Todd's Take

USDA's World Agricultural Supply and Demand Estimates (WASDE) reported a week ago Friday (8/10) had a familiar feel to it. Much like a year ago, when the clock struck 11 a.m. CT and USDA's numbers appeared, the corn yield estimate wasn't the 176.3 bushels per acre (bpa) that Dow Jones' analyst survey was expecting, but a higher number -- a record high 178.4 bpa.

While both August WASDE reports offered surprises, it is probably fair to say that the 2017 report offered the bigger shock. Drought had become more of a concern in 2017, stretching from the Dakotas into Iowa. In 2018, northern Missouri was the consistent trouble spot, but most of the larger producing states were generally doing well and USDA's crop ratings were high. Given last year's final record corn yield of 176.6 bpa, I doubt anyone fainted when they heard this year's 178.4 bpa estimate.

Of course, it is still early and these numbers will change through the fall, but a 14.6 billion bushel (bb) crop and a record high yield of 178.4 bpa are bearish enough to keep corn prices under pressure into harvest as is typical for corn prices when crops are big. After all, don't forget that the U.S. will also be carrying roughly 2 bb of old-crop corn into the next season.

It is after harvest, and whenever the seasonal low happens, that the year ahead should start to look different for corn. One year ago, U.S. new-crop corn sales were down 43% from the prior year as Brazil and Argentina punished U.S. exporters with 139.5 million metric tons (mmt), or 5.49 bb, of combined corn production.

This year, the situation is different as dry weather knocked Brazil and Argentina's combined production down to 116.0 mmt or 4.57 bb. USDA is expecting a third competitor, Ukraine, to increase its corn crop from 24.1 mmt a year ago to 31.0 mmt (1.22 bb) in 2018. Overall, however, U.S. exporters are in better shape to do more business in 2018-19, and new-crop corn sales are already up 54% from a year ago at this time.

With the U.S. well-positioned for more exports, it is also beneficial for U.S. corn prices that USDA is expecting a 3% increase in world corn demand. Not only is the world economy growing and wanting more corn-fed meat on the table, ethanol is becoming a popular oxygenate for fuels around the world. As USDA reported earlier this month, U.S. ethanol exports are up 33% in the first half of 2018 from a year ago.

So when will we see $5.00 corn? Sorry, but the situation is not that bullish. Corn still needs help from U.S. weather to reach $5.00, and as it now looks, 2018 will be the sixth consecutive year of good (or good enough) weather in the U.S. to produce a big crop.

Thanks to impressive growth of world demand and help from dry weather in South America, the outlook for corn prices is more bullish for the next nine months than it was a year ago. The one obstacle in this scenario is the rising U.S. dollar index, but it helps that South American supplies are down.

DTN's national index of cash corn prices, sitting at $3.34 on Thursday evening, probably won't see $5 by June 2019, but $3.80 to $4.00 is plausible.

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

Follow him on Twitter @ToddHultman

(BE/BAS)

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