Todd's Take

One week ago (May 31) in this column, I walked through two possible scenarios for this year's corn market. I was not claiming any inside information on what production would actually be in 2019, but saw this as an exercise to show that it didn't take outrageous assumptions to make a significant dent in U.S. corn supplies in 2019-20.

If you recall, a reduction of 8 million harvested corn acres and a modestly lower yield of 170 bushels per acre, put the estimate of U.S. ending corn supplies down to a theoretical 878 million bushels (mb) or 6% of annual use. In the past, a 6% ending stocks-to-use ratio put prices in the $6.00 to $8.00 per bushel range -- cash prices not seen since early 2013.

Obviously, there are plenty of things about this year that are challenging to producers, starting with not being able to get crops planted. Or maybe worse, getting crops planted and then seeing them ruined by weeks of rain or flooding. On the marketing side, it is difficult to make forward sales when you can't be confident of your own production ability, let alone everyone else's.

As things now stand, Friday's seven-day forecast is starting to look better for planting in the northern and Western Corn Belt, while eastern and southern areas still look wet. USDA's acreage estimate of June 28 is based on surveys conducted in the first two weeks of June and will be incomplete this year as Monday's (June 3) Crop Progress report showed over 30 million acres of corn still needing to be planted.

USDA's next planting estimates will arrive in the August Crop Production report on August 12, probably about the same time USDA's Farm Service Agency will release its first estimate of prevented plantings in 2019. USDA's first field-based yield estimates aren't due out until September.

The point is that we have at least two months of waiting before any credible data will be available to narrow the ranges of the wild you-know-what guesses now being made. That is a lot of time for traders to stir up mischief, and I expect two months of erratic price moves in this extended window of uncertainty.

Looking beyond this spring's planting challenges, recent news headlines have remained hostile to U.S. ag interests. RTTNews.com reported Wednesday (June 5) that the World Bank cut its estimate of world gross domestic product (GDP) growth to 2.6%, citing bearish influence from trade disputes. Historically, world corn demand and corn prices do not tend to do well in years when world GDP growth falls below 3%.

It was also interesting that in spite of the billions of dollars of tariffs that the U.S. is enforcing against Chinese goods, the International Monetary Fund lowered its estimate of GDP growth for China from 6.3% to 6.2% for 2019. That is down a little from recent years, but doesn't really match the image of an economy that is suffering the stranglehold of punitive measures.

On June 5, Bloomberg news quoted former U.S. Secretary of State Rex Tillerson as saying, "If I had a concern about it, it's that the Chinese, I hope, do not come to the conclusion that they can't make a deal with this administration."

Read the article here: https://www.bloomberg.com/…

While negotiations with China have come to a halt, the White House stands ready to move forward with new tariffs against Mexico on June 10. Mexico is still trying to negotiate and has not yet mentioned retaliatory measures, but we can't ignore that Mexico has been an important customer of U.S. ag products, accounting for 30% of this season's U.S. corn exports.

And then there's Japan, representing 25% of this season's corn exports. A trade delegation from Japan will be in Washington on June 10-11 to hold talks with U.S. officials. Is it too much to ask that talks with Japan don't end with retaliatory tariffs?

I am not just highlighting current U.S. trade difficulties to vent long-held frustrations about how political decisions tend to make life more difficult for America's farmers, but to make an important point about how the current scenario impacts corn's pricing model.

We can look back and see that an ending U.S. corn stocks-to-use ratio of 11% has historically pointed to cash corn prices around $4.20 or how a ratio of 6% has sent prices above $6.00 a bushel. But we can't look back in history and find a comparable time for corn prices when ending soybean stocks were above a billion bushels because China wouldn't buy from us. And I can't recall when the status of three large U.S. trading partners were in doubt.

The ongoing uncertainty of who is going to be left to buy U.S. ag products is a hidden tax on U.S. producers that doesn't show up in corn pricing models. Because of that, I suggest we maintain some sobriety about how high we expect corn prices to rise in 2019.

The production threat is legitimate, and corn deserves a higher price, but you can't have grain markets without grain customers. Until these trade disputes find a workable solution, outside market influences are a bearish weight on all U.S. crop prices.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/BAS)

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