Todd's Take

Each fall, when Lucy convinces Charlie Brown that he is supporting the great Thanksgiving tradition of kicking the football, we plead with him not to do it. Of course, Lucy wins out and Chuck ends up on his back, betrayed again by Lucy's dirty trick of pulling the ball away. No matter how many times Charlie tries and fails, he genuinely believes the next time will be different. The naive faith is a bit endearing, but come on -- Chuck also needs to wake up.

You've probably guessed by now that we are Charlie Brown in this metaphor, surprised again after USDA just pulled the football away on Wednesday and posted a new record-high corn yield estimate of 181.3 bushels per acre (bpa). If the surprise of USDA's higher-than-expected estimate feels familiar, it was just 10 months ago I wrote about USDA posting a new record yield of 175.4 bpa in the November 2017 WASDE report in a column titled "Is This the Year of Super Corn?"

Read the column here: https://www.dtnpf.com/…

Last year's record estimate was actually more of a surprise, as drought conditions were more threatening in 2017. Other than Missouri and Kansas, most corn-producing states showed adequate soil moisture this year, and summer temperatures were largely moderate in July and August. Comments from private crop tours frequently included the word "variability" for a second consecutive year, but judging from USDA's latest report, the caution in those observations was unwarranted.

Based on the past 37 years of guessing yields, Wednesday's corn crop estimate has a 90% confidence interval of plus or minus 7.6%, so there is still ample wiggle room in Wednesday's number. However, the same track record also shows that USDA's September estimate has been too low two-thirds of the time. Admittedly, we have no real evidence at this point to argue USDA is drastically wrong, other than the same naive hope that entices Charlie Brown into whiffing each fall.

If we get back to our main task of trying to understand what corn prices should trade at, given what we currently know, Wednesday's report was more apt to be a good buying opportunity for end users than the start of a new bearish move.

I suspect Wednesday's 14 1/4-cent drop in December corn was largely an emotional response of noncommercial liquidation, which will not stand the test of time. USDA's report aside, shame on speculators for hanging on to the long side of the market in front of harvest after a summer of good crop conditions. Like Charlie, they largely got what they deserved.

Corn producers, however, should not be swayed by Wednesday's report. After six consecutive years of good growing weather, it should be no surprise that cash corn prices are low heading into harvest -- that's a common seasonal influence. What is not common is USDA estimating lower ending corn stocks in 2018-19 for both the U.S. and the world -- times are a changing.

The last time I wrote about USDA surprising us with a higher yield estimate for corn was on Nov. 14, 2017. As we now know, last year's yield of 175.4 bpa eventually went even higher, to a final 176.6 bpa in January. November's ending stocks estimate was high at 2.487 billion bushels (bb) and the DTN National Corn Index was low, at $2.99 a bushel. The mood for corn was bearish, noncommercials were net-short 125,113 contracts, and the demand outlook was not so good.

Six months later, the DTN National Corn Index was at $3.62, boosted by an unexpected drought in Argentina that was not part of the conversation in November. Once again, corn's bearish harvest mood proved temporary, and prices succumbed to their seasonal tendency.

In spite of the initial shock of Wednesday's 14.8 bb crop estimate, the outlook for corn prices after harvest looks more bullish than it did a year ago. Among the U.S.' top competitors for 2018-19 exports, Ukraine's crop is expected to be up 271 million bushels from a year ago, while the combined production of Brazil and Argentina was down 1 bb in early 2018. Until South America can ship more corn again in mid-2019, the U.S. is well-positioned to benefit from increased world demand.

As a guy who has studied market behavior for decades, I find it a little humorous that, much like Charlie Brown, we humans continue to get wrapped up in guessing games over yield, and then act surprised when we find out, once again, that we are not very good at it. But in the larger scheme of things, surprises like Wednesday's are small tweaks that need to be considered in the context of everything else going on.

Meanwhile, traders continue to ignore that 2018-19 is offering U.S. corn prices the best demand environment since the ethanol boom. Yes, there is plenty of uncertainty ahead, and this is not a justification for $5.00 corn. However, while we lay on our backs looking at an autumn sky and feeling the pain of the latest whiff, there is plenty of reason to believe that the current bearish mood will not last, and corn's seasonal influence will likely bring higher prices again in the second quarter of 2019.

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

Follow him on Twitter @ToddHultman

(BAS/AG)

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