Todd's Take

Corn's Unexpected Turn

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The chart of July corn shows how quickly prices fell after the weekend of March 7-8 when coronavirus spread to new locations and Saudi Arabia announced an unexpected oil production increase. The two surprises assaulted two of corn's three demand sources, resulting in a sudden drop in prices that may not be over yet. (DTN ProphetX chart)

When asked about corn over the winter, my typical response was that USDA's 13.66 billion bushel (bb) production estimate was too high and the 1.91 bb of estimated U.S. corn stocks would disappear quicker than usual in subsequent quarterly grain stocks reports. In many areas, the corn was poor quality and lighter than normal.

I also explained the strong cash basis around the country was no fluke and offered a better assessment of limited corn supplies than USDA's World Agricultural Supply and Demand Estimates (WASDE) reports. For the most part, the assessment was on track as USDA's March 1 corn stocks came in at 7.95 bb, less than trade estimates expected. Eight billion bushels of corn demand in the first half of 2019-20 was an impressive showing, even with corn's poor export performance.

Except for North Dakota, USDA will have a new production survey for northern states in May's Crop Production report. According to the state National Agricultural Statistics Service (NASS) office, North Dakota still has 14% of its corn crop in the field and it seems likely some will be abandoned.

In most years, we would coast through an uneventful winter, keep an eye on Brazil and wait for corn prices to turn volatile in May. The bearish risk of increased corn plantings in the spring was a concern for late March when USDA's Prospective Plantings report would gain attention.

All was going according to plan until the weekend of March 7-8. In what felt like the twinkling of some sinister eye, news broke that coronavirus infections and deaths jumped higher in Italy and Iran. COVID-19 wasn't just a Chinese problem anymore and the world was just starting to get a hint of how contagious the virus was.

The same weekend, oil talks between Saudi Arabia and Russia broke down. Saudi Arabia announced they were cutting prices and intended to increase production. Coming at a time when economic growth was slowing, Saudi Arabia's move looked like a temper tantrum and oil prices plummeted.

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One of the occupational hazards of being a grain market analyst is that much of the work relies largely on probability assessments, based on comparisons to the past. Back in December, we could have spent a lot of time talking about the risks to corn prices and never would have put global pandemic in the top 20 or even top 50.

I don't know if Vegas even offered odds in 2019 for a bet on a global pandemic in the spring of 2020, but 1,000-to-1 would have been a good start. Even in February, it was difficult to grasp the virus' potential as it was not something we had ever experienced.

To his credit, Bill Gates predicted a global pandemic in a 2015 TED Talk, but for most of us, the talk will become an example of hindsight bias. We can always go back after the fact and find someone was warning about a contagious pandemic or terrorists flying into buildings. We kick ourselves for not paying more attention.

We soon forget life is full of dangerous possibilities that never see the light of day. For our own sanity, we don't normally spend time worrying about nuclear annihilation, getting hit by meteors or suffering some other catastrophic event -- all of which are slight, yet legitimate risks.

Clearly, there's not enough margin money in the world to hedge against all of life's risks -- especially the unexpected ones. Buying put options is usually the best defense for prices against unforeseen risks -- but don't spend too much; thankfully, these disasters don't happen every year.

It is interesting to this analyst that the practice of assessing the market's likely probabilities didn't help us prepare for the bearish tentacles of coronavirus in the first place. Now that we're in a mess, many are still trying to use the same approach to figure out when the pandemic will end.

With July corn closing at $3.26 Thursday (April 23), there is no confident model for assessing how long it will be before people start driving again and meat packers safely go back to work.

I find bullish potential for a modest rebound in corn prices from CFTC data showing managed futures funds are net short and commercials have turned net long -- a positive sign of demand for corn's cheaper prices. The market has a powerful ability to balance excessive behavior and right now incentives are high to find a solution.

We can't stop being human and we'll never be able to foresee all the things that bite us. I can't say when the bearish pressure on corn will ease, but corn's role in all this drama arrived as a surprise -- and it could leave as one too.

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

Follow him on Twitter @ToddHultman

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Todd Hultman