Todd's Take

For U.S. grain producers, the presence of noncommercial traders in grain futures has always been both a blessing and a curse, and we are already seeing evidence of that again in 2018. Friday's CFTC data showed noncommercial speculators increased net-long holdings in corn a sixth consecutive week to 320,384 contracts, the largest buying surge in over a year and a half, which is a big part of the reason why Monday's close in May corn was up 37 cents from its January low.

On Thursday, USDA also contributed to a higher corn price by boosting its estimate of ethanol demand by 50 million bushels and export demand by 175 million bushels. May corn jumped 6 1/4 cents on the day with many hoping USDA's shift marked an end to corn's big surplus.

After conducting DTN's post-report webinar on Thursday, one participant shared with me his own estimate of a 1.32 billion bushel carry for 2018-19 and asked if that would justify $5.00 corn. My answer was no. It would take serious adverse weather and emotional traders to get spot corn prices to $5.00 a bushel. However, I appreciate the question as he rightly pointed out that USDA's new ending stocks estimate gave corn prices a better chance at a more bullish looking balance sheet in 2018-19.

Pause a moment to notice how we just assumed USDA's new export estimate of 2.225 billion bushels is legitimate and how quickly we go from there to thinking about what lower yields might do to ending surplus estimates for 2018-19. This seems to me like a classic case of confirmation bias, finding conclusions we want to hear without asking the hard questions.

The facts we reasonably know in early March are that U.S. corn shipments total 740 million bushels in the first half of 2018-19, down 28% from a year ago. Part of corn's slow start in 2017-18 was due to South America's bigger corn harvest in early 2017 and part has been due to recent flooding along the Ohio, Illinois and lower Mississippi Rivers.

USDA's new 2.225 billion bushel export estimate means the U.S. is going to ship 1.485 billion bushels of corn in the second half of 2017-18. That is a Herculean task, especially when we consider that U.S. corn shipments only totaled 1.149 billion bushels in the second half of 2016-17 after both Brazil and Argentina experienced late-season crop reductions in early 2016.

In the March WASDE report's own words, the increased corn export estimate reflects "U.S. price competitiveness, record-high outstanding sales and reduced exports for Argentina." Here USDA's arguments ring hollow as Monday's FOB corn prices were 10 cents a bushel higher in New Orleans, Louisiana, than Paranagua, Brazil -- not exactly a bargain when we consider that Brazil has a cheaper transportation cost to East Asia.

I agree with USDA that outstanding corn sales are high, at 879 million bushels so far in 2017-18, but they are not necessarily reliable. Some portion of outstanding sales go unshipped nearly every season and, given this year's uncertainties over NAFTA and difficulties shipping down the Mississippi River, it seems reasonable that some portion of outstanding sales will go unfilled again in 2017-18.

Finally, USDA did not say specifically how much export business they expect the U.S. to pick up from Argentina's drought, but USDA has to know its own estimate of Argentina's corn exports has dropped only 157 million bushels (4 mmt) from December to March. Also, it is likely that Brazil will get a significant piece of Argentina's lost business. One-hundred fifty-seven million bushels of lower exports are a long way from the 1.485 billion bushels of corn shipments USDA expects in the second half of 2017-18.

While noncommercial buying in corn has lifted prices, and has been a blessing for U.S. corn producers so far, we also saw an example last week of what happens when Cinderella's carriage turns into a pumpkin. Spot soybean meal prices rode noncommercial buying and Argentina's drought to their highest prices in over a year and a half in early March, only to give back a quick $18.50 last week.

Now, the situation in soybean meal has turned dangerously bearish with speculators holding their largest net-long position on record in a market where price momentum just made a sharp bearish turn. Given speculators' current bullish enthusiasm in corn, and USDA's weak fundamental case for March's lower ending stocks estimates, corn's carriage may not be too far from its own midnight bell.

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

Follow Todd Hultman on Twitter @ToddHultman1

(BE/CZ )

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