If we look at Thursday's World Agricultural Supply and Demand Estimates (WASDE) report from USDA, especially the world estimates for corn, it is easy to get a bullish feeling for corn prices. USDA lowered its estimate of world ending corn stocks to 151.96 million metric tons (mmt) (5.98 billion bushels) for 2018-19, a 21% drop the previous season's 191.73 mmt (7.55 bb). Not only are world corn stocks expected to be lower in 2018-19 relative to use, corn is expected to have the lowest stocks-to-use ratio since 1995-96, one of the more bullish years in corn price history.
When we look at corn prices themselves, however, we see a chart in a deep slump. December corn is trading at $3.56 early Friday, down a painful 17% from the high it reached just seven weeks ago. Moving to a long-term chart of December corn prices, current levels are not too far from last year's harvest low of $3.35 1/2, or the eight-year low at $3.18.
So what gives? Why are corn prices in the dumps when USDA's world estimates look so bullish? That's a fair question and I have a few thoughts to help try to understand corn's dilemma.
First, if we never saw USDA's world estimates, there wouldn't be much argument about December corn trading as low as it currently is. Back in early May, when December corn prices were pushing near what would eventually become their seasonal highs, noncommercials put on their largest net-long position since 2011.
Dry weather for Brazil's second corn crop -- coming after Argentina's drought -- surely inspired some of the bullishness, but the exuberant noncommercial response was revealed to be unsustainable when early planting went well in the U.S., and early crop conditions looked good.
Lots of bullish noncommercial positions have been losing money as USDA has repeatedly reported high crop ratings each Monday, which was a certain recipe for even lower prices. And that's what happened to corn. Add to the mix generally bearish concerns in grains over the lack of a NAFTA agreement and a trade war with China, and a bullish argument for corn prices becomes difficult to make.
It is in this heavily bearish environment that we are asking traders to have faith in USDA's more bullish projections for 2018-19. Keep in mind that the first field-based corn yield estimate in the U.S. will not be released until USDA's next WASDE report on Aug. 10 and last year's corn yield hit a record high 176.6 bushels an acre (bpa) on much less than ideal conditions. Can anyone yet say that a 15.0-bb crop with an average yield of roughly 183 bushels is out of the question?
Here in the U.S., USDA expects the current season to end on Aug. 31 with 2.03 bb of surplus corn. However, the 5.3 bb of corn stocks USDA reported for June 1 shows that demand is running 77 mb less than a year ago, but USDA is predicting 261 mb of increased corn demand in 2017-18. The final ending stocks for corn this season could easily be 2.2 bb.
When we take a closer look at USDA's world estimates, we see that world corn production is expected to be up 20.6 mmt (809 mb) in the new season, while world demand is expected to be up 24.4 mmt (961 mb). As mentioned earlier, the U.S. crop is still young, and new crops in Brazil and Argentina have yet to be planted. We are also talking about demand estimates that extend to Aug. 31, 2019.
Looking at world corn demand, it is difficult to tell in the WASDE report where the surge is coming from, but we do see that 7% of the 24.4 mmt increase is coming from China. Keep in mind that China reportedly has plenty of old-crop corn on hand and is only expected to import 1 mmt more than it did a year ago. So we have to note a significant part of the demand surge USDA is recording will not translate as increased exports for the U.S.
It has been said that all politics is local and that may also be a good bit of wisdom when trying to understand this year's corn prices. On the practical side, ending U.S. corn stocks in excess of 2 bb, a slower demand pace in the current season, uncertainty over the future of NAFTA, and relationships with other trading partners, are all bearish factors close to home. So is the corn growing in U.S. fields, most of which is off to a good start in 2018.
At this point, USDA's world estimates are still more theoretical than practical, and plenty of changes are still possible as we journey on. It takes more than just estimates to move markets -- it takes real people actually buying corn and that's what we're not seeing yet. Stay tuned to DTN for what promises to be an interesting season for corn.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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