,” says Splitt. “USDA showed us this week that the 2020/21 marketing year will require total demand to be nearly 1 billion bushels more than the total demand projected for the current marketing year just to keep carryout at 3.3 billion bushels.”
Prior to Tuesday’s USDA report, some analysts were throwing out some burdensome stock estimates, including 4 billion bushels. Nellinger says corn carryout that large is still a possibility, especially if current demand projections don’t pan out. However, he says while 4 billion bushels of carryout is possible, so is a much lower carryout scenario.
“Likewise, a 2-billion-bushel carryout is also possible if we shave a couple million acres off of planted acreage and have a crop size well under trendline,” says Nellinger. “We can’t forget weather still matters.”
Brian Basting of Advance Trading thinks when it comes to supplies, the production potential of the U.S. producer should not be underestimated. He says a prime example was 2019, when despite extremely challenging planting conditions, final yields were surprisingly high in many areas.
“With a normal growing season, it’s possible that U.S. producer could match, or perhaps exceed, the current USDA national trend yield forecast of 178.5 bushels per acre,” says Basting. “Assuming 97 million acres are planted, an above-trend national average yield would push the crop to record of more than 16 billion bushels.”
Driven By Demand
Splitt says old crop demand for corn used for ethanol was lowered due to COVID-19 impacts, but USDA was reluctant to carry that story into the new crop marketing year
“How long does it take to get back to ‘normal,’ and how much of that year over year increase in demand can we realistically hold onto?” asks Splitt. “In similar fashion, USDA suggests soybean export demand for the 2020/21 marketing year will be 375 million bushels better than their estimate of export demand for the current marketing year. The crush estimate looks realistic, so once again we’re forced to hang in there and wait to see if China lives up to their end of the trade deal.”
Meyer thinks the demand side was the more interesting update from USDA this week. He says while some post-report analysis called USDA’s corn demand picture optimistic, that’s not necessarily the case. Meyer thinks there are several factors that will impact demand, including feed and residual use. He also thinks USDA’s export forecast is realistic, as USDA didn’t change the size of Brazil’s safrinha corn crop in the latest report.
“To me those exports are not all that aggressive given the size of the crop, and they don’t imply aggressive moves on corn by China to meet Phase 1,” he says. “Total Chinese corn imports were forecast at 7 million metric tons (mmt) and the TRQ is 7.2 mmt. Some folks in China were saying, given internal prices, they would import much more, but I’m skeptical, and I think WASDE was prudent in its export program. This does remain somewhat dependent on how Phase 1 shakes out, and it’s the same case for soybeans.”
Meyer says when it comes to ethanol mandates, those are based on a calendar year. So, he says the 2020/2021 crop year includes the last four months of 2020 demand and is dependent upon how much people are driving.
“Add to that 2021, which is through the Sept. 1 marketing year, it’s going to depend on the forecast demand for driving and how EPA responds to that,” adds Meyer. “My very rough read of what WASDE did was to say that there would continue to be a modest reduction in driving the last four months of 2020, and an EPA which probably takes the forecast for 2021 and thinks about inclusion rates. In short, I don’t find this number overly aggressive either.”
“On the demand side, the major unknown is the duration and impact of COVID-19 on driving patterns and, correspondingly ethanol production,” says Basting. “If the impact of COVID-19 persists longer than projected, the USDA forecast for ethanol production for the 2020/21 crop year may be too optimistic.”.
With all the demand variables at play, Splitt says if trendline yields materialize, demand has to be strong in order to keep new crop stocks under 4 billion bushels.
“In order for the USDA to print a number like that in the short term, it would likely require a tremendous growing season where the USDA feels compelled to increase yield estimates to above trend on the August report,” says Splitt. “Even without that coming to fruition, a weak demand profile would cause a slow bleed of demand off the balance sheet where the USDA makes reductions here and there throughout the marketing year.”
Splitt says while he tries to steer clear of forecasting a specific futures price, he says the charts show lower prices are not out of the question.
“I do believe the fall low will be lower than our spring low which, at this point, was made by the May contract at $3.00. The continuous chart for corn would suggest that the next major support below the 2008 low of $2.90 would be highs made in July of 2005 and May of 2006 at $2.63 and $2.64, respectively. I’ll finish by saying I haven’t lost all hope, and seasonal tendencies suggest we see some kind of rally into the June/July timeframe. Unfortunately, the levels we’ve become accustomed to for summer highs are unlikely without a major weather story.
Nellinger thinks $2.60 to $2.70 new crop corn prices are possible, but not inevitable, due to a wide variety of factors, including demand and weather. He also says due to certain programs, there may be less risk with prices falling to that level.
“It goes against human nature and is somewhat counterintuitive, but producers who carry high levels of crop insurance coverage will make more money if December futures are $2.70 in October than if December corn is at $3.70 in October,” says Nellinger. “There is a ‘black hole’ of revenue in the 3.60 to $3.90 price range, assuming average APH yields, because that zone is where there are no crop insurance payments.”
Nellinger also says PLC payments will kick in below a $3.70 marketing year average price. He says that will serve as a revenue backstop, and prices trending higher than $3.70 would reduce possible PLC payments.