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Last week's USDA Supply and Demand report took into account the adjusted stocks in bins estimate from the late September report. The next day, the President announced a trade deal with China could be coming in the next 5 weeks.
This week few details have been provided on the trade deal and some are questioning if a deal will actually be signed in the late November Chile meeting. If a deal is signed some are questioning if China will buy more ag products than pre-trade war levels. This combined with the killing frost throughout parts of the corn-belt this week created more market uncertainty.
Demand Obstacles Corn Must Overcome for A Price Rally
The over-abundance of US and global wheat has led to the cash price of hard red wheat being the same value as cash corn in the southern plains. This means, if prices rally, some livestock producers may replace corn with less expensive wheat, which could potentially reduce the feed category for corn by 100-200 million bushels.
Ethanol Demand Is Limited
Several ethanol plants have gone idle while others are running at reduced capacity. This suggests production increases are limited and corn's use in ethanol may have minimal upside potential. Without an energy policy change or increased ethanol exports, the 1-2% grind reduction the USDA highlighted this past week will continue or be reduced by potentially another 25-50 million bushels.
Also, the EPA announced this week that the deal between big oil and ethanol groups was not as favorable for ethanol as previously believed several weeks ago. While there are still many unanswered questions, some market participants have suggested this new deal could reduce ethanol demand by more than 10%.
When comparing the US to competitors, US corn is not competitive globally at higher prices. Currently, export pace is expected to decline lower than '16, '17 & ‘18 levels. Current estimates place export pace at the upper levels seen in '13, '14, & '15. Higher price values could threaten to slow export pace as much as 100-150 million bushels.
Analyzing Possible Supply vs Demand Scenarios
Some in the trade are suggesting that there will be acre and yield reductions in future reports resulting in a price rally. However, supply and demand are correlated, so if supply changes and prices rally, demand will likely be affected as described above. To illustrate this, in the chart below I've included some possible acre and yield reduction outcomes that illustrate how the market and demand could be affected with any variances from USDA estimates.
Historical data from the last 6 years is included to the left, plus this year's USDA estimates in green. The 5 columns on the right include predictions of potentially lower acres and yields (1st 4 rows) and then how demand would likely be affected (3rd set of 4 rows). Light blue numbers suggest minor adjustments to the USDA’s current estimates and darker blue cells are bigger changes.
The Stocks to Use Ratio at the bottom of the chart can help indicate price movement potential when comparing year over year. When looking at the past several years, the trend suggests a significant rally will be a challenge without a production issue. A spike in demand from either a positive trade deal or an increase in ethanol production demand would help prices too, but seems less likely.
While I only show acre and yield decreases in this chart, it’s still possible yields could increase and/or acres could remain unchanged. Neither would be bullish scenarios.
If production values stay within the USDA forecasted range, and demand remains the same, it’s likely the market will stay within a tight trading range. Last year futures ranged between $3.65-$3.80 for nearly 6 months. Maybe this year the range will be between $3.80 and $3.95 for the next several months.
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