What Price Will Farmers Sell Their Remaining Unpriced Corn?
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Market Commentary for 2/12/21
USDA February Report Observations & Highlights
Corn
The February USDA report is usually considered less important than most other monthly reports. Still, the market was hoping for some big adjustments but were disappointed when the corn carryout was only decreased 50 million bushels. The average trade guess had expected a drop of nearly 150 million bushels.
USDA in a Carryout Catch-22?
The USDA seems to be playing catch up when estimating final carryout at the end of the marketing year in August. If they lower carryout too quickly, the market could spike early and force a rapid drop in demand. That could in turn hurt overall demand and trim usage later or even worse decrease demand long-term. On the other hand, decreasing carryout too slowly may mean limited short-term demand rationing, which could cause supply issues later this year and early 2022.
Exports
February’s report showed exports increased by 50 million bushels. This suggests there is strong export potential, despite slower than usual shipment pace. If export demand and pace stay strong for the next 6 months, and the USDA increases the export number each month by 50 million more bushels, it could still further reduce the carryout by 300 million. This would mean carryout is eventually reduced to 1.2 billion by the end of the marketing year.
Some bullish traders think final carryout will be under 1.2 billion, which is theoretically possible if feed, ethanol and export pace stay consistent. There are some who believe that the market is currently trading a carryout between 1.3-1.4 billion bushels.
South America
Argentina weather hasn’t been as dry as expected. While the last 5 La Nina weather events resulted in 20-25% yield reductions, current USDA estimates show only a 10% reduction in yield and some private forecasters are only looking at a 15% reduction this season.
Due to excessive precipitation, Brazil’s 2nd corn crop’s planting pace is behind. If significant planting progress isn’t made in the next 2 weeks, a lot of their corn will be pollinating in late May’s dry season. Generally, the later Brazil’s crop is planted the more volatility in their final yield.
The Cure for High Prices is High Prices
Global corn carryout increased slightly in the February USDA report, while wheat carryout dropped. This suggests wheat is replacing corn in feed rations around the world. Demand for other feed grains is still very strong as world feeders search for economical replacements for corn.
China
The USDA did surprise the market by increasing Chinese imports from 17 MMT to 24 MMT, when analysts only expected the USDA to show at most 20 MMT of world demand in this report. Some market participants think China could import even more, with estimates as high as 30 MMT. This is significantly higher than the 5-7 MMT that China has imported the last few years.
Ethanol
Covid vaccinations are increasing and infection cases are dropping, so global economies may start opening more. Weather should start warming up soon and driving season is around the corner, so gas and ethanol demand may start moving higher. High priced DDGs along with higher ethanol prices should keep margins profitable for ethanol plants, despite higher corn values.
Futures
Usually, during this time of year the futures market has a carry in the spread between the March and July contracts, but currently there is a large inverse (i.e. when the nearby month is higher than months after it). This hasn’t happened since 2013 and suggests the market wants corn now and not later. This inverse will likely push many commercial elevators to set basis and ship corn sooner than later.
Remaining Unpriced Corn
I know some farmers with unpriced corn still left in bins, and they don’t seem to be planning to sell anytime soon regardless of price levels. Many of these farmers think there will be a summer drought, so they want to wait until after July 4th, hoping for $8 corn like they saw in 2012.
Basis Potential
If elevators have set basis on their corn ownership and many farmers aren’t selling the remainder of their grain until mid-summer, then cash grain prices through June could get interesting. A large basis spike after May 1st is a real possibility. This happened in the early summers that followed the drought years of 2011 and 2012 when the carryout was last this tight.
Beans
Stock to Use Ratio
The USDA showed the tightest bean stock to use ratio ever. The 120-million-bushel carryout was 3 million less than the market expected, which isn’t bearish information. After the report, Midwest basis bids were 10 cents higher, indicating end users are concerned they will run out of beans by summer.
Brazil
The Brazilian bean crop is still expected to be sizable and significantly larger than last year. Also, 2022 harvest production predictions show big growth potential too. This suggests that while prices are strong today, and probably through all of 2021, eventually prices will likely turn around. The 2021 Brazil harvest is moving slow, but once the crop is harvested, export pace will ramp up substantially. There are some concerned that as Brazil’s bean prices become more competitive, there may be US shipment cancellations.
Looking Forward
This is a 3-day weekend for the US, as the markets are closed on Monday. The Chinese New Year just began and lasts over two weeks. The market could be range-bound and slightly boring for the next couple of weeks with the worlds biggest bean buyer on break.
The next big factor impacting the market will be the acreage battle between corn and soybeans over the next few months. The first look at planting intentions will be the USDA Outlook Forum the end of next week. Then on March 31st the widely anticipated Spring planting intentions report from the USDA will be released.
Want to read more by Jon Scheve? Check out recent articles:
$6 Corn? $15 Beans? Hang On Tight Its Going To Be A Bumpy Ride
Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
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