A few weeks ago, around the time of Halloween, I wrote an On the Market column titled "Dr. Technical and Mr. Supply." Based on Stevenson's Jekyll and Hyde, the theme was that the technical (chart-based) analyst side of me still viewed grains, including corn, as bullish. However, the fundamental (supply and demand-based) analyst that makes an appearance now and then can't be anything but bearish.
It is the latter that is writing this blog. So don't hold his conclusion against me, sweet ol' Dr. Technical. I had nothing to do with it.
It is Mr. Supply's opinion that if one is still bullish corn, like Dr. Technical, then one is obviously crazy. All you have to do is look at USDA's November Crop Production and Supply and Demand reports, and we all know USDA is NEVER wrong, and see that corn production is pegged at a new all-time high of 15.226 billion bushels, raising ending stocks to a modern-day record of 2.403 bb. And yes, those 3 million bushels ARE important, so don't drop them off!
Anyway, record demand projected at 14.610 bb doesn't help at all, with the bottom line ending stocks-to-use coming in at 16.4%. What's that you ask? What's "ending stocks-to-use" have to do with anything? Haven't you been paying attention?! (Dr. Technical: See, I told you he was mean.)
Ending stocks-to-use are the Holy Grail to fundamental analysts. The higher the percent, the more bearish the market. Easy enough, right? What, more questions?! Just take a look at the attached chart...
Granted, I'm not a specialist in scatter charts. I tend to leave those for DTN Analyst Todd Hultman and DTN Contributing Analyst Elaine Kub to decipher, but this is my best shot at one. Annual ending stocks-to-use pulled from USDA's January reports are plotted along the X-axis (bottom), with calculated national average cash price received plotted along the Y-axis (left hand). The blue dots show the combination of the two dating back to the 1995-1996 marketing year. For example, the first blue dot on the Y-axis is the ending stocks-to-use of 5% from 1995-1996, with an average price of $3.24.
Generally speaking, the lower the ending stocks-to-use, the higher the price. That blue dot shining like the North Start at the top of the chart is the 7.4% (es/u) from 2012-2013 that had an average cash price of $6.89. On the other end of the spectrum, the last blue dot to the right marks the 19.8% from 2004-2005 with an average cash price of $2.06. Simple enough, right? Good!
So if, like me, ending stocks-to-use run your analytical life, then there is only one conclusion: This year's cash corn price is overpriced, and needs to be closer to $2.00 per bushel.
There, I've said it again. I was told earlier this year, "It just isn't summer unless Newsom predicts $2.00 corn." (Dr. Technical: Again, don't blame me. Mr. Supply is the crackpot.)
Take a look at the fenced-in area. The big red dot (I did that intentionally to signify bearishness) marks USDA's latest projection es/u projection of 16.4%. Did I mention that's the largest in 10 years? Anyway, USDA also calculated the average cash price at $3.30 in November. But look below that comet that is flaming out and you see something more realistic. Back in 2001-2002 es/u was calculated at a familiar 16.3% with cash price coming in at $1.97.
So, yes, based on the purest of fundamental standards -- remember, USDA is infallible -- the average cash corn price for 2016-2017 should be close to $2.00.
It's time for all you technical bulls to drink the elixir that opens your eyes.
Darin Newsom can be reached at email@example.com
To track hisy thoughts on the markets throughout the day, followhim on Twitter @DarinNewsom.
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