Todd's Take

After the central Midwest experienced its highest temperatures of the year last week, it was not a big surprise that USDA's good-to-excellent crop ratings fell from 64% to 62% for corn and from 61% to 57% for soybeans in Monday afternoon's Crop Progress report. While conditions in the Dakotas remain grim, poor-to-very poor ratings in the double-digits in states like Illinois, Nebraska, Indiana and Ohio are also serious warnings -- this year's corn crops are struggling.

As DTN Senior Analyst Darin Newsom discussed in his July 21 Newsom on the Market column, "When Corn's Market Scale Tips," there is understandable frustration among many wondering why this year's corn prices are not trading higher. DTN's index of national cash corn prices stood at roughly $3.32 a bushel on July 21, below USDA's national cost of production estimate of $3.67 a bushel for 2016, even though this year's crop lacks the ability to achieve last year's record yield of 174.6 bushels per acre.

From my perspective, Newsom's comment that "for now, old-crop stocks outweigh new-crop weather concerns" explains a lot about the prices we are seeing, and also opens a door to understand more about how this corn market is behaving.

Just for kicks, let's say the national corn yield drops from last year's 174.6 bpa to 165 bpa in 2017. USDA hasn't yet accounted for prevented plantings, so let's also trim USDA harvested acres estimate down, from 83.5 to 82.5 million. That gives us a rough production estimate of 13.6 billion bushels in 2017, down 10% from 15.15 bb a year ago.

Clearly, this month's hot and dry weather and declining crop ratings have given noncommercials reason to buy corn. Friday's CFTC data showed traders net long 177,147 contracts as of July 18, the most since March. Looking at the market through the eyes of commercials, however, provides an even more interesting picture.

If we accept USDA's ending corn stocks estimate of 2.37 bb in the current season, then even a lower, 13.6 bb crop means that roughly 16 bb of corn will be available at harvest time in 2017.

From a commercial point of view, it seems highly unlikely that corn will be difficult to obtain at the end of 2017 -- even with this year's weather problems. For that reason, December 2017 corn is apt to run into bearish pressure as we approach harvest, just as corn prices typically do in late summer.

If there is any challenge obtaining corn in 2017-18, it would come toward the end of the season after harvested supplies have had time to draw down. Using our 13.6 bb production estimate takes ending corn supplies down to roughly 1.6 bb by the end of 2017-18 -- a lower, but still comfortable level of surplus.

When we look at September 2018 and December 2018 corn prices, we see more bullish behavior than what current prices are showing. Both are down from last week's highs, but September 2018 corn posted a new contract high on July 20 and December 2018 is back above $4.11 1/2, the site of its bullish breakout in June.

Where is the bullish market response to this year's hot and dry weather?

Granted, there hasn't been much yet, but this year's weather concerns have been showing up more in contracts over a year out. Even with this year's lower crop ratings, it may be difficult for December 2017 corn to overcome seasonal bearish pressure as harvest approaches.

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

Follow Todd Hultman on Twitter @ToddHultman1

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