Todd's Take

Corn Supplies Get Fresh Attention

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Thursday's close of $5.35 per bushel for DTN's National Corn Index suggests roughly 1.10 billion bushels of ending corn stocks for 2020-21, 400 million bushels less than USDA is currently estimating. (DTN ProphetX chart)

May corn prices are up 51% in seven months, not a bad accomplishment for a market that USDA said in August would average $3.10 per bushel and be weighed down by 2.756 billion bushels (bb) of ending stocks. Not since 2010 have spot corn prices seen this big of a gain in such a short time.

Looking back, it's easy for many of us to beat ourselves up for selling out too soon; it looks so easy on the chart. Prices broke higher in August and never looked back. Even after Thursday's sell-off, the uptrend in May corn has yet to trade below the 50-day average that sits at $5.37 as of March 18.

This is one time that technical trend followers can gloat. They have had a six-year dry spell in corn, but if they rode the trend during the past seven months, they now look like geniuses.

The fundamental approach, on the other hand, was extremely frustrating for anyone trying to anticipate corn's next moves in 2020 and remains so today.

By the time USDA had its first World Agricultural Supply and Demand Estimates (WASDE) report on May 12, 2020, for the 2020-21 season, spot corn prices were already beat down, trading at $3.22 1/4. USDA added to the bearish mood, estimating 3.32 bb of U.S. ending corn stocks. The Aug. 12 WASDE report mentioned above was a little less bearish, but no one was predicting $5 corn.

It was the day after the Aug. 12 report that corn prices traded higher and never looked back, initially given a boost by the realization of how badly the derecho tore through the corn crop in Iowa and neighboring states. Even after waking up to the damage, and the late-season dry spell that followed, fundamental assessments could not keep up with corn supplies that were shrinking before our eyes.

As USDA's Oct. 9 WASDE report estimated 2.167 bb of ending corn stocks and a farm price average of $3.60 per bushel, spot corn finished the day at $3.95. USDA's Nov. 10 report took another bullish step with ending stocks falling to 1.702 bb, pulling the average farm price up to $4 per bushel.

On Jan. 12, 2021, USDA surprised us with a larger-than-expected drop in production, taking the ending stocks estimate down to 1.552 bb and lifting the average farm price estimate to $4.20. Spot corn remained well ahead of the game, closing the same day at $5.17 1/4.

As far as USDA's estimates are concerned, I've already criticized the department for sticking with a bloated estimate of China's corn ending stocks in the face of contrary evidence. And USDA was initially slow to raise the corn export estimate for China when purchases from the U.S. were already higher.

Even without those flaws, it would have been difficult for anyone's fundamental assessment to keep pace with corn's shrinking supplies, largely because China has been good at delaying the reporting of their unexpectedly large corn purchases.

After more than three months of quiet activity, the final four business days of January saw USDA announce 230 million bushels (mb) of U.S. corn sold to China for 2020-21, followed by a couple weeks of modest sales, followed this week by three sales totaling 121.1 mb. China's official tally of U.S. corn purchases is now up to 883 mb for 2020-21 or a little more than 22 million metric tons (mmt) -- far more than anyone expected when the corn rally first began.

We can look at the situation in two ways. The traditional view is that each WASDE report along the way made a good case for selling corn. For example, on Oct. 9 -- when USDA was estimating 2.167 bb of ending corn stocks and a farm price average of $3.60 per bushel -- the spot price of $3.95 looked like a pretty good deal, especially as the daily count of COVID-19 infections were rising to new highs in the U.S. Only in hindsight do we now shake our heads at $3.95 a bushel.

The other view to consider is that there are times when the market knows better than our best traditional assessments. Another way of looking at the $3.95 spot price on Oct. 9 was that it was suggesting ending corn stocks were roughly 350 mb less than USDA's estimate. Those rising spot prices were moving assessments; difficult to keep up with and constantly suggesting corn supplies were tighter than we realized.

Another indicator that was starting to turn more bullish was the cash basis. Figured off of DTN's National Corn Index, the national cash basis was 25 cents under the December contract at the time of the October WASDE report. It wasn't as narrow as the 19 cents under the board seen the year before, and it wasn't suggesting $5 corn either, but it was tighter than usual during harvest.

The confusing part of all this is that market prices aren't always reliable by themselves. Sometimes they get detached from reality and shouldn't be trusted.

So, how do we know when rising prices are legitimate bullish signals?

That brings us to the current dilemma. DTN's National Corn Index is sitting at $5.35 on Thursday's close (March 18). Based on historical comparisons of corn prices and ending stocks-to-use ratios, the market is either telling us that U.S. ending corn stocks are roughly 1.10 bb in 2020-21 or corn prices have gone too high and need to correct back.

I suspect the truth is somewhere in the middle, but the question of ending stocks remains a guessing game with much depending on China and the weather. Technically, the trend in May corn remains up as long prices trade above the February low at $5.23 1/4. The 50-day average, which has not been violated since mid-August, is at $5.37 and would be the first warning bell, should prices break lower.

Given the lack of information we have about China and the general uncertainty we have about the future, this seems to be one of those times when actual prices are more trustworthy than the information we have about the markets they represent.

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

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Todd Hultman