I apologize to corn producers for rehashing painful topics in 2020, but it's important to set the stage when talking about corn prices. USDA's first estimate of U.S. ending corn stocks in 2020-21 was 3.32 billion bushels (bb), based on a 97.0-million-acre planting estimate that came from USDA's March survey of planting intentions.
If true, May's ending stocks-to-use ratio of 22% would have been the highest in 28 years and points to cash corn prices near $2.50 a bushel, a much more depressed situation than USDA's average farm price of $3.20 per bushel suggested.
Not surprising, futures funds were net short over 200,000 contracts of corn at the time of the May World Agricultural Supply and Demand Estimates (WASDE) report and continued to increase net shorts after the report, reaching a peak of 301,873 as of June 9.
In the July WASDE report, USDA lowered its estimate of the new corn crop from nearly 16.0 bb to 15.0 bb and reduced the estimate of ending stocks from 3.32 bb to 2.65 bb, or 18% of annual use. The lower estimates were largely due to USDA's lower planting estimate of 92.0 million acres -- a figure that is still hard to believe.
July's lower ending stocks-to-use ratio of 18% raises the expected cash corn price to $3.00, within 6 cents of where DTN's National Corn Index closed Thursday evening (July 23). Now we come to the tricky part of the year when everyone is guessing yield but none of us have very good tools to do so.
We take USDA's planting estimates and pay close attention to the areas that have gotten rain and those that haven't. We scrutinize every state in USDA's crop condition tables every week and keep an eye on the extended forecasts. When all is said and done, we are still often surprised -- sometimes shocked -- by USDA's August crop estimate.
Last year's WASDE report was a bearish stunner for corn as USDA estimated 2.18 bb of ending stocks versus pre-report expectations of 1.60 bb. Two years earlier, USDA estimated 2.27 bb of ending corn stocks in August versus a pre-report estimate of 1.97 bb.
Both August reports were scandalous at the time, but at the end of both seasons, USDA's bearish August estimates were closer to the final outcome than the private pre-report estimates.
I'm not saying USDA's estimates are flawless because they're not; I blame the large estimating errors on confirmation bias. We try to be objective, but it's very common for grain analysts and grain producers to be sympathetic to higher prices whether we admit it or not. There is also a tendency for crops' problem areas to get a lot of attention. Many times a dry field or hailed-out corn crop will get its picture posted on Twitter, while fields of lush, green crops grow in relative silence.
USDA's field estimates used to start in August and it's unfortunate they don't start until September now. However, methodically surveying thousands of producers is a more reliable way of estimating yield than looking at subjective crop ratings and extrapolating the backyard crop tours we all tend to conduct.
To avoid reviving old debates on the history of USDA estimates, let me quickly point out that all this yield guessing is only of limited value. Comparing 23 years of USDA ending stocks-to-use ratios and cash corn prices only have an R-squared value of 54%. In other words, even if we knew USDA's balance sheets ahead of time, the correlation to prices is very loose, at best.
Markets are emotional and corn prices are influenced by many things not covered on USDA's balance sheet. This year, it is easy to see the bearish effects of a global pandemic on corn prices. Some of that translated to lost demand, but a lot of it simply made people cautious and discouraged investors from participating in U.S. ag markets.
I've mentioned before that the coronavirus messed up the typical seasonal patterns for corn and soybeans this year, robbing producers of selling opportunities during the time of year when prices often cooperate the most.
Because we didn't have the normal bullish spring/early summer influence in corn this year, I suspect the usual bearish turn towards fall harvest will not carry the same bearish punch it usually has. Much of the potential bearishness of the market was already been spent, largely by noncommercials in early June.
Weather will have the most to say about how this turns out, but it is possible we could see a large corn harvest near the 2016-17 record of 15.15 bb or more without much more price erosion. As mentioned above, USDA's current crop estimate suggests a $3.00 cash corn price and we're already there as a national average.
It is also encouraging for corn prices that commercials have been loyal supporters on the long side of the market since December prices fell below $3.40. Of course, I have my own confirmation bias to consider and I'm trying to keep this from turning into an exercise of wishful thinking. I make no guarantees.
Fall harvest will prove interesting, and if it works out as I suspect, the harvest low may come earlier than October. After a long bearish year, we may finally see some better selling opportunities by January 2021 when this fall's crop is stored away.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of commodities and futures contracts involve substantial risk and are not suitable for everyone.
Todd Hultman can be reached at Todd.Hultman@dtn.com
Follow him on Twitter @ToddHultman
(c) Copyright 2020 DTN, LLC. All rights reserved.