Newsom on the Market
Unless...
This column is going to be different. No tie-in to movies or songs, just a one-word reference to a favorite book of mine that fits the corn market to a T. I'll even let you figure out which one (hint, it's in the title). No technical analysis mumbo-jumbo to cause confusion, but rather a simple supply-and-demand table that everyone seemingly understands. Why this change? Because the corn market isn't complicated heading into 2017. It has the potential for being bullish. Far different from my recent discussions about the outlook for soybeans.
Let's start at the beginning, which in this case is actually ending stocks. On Thursday, Jan. 12, USDA will release its much-ballyhooed set of "final" 2016 production numbers, the latest supply and demand data (including ending stocks), and Dec. 1 quarterly stocks. For now, I want to focus on the ending stocks possibilities given the torrid pace of exports over the first quarter-plus of the 2016-2017 marketing year.
According to the latest weekly Export Sales and Shipment report available (this week's report is delayed until today -- Friday -- due to Monday's holiday), corn shipments were 579 million bushels (through the week ending Thursday, Dec. 15). This amounted to 26% of USDA's current export demand projection of 2.225 billion bushels, putting it 6% ahead of the previous three-year average pace. If, I repeat if, corn stays at this pace, it would result in an export figure of 2.358 bb, for a possible decrease of 2016-17 ending stocks (assuming other demand categories are left unchanged) of 133 mb.
Recall that USDA's current ending stocks estimate of 2.403 bb is the largest on the books since the end of the 1987-1988 marketing year. Reducing this figure to 2.270 bb doesn't change that scale. However, it's what could happen as we make our way through 2017 that changes the big picture.
Heading into the annual DTN/The Progressive Farmer Ag Summit at the beginning of this month, Informa Economics Group calculated 2017 corn plantings at 90.8 million acres. If realized, this would be a decrease of 3.7 ma (planted) from 2016. Using an average harvested/planted differential of 91.7% puts the possible harvested area at 83.3 ma. Using an Olympic average of the last four years of record U.S. average yields of 169.7 bushels per acre, results in a production estimate of 14.136 bb for 2017.
P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]
Total supplies then would be approximately 16.4 bb (adding in an expected 30 mb of imports), second only to 2016-17's estimated 17.0 bb. Now the question becomes demand. Using a simple slope formula for demand growth from 2003 (the first year total U.S. demand climbed above 10 bb) through 2016 projects 2017-18 total demand at 14.923 bb. How the final breakout of this demand occurs is anyone's guess, though the same sort of simple slope results in a slight decrease of feed offset by an increase in exports. The bulk of demand growth falls into the "other" category (food, seed, industrial, etc.).
If this scenario plays out, with total supplies of approximately 16.4 bb and total demand of roughly 14.9 bb, ending stocks for the 2017-18 marketing year would be calculated at about 1.5 bb. And, if so, then ending stocks-to-use would come in at 10.1%, the second-tightest bottom line (excluding the drought years of 2010 through 2012) since the beginning of corn's demand market back in 2006.
Therefore, the initial supply-and-demand table looks bullish for corn heading into 2017.
Unless...
President-elect Donald Trump follows through on his campaign promise to disrupt trade with Japan and Mexico, the world's first- and second-largest buyers of U.S. corn. It is possible the pace of corn sales and shipments to finish off 2016 is more of a preemptive move ahead of the Jan. 20 Inauguration Day and insurance waiting for more information regarding Brazil's crop. Recall that 2016 saw Brazil basically run out of corn due to weather-related production problems, so that country will need to rebuild its stocks before becoming a serious threat to U.S. exports again. The December WASDE report increased Brazil's ending stocks projection to 6.44 million metric tons, after exports were increased to 28 mmt. Brazil reportedly exported only 16.5 mmt in 2015-16, 34.46 mmt the year before that.
On top of that, the president-elect's early cabinet and key adviser nominations have a general anti-ethanol theme going. While it would still take an act of Congress to change the existing energy policy, remember that all of government is lined up on the same side of the aisle following the inauguration.
U.S. producers could plant more corn than expected again in 2017. In December 2015, the thought was U.S. corn planted area would be around 90 ma, before climbing to 94.5 ma through the December report (this number could still change in January). It's possible such a scenario could play out again this year, though the November soybean/December corn futures ratio of 2.61:1 would suggest soybeans have tried to buy acres.
The possibility exists then for U.S. old-crop ending stocks to be larger than expected, meaning new-crop beginning stocks would be larger as well. Both old-crop and new-crop demand could be reduced, possibly, and the U.S. could once again prove it just likes to plant corn. If all, or even some, of this occurs, it would dramatically change the outlook for corn.
Bonus question: What book uses the word "Unless" as a central theme?
Darin Newsom can be reached at darin.newsom@dtn.com
Follow Darin Newsom on Twitter @DarinNewsom
(AG/BAS)
Copyright 2016 DTN/The Progressive Farmer. All rights reserved.