Chip Flory: No Bull for Corn

November 7, 2017 01:56 PM
 
Chip Flory

For the past 25 years, scouts on the Farm Journal Midwest Crop Tour have been surveying fields in six states the third week of August. The goal is to gauge corn and soybean yield potential. This year, the corn crop was better than we expected, and the theme quickly became “no bull market for corn.”

The 2017 corn crop will be about 1 billion bushels smaller than a year ago, but it’s not just the size of the current crop that matters. Total supply, including imports of about 50 million bushels and beginning stocks of about 2.35 billion bushels, needs to be factored into the equation. Add it all up and the grand total for 2017/18 of about 16.5 billion bushels will more than adequately meet demand.

Demand is where corn market bears are thriving. The U.S. will use about 12.45 billion bushels in the current marketing year, which is up about 100 million bushels from the previous year. But competition from Brazil, Argentina and an increasing number of feed wheat suppliers is expected to knock U.S. corn exports back about 400 million bushels.

Carryover at the end of the 2017/18 marketing year will likely be lower than the previous year. However, there will still be an adequate domestic supply with South American exporters attempting to take even more marketshare from the U.S. in 2018/19.

Margins matter in global crop production, but because about two-thirds (and increasing) of corn grown in Brazil is double-crop, it’s not about picking between corn or soybeans but rather generating as much revenue as possible per acre. The homegrown supply of Brazilian corn will eventually increase the country’s demand, but until then, Brazilian corn is exported. That’s one big reason U.S. corn exports are expected to drop sharply from year-ago.

Brazilian double-crop corn is done “on the cheap” and crop management isn’t nearly as intense as it is in the U.S. That leaves the crop more vulnerable to weather stresses and the global market more vulnerable to South American supply fluctuations. One “bad crop” in Brazil will send demand back to the U.S.

Before a new growing season starts in South America, combines will roll in the Midwest and scale tickets will be tallied. If the dry second half of the growing season took a bite out of Midwest yields dropping the U.S. crop below 13.7 billion bushels, futures would respond by adding 10% to 15% to the value this winter.
That’s why corn is not “rally proof.” Short-term rallies are likely until spring, but they will be met with farmer selling to cap upside potential. Selling strength in the corn market should be your plan going forward.

Soybeans are a different story. Robust demand, competitively priced U.S. soybeans in the global market and a dry August in the Midwest could spur a harvest-season rally. A soybean crop under 4.25 billion bushels with 2017/18 demand at expected levels are the foundation for the market to add 10% to 15% to value.

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