Todd's Take

I don't mean to dwell on the past, but it wasn't that long ago (Jan. 12) when USDA increased its corn yield estimate to a higher-than-expected 176.6 bushels an acre and estimated U.S. ending corn stocks at 2.477 billion bushels (bb) for 2017-18, the most since the 1980s. December corn dropped a couple cents that day and looked like it was on its way to a new contract low. But, as we now know, the bearish trend ran out of gas. December corn prices that were near their lowest levels in a year in early December are now near their highest point in a year, and it is helpful to understand why.

Thursday's bullish response to USDA's lower-than-expected planting estimate of 88.0 million acres (ma) was the third time since Jan. 12 that a USDA estimate promoted a bullish price response in corn, as USDA previously increased its estimate of U.S. corn exports twice, related to Argentina's drought.

So far, USDA's estimate of Argentina's corn exports has only come down 4 mmt (157 mb) since December, but to be fair, there is room for USDA's estimate to come down another 3 mmt (118 mb) as Argentina's row crops have stayed dry late in the season. Even so, that is not enough to support USDA's 2.225 bb export estimate for 2017-18, as Brazil is sure to capture some of Argentina's lost business.

For corn bulls, the nice thing about USDA's estimates this early in the year is that they can go unchallenged for months, and so far it looks like noncommercial traders are trying to believe USDA's optimistic view. Back in mid-January, speculators were net short 92,247 contracts, but CFTC's latest data shows them net long 301,735 corn contracts as of Mar. 27, a sign of bullish confidence that likely grew larger after USDA just estimated 88.0 ma of plantings.

The question for corn prices now is just how bullish is USDA's new planting estimate? USDA's reliability table at the bottom of Thursday's report tells us that over the past 20 years, USDA's March planting estimate has missed the final estimate in January by an average of 941,000 acres.

More important than the history of USDA's March report is the role that weather will play in the weeks ahead. Some corn planting has begun in the South, but so far, no significant progress has been made in the Corn Belt. Soil temperatures are still too cold and the southeastern Midwest, in particular, has been too wet for fieldwork. Corn can get past a wet spring, but the possibility of prevented acres will be an important factor to monitor.

Assuming, for simplicity's sake, that USDA's 88.0 ma planting comes true, what would corn's new balance sheet look like? Using USDA's early yield estimate of 174.0 bushels an acre, and factoring for harvested acres, we get a 14.1 bb crop estimate versus USDA's estimate of 14.5 bb of total use in 2018-19, resulting in a production deficit of roughly 400 million bushels.

March 1 corn stocks of 8.89 bb makes it likely that U.S. ending corn stocks will be higher than USDA's estimate of 2.13 bb in 2017-18, but even ignoring that, USDA's 88.0 ma planting would result in roughly 1.73 bb of domestic ending stocks, or 12% of annual use. While this scenario would bring a modest reduction in corn supplies, it is a not a big enough change to shift December corn prices out of the $3.15-to-$4.50 range that they have traded in the past two years.

Alternatively, if we look at last year's yield of 176.6 bushels achieved in a dry Midwest, a good weather yield of 180 bushels is not unreasonable in 2018. That scenario would keep U.S. ending corn stocks roughly the same in 2018-19 as the current season.

Here in early April, we are relying on the word "if" far too often to be comfortable with any scenario yet. Thursday's USDA report probably narrowed the range of possible corn acres, but the biggest "ifs" of weather and yield are still ahead.

Part of corn's current uptrend may be traders breathing a sigh of relief that U.S. corn ending stocks are unlikely to increase in 2018-19. However, it is still difficult to envision a bullish scenario without help from adverse weather. Presently, corn's fundamental outlook is neutral, a potential disappointment to all those bullish speculators facing plenty of unknowns in the months ahead.

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

Follow Todd Hultman on Twitter @ToddHultman1

(BE/CZ)

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