With old crop corn ending stocks at only 1.365 billion bushels, the recent push to new contract lows in corn futures and collapse in the July/December spreads has been a head-scratcher for market watchers and a huge source of frustration for farmers.
Historically, the corn market has been well over $5 with ending stocks this tight, says Darren Frye president and CEO of Water Street Advisory, Inc.
“If you go back to last fall, we were projecting 2.3 billion bushels for a carryout. We’re roughly 1 billion under that. Prices are now cheaper than they were then. People are puzzled by that,” he explains.
Regardless, speculative or fund traders have been relentless sellers in the corn market and have added to their short position, but was there a catalyst or fundamental reason for the selling?
Dan Basse, president of Ag Resource Company, points to a combination of factors, including the lack of a weather threat and Brazil’s record large safrihna crop.
“My team in Brazil now estimates the corn crop at over 140 MMT. We had a private entity down there put the crop at 150 MMT, which would be 20 MMT above USDA,” he says.
Basse says Brazil received some unusual June rains, which is filling out the crop and adding to yield potential.
“We’re looking at the yields coming out of Mato Grosso that are record large by 5% to 7%. I’m thinking the corn crop in Brazil is a record. The prior record was 137 MMT,” he adds.
On top of strong yields out of Brazil, there was massive liquidation of the July contracts going into first notice day on June 30 and a big increase in farmer selling of old crop corn.
Will that result in higher corn inventory than expected in USDA’s Quarterly Stocks Report? Average trade guesses are around 4.625 billion bushels, which would be down over 350 million bushels from last year.
Basse says that aligns with their expectations, but the difficulty comes in trying to assess the feeding value or ethanol conversion value of last year’s crop.
“When we look back at last year’s crop, it was a very dry corn crop. Starch and dry matter within the seed was very high. That has caused a lot of our end users to use less,” he explains. “With that in mind, I’m looking for the stocks report to be slightly bearish.”
Frye agrees in the possibility of a bearish surprise for corn.
“The way this July to December spread has acted, its either because we got a larger safrihna crop in Brazil, we got more stocks/less feed or somehow [USDA] undershot what the yields were back in January.”
The trade is expecting quarterly stocks for soybeans nearly steady with last year, but wheat up 140 million bushels.
Over the past four years, corn acres have been up an average of 1.38 million while soybean acres down 1.77 million versus the March estimate.
The corn market is also gearing up for a record U.S. corn crop due to nearly 5 million additional acres, which will likely be confirmed in USDA’s Acreage Report. Surprisingly, trade guesses are up just 100,000 acres from the 95.3 million corn farmers said they intended to plant in the March report.
Basse says Ag Resource Company is at 95.8 million acres on corn: “When I look back historically, we always find corn acres between the March and the final report. We always lose bean acres. It was an early planting year and farmers just got at it, and we think they planted a little more corn.”
Frye also expected farmers to plant even more corn than they indicated in March largely due to economics.
“I thought we’d have a few million more because really when you projected what you could make or lose when you planted corn or beans, it worked out a lot more favorable for corn. Some bankers were pushing that,” he explains.
However, he’s since backed off that estimate, in large part due to excessively wet weather, planting delays and even some prevent plant acres in the southern and eastern Corn Belt.
Yet, both Frye and Basse think soybean acres could be close to slightly lower than the 83.5 million acres projected in March, and cotton acres will also be lower due to prevent plant.
The average trade estimate on soybeans shows acreage up just 160,000 acres from March.
Without much change in the June 30 reports, will the corn and soybean markets continue to slide lower?
Basse fears without a big weather issue, or a big bullish demand story, corn could possibly fall below $4 and soybeans below $10.
“If the U.S. weather doesn’t have a problem going forward, I don’t think we doubt that corn’s going under $4. My question is how far? I mean, some of our work suggests down to $3.50 or $3.70, which seems a little cheap today. However, let’s see how Mother Nature treats the crop during the month of July,” he says.
Both analysts believe soybean prices could also fall below $10 without some concrete trade resolution with China by the end of July.
“The RVO news isn’t going to increase crush enough to make up for exports that aren’t there if we don’t get a deal with China, so there’s a lot of uncertainty still,” Frye says. “I think the path of least resistance for soybeans is clearly lower for now.”
While the U.S. and China have worked out a trade framework on rare earths, there was no mention of agricultural goods in the deal, which is a concern to Basse.
“If China doesn’t come forward my export estimate on soybeans isn’t at 1.8, it’s 1.5 billion bushels. That’s 300 million bushels that would get added to end stocks and creates a much different soybean market,” Frye says.
