Commodity traders look for an “analog” year to compare the past to the present. Weather is often a common factor, but situations vary. For example, 2023’s agronomic conditions are similar to 2012. But it’s more important to develop an outlook based on price actions and reactions.
Lessons Learned From 2012
In spite of the war in Ukraine and early growing problems in South America, the high posted in April 2022 could not exceed the drought high of August 2012.
- The two-year bull market was over, just as it was in 2012.
- Sustained $8 corn destroys demand. Anyone can grow $8 corn; few can use it.
- Monthly WASDE reports continue to reduce demand (exports).
By June’s end, 2023 futures gapped lower due to more acres/supply, which mimicked the price action of 2022 and 2012. While 2022 held the $5.50 bull market retracement, 2023 blew through it as it did in 2013.
Export Outlook
Post-2013 futures spent six years below $4.50 buying demand before a black swan event bailed out oversupply. The 2013/14 ending stocks went up 800 million bushels and 2024 ending stocks are projected to increase 800 million bushels; 2024 ending stocks are projected up 800 million bushels as well.
The July WASDE report had optimistic demand, increasing 2023/24 exports by 375 million bushels compared with 2022/23. 2013/14 exports recovered significantly but at prices $4 below 2012 highs.
- 2023/24 exports are expected to increase 375 million bushels to 2.1 billion bushels resulting in ending stocks of 2.26.
- Reading between the lines, WASDE is saying best case is if prices are cheap enough, we can hold or buy demand.
- Since 2013, Brazilian exports increased 34 million metric tons to 55 mmt, while the U.S. exports are 53 mmt. Should Argentina recover, it would add 17 mmt (480 million bushels) to global supply.
Implications
Even if USDA is right on the demand side, the carry-in to 2024/25 will be 800 million bushels more than 2022/23. During the six years of sub-$4.50 corn, U.S. ending stocks never dropped below 1.7 billion bushels showing the magnitude of the problem of too much.
- A whopper is needed. The ace in the hole is for corn yield to suffer a major setback in subsequent WASDE reports. In 2012, the August yield dropped more than 20 bu. versus July. Is that possible this year? I’m doubtful.
- When is the next black swan? An escalation of the war or a crop failure in South America or the U.S. next year is possible, but unlikely. Production costs and cost of carry make the next two to six years unlike the previous two.
- Technicals versus fundamentals. There are a lot of fundamentals in the current situation. While I warned of a black swan event last spring, the outcome was forewarned with the price volatility filled with opportunities.
Price discovery, cash flow and common sense coupled with being a proactive partner with fundamentals derives an outlook. Technical analysis (price charts and money flow) isn’t a science but an art. It also helps to have been there before; this wasn’t my first rodeo. TP
