Chip Flory: Corn's Line in the Sand

April 18, 2018 04:20 PM
Chip Flory

After the 2017 Pro Farmer Midwest Crop Tour, the bottom line from U.S. market analysts was “no bullish story for corn.” Of course, that analysis (including mine) came with, “unless there’s a weather problem.”

Now that we’ve had a weather problem with Argentine corn production, which is off 5 million to 7 million metric tons (MMT) from a year ago (200 million to 275 million bushels), it’s easier to find the bullish story for corn. Argentina’s production shortfall became a 175-million-bushel increase in USDA’s U.S. corn export estimate in March.

Another potential “short crop” is in the works for Brazil. A year ago, Brazil produced 98.5 MMT of corn and in March USDA was clinging to a Brazilian corn crop estimate of 94.5 MMT, although most crop-watchers are projecting a crop short of 90 MMT. That could be another 7 MMT to 8 MMT (275 million to 315 million bushels) lost from the South American export supplies. So far, however, the potential for lost bushels in Brazil has not translated into additional demand for U.S. corn—that might come later.

And don’t lose track of South Africa (listed as a major exporter in USDA’s Supply & Demand Report). Along with political upheaval in the country, drought is expected to drop its corn crop from this past year’s 17.5 MMT to 13 MMT this year (a loss of 175 million bushels).

These cuts to the 2017/18 global supply come as global demand for corn is rising. The global stocks-to-use ratio for corn at the end of the 2015/16 marketing year was 22.2%; 2016/17 ended at 21.9%; 2017/18 was estimated in March at 18.5%.

The global stocks-to-use situation on its own is not price-bullish at the moment but it’s not price-bearish, either. USDA’s March Supply and Demand Report featured a 225-million-bushel increase in estimated total U.S. corn use. In one month, the U.S. stocks-to-use ratio declined from 16.1% to 14.4%, and estimated 2017/18 corn carryover inched closer to 2 billion bushels.

Now global and U.S. stocks have tightened enough that markets will be sensitive to any crop problem (real or imagined) during the 2018 growing season. It’s a different story than at the end of the 2017 U.S. corn harvest; it’s much easier to find the bullish story for corn.

But don’t misread this as a bullish story about the corn market. It’s simply a warning corn prices will be sensitive to potential changes in corn yields.

This year’s national average trendline corn yield (according to USDA’s Ag Outlook Forum in February) is 174 bu. per acre. Based on acreage expectations for 2018, that would hold 2018/19 corn carryover about steady with this year. That’s your “early leader” for the line in the sand. Anything under that trendline yield will provide an improved marketing opportunity. Higher yield potential will add to carryover, making price gains more difficult.

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