Todd's Take

Corn Lessons From the Road

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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This chart of spot corn prices shows several examples where big harvests and low prices were followed by significant and unexpected price rallies -- a good reminder to keep our eyes on the road and not to fixate on the size of the harvest (DTN's ProphetX chart).

A week ago Thursday, I was driving back to Omaha with DTN Senior Ag Meteorologist Bryce Anderson, and we were surveying one corn field after another along I-80. We had just come from three days of speaking engagements at Husker Harvest Days in Grand Island, Nebraska, and still had USDA's latest crop estimate fresh on our minds -- 14.83 billion bushels (bb) of corn.

Looking over what seemed like endless rows of full, good-looking crops for miles and miles, I commented to Bryce that it was difficult to even imagine how much corn this country produces, knowing that the fields we were seeing from the road in central Nebraska only represented a tiny sliver of the nation's output.

Bryce said he remembered in 1981 what a big deal it seemed to be when the harvest first hit 8 bb. I replied that I remembered 10 bb being a big accomplishment, but I couldn't remember which year it was. My best guess was the early 1990s.

Working with a faint cellphone signal, Bryce found a website with the answers we were looking for and started reading off crop sizes by the year. 1985 and 1986 were both over 8 billion, and when was the drought? Oh yeah, 1988.

1992 had a big crop of nearly 9.5 bb, but the 10-bb mark wasn't broken until 1994 with a record yield of 138.6 bushels per acre (bpa) -- a yield that would be considered a disaster today. In between those two big crops was the wet year of 1993 when harvest fell to 6.3 bb.

As Bryce continued reading off the numbers, this analyst's wheels started to run. Isn't it interesting, I thought, how several of the big crop years were followed one or two years later by an event that would take prices significantly higher. When prices were depressed, we had no way of knowing that big opportunities were just around the corner.

Big crops of 1981 and 1982 were followed by drought in 1983. Depressed prices at the time of the big ending stocks in the mid-1980s were rescued from the lows by the drought of 1988. The wet year of 1993 followed a big crop in 1992 and that 10-bb achievement in 1994 was followed by 1995-96, the biggest bull market corn had seen at that time.

I don't mean to sound like Pollyanna here, and the moral of the story is not that big price rallies always follow big crops. I also remember the long, four-year slump from 1998 to 2001 that was accompanied by Asia's recession and a string of big crops.

My interest was more from an analytical point of view of how much emphasis we often put on the market factors that we know -- especially at harvest time when talk about the size of the crop overshadows everything else.

I won't disagree that 14.8 bb is a lot of corn, and the bearish impact it is having on current prices is obvious and well known. My conversation with Bryce, however, reminded me once again that we have to hold lightly the factors we know. An entirely different market environment could be less than a year away, and that is why we stay vigilant -- we have seen all too often how unexpected events can change the trajectory of expectations.

The good news for corn prices is that world demand is rising, and thanks to lower South American production in 2018, the U.S. is poised to benefit from increased exports the next several months. Thursday's export sales report from USDA already shows total commitments for corn up 50% from where they were at this time a year ago.

We can admire this big crop for now, but in the months ahead, we need to keep our eyes on the road. This is no time to be caught gazing in the rearview mirror.

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Todd Hultman