Todd's Take
An Interview With Joel Karlin
Joel Karlin is no stranger to DTN subscribers, the author of our Fundamentally Speaking blog, known for its in-depth statistical study of numerous weather and market factors.
Joel Karlin is also a commodity merchandiser/market analyst for Western Milling and a professor in the Ag Business Department at Fresno State University. His specialties include supply and demand analysis, price forecasting and relative value nutritional analysis. He is also Western Milling's economist. Joel received his bachelor's degree from Northwestern University and his master's degree from Kansas State University in 2010.
The following is the interview in written form.
TODD: When did you start writing for DTN?
JOEL: Started writing for DTN in 1999, can't believe it has been 20 years.
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TODD: Joel, while looking at Dow Jones pre-report survey, I saw most analysts estimating new-crop U.S. ending corn stocks at an average of 1.684 billion bushels (bb), but you came in at the low end with 1.257 bb. I know you put a lot of thought into your estimates -- could you tell us some of the reasons why you think ending corn stocks will eventually be lower?
JOEL: With Thursday's (Oct. 10) USDA WASDE figure of 1.929 billion, I was off by far more than the trade that had an average guess of 1.689 bb. My lower 2019-20 ending stocks figure was predicated on a planted figure of 88.0 million, which is 1.90 million lower than Thursday's revised planted number with a harvested area of 80.1 million versus Thursday's USDA figure of 81.8 million, which is down 200,000 from their September figure. I was also looking for a yield of 164.5 bushels per acre (bpa) versus Thursday's USDA yield of 168.4 bpa, which was surprisingly boosted by 0.20 bpa versus the average trade guess of 166.8. My demand expectations were fairly close to the USDA expectations, which were lowered by 150 million in the export category to 1.90 billion, and corn used for ethanol lowered by 50 million bushels (mb) to 5.40 billion. Given the delayed maturity of the crop, the current winter storm moving through the Dakotas into the Midwest -- and the growing drought in the Southeast, Delta and Ohio Valley -- it is still possible to see yield reductions in both the November 2019 and January 2020 USDA crop reports. Such was the case last year when the USDA pared the 2018 corn yield from 180.7 bpa to 176.4 bpa from the October to January reports, a decline of 4.3 bpa. We should note that, of the percent of corn samples sent to the lab, USDA noted that 49% was still in the dent stage and only 29% was mature, which shows that much is still to be determined about this year's crop.
TODD: In Thursday's WASDE report, USDA increased the feed and residual demand estimate from 5.275 bb to 5.618 bb. Do you think we can expect higher feed demand for corn in 2019-20?
JOEL: The USDA did increase feed and residual demand by a sharp 343 mb for the last marketing year to 5.618 bb and this no doubt contributed to the USDA decision to boost the 2019-20 feed and residual usage category by 125 mb to 5.300 bb. Given these figures, I have a hard time reconciling the far lower than expected Sept. 1 stocks of 2.114 bb to enhanced feed usage during the June-August 2019 quarter. The December, March and June Quarterly Stock reports all came in higher than expected and this was supposedly linked to less than anticipated feed usage. So, in my opinion, it strains credibility that all of a sudden more corn was fed. Over the years, feed usage of corn has struggled to get back to levels seen 15 years ago when over 6.1 bb of corn was fed. Since that time, feeders have extensively used a number of different byproducts, such as DDG and corn gluten feed with good results, while this year, wheat in the summer was trading at 14-year lows. In my opinion, and that of some other respected analysts I have talked to throughout the country, we feel that the real reason why the Sept. 1 stocks report was so low was the 2018 U.S. corn yield, and that the output of 174.6 bpa and 14.420 billion are both overstated. The problem is that, as opposed to soybeans where the USDA makes revisions in soybean acreage, yields and production a little over nine months after the annual crop production figures are released, if the 2018 U.S. corn crop, yield and acreage is revised it will not be until the next USDA Ag Census, which will not be for five years. This leads me back to saying that I think the real yield last year was closer to 171.5 to 172.0 and this year's yield, based on current crop conditions and yield results reported so far, is at least 4% below year-ago levels.
TODD: Brazil and Argentina have offered more aggressive export competition in late 2019. Can the U.S. still achieve 2.05 bb of exports in 2019-20? If not, how far do you think we may need to come down?
JOEL: Our corn sales pace has been abysmal with yet another paltry figure reported Thursday, so no surprise that the USDA ratcheted down our projected overseas sales by 150 million to 1.90 billion, which would be the lowest total in five years. At a time when we should be the most competitive seller in the world, Argentine and Brazilian offers are well below those of the U.S. Keep in mind, however, that most foreign buyers have a complacent attitude, for they know U.S. and global corn stocks are more than ample, and with trade tensions, there is little fear that prices will move higher. Should, and I repeat should, U.S. 2019 production not be as large as projected Thursday, and early season dryness concerns in South America continue to proliferate, perhaps this complacent mindset may change.
TODD: Is there anything else about the corn market in 2019-20 that you think we should be paying attention to?
JOEL: Even if U.S. corn production were to move lower, the fact that our beginning stocks are the third highest since 1988, export demand is poor with ethanol margins under pressure and feed and residual demand is still flat, it would take a real South American weather scare to get corn prices to move higher, especially with much of the 2019 crop not sold. Furthermore, there is a lot of corn ground that was not able to get planted this past spring that undoubtedly will go back into production next year.
TODD: Thank you Joel. As usual, you've given us a lot to think about. USDA's estimates didn't agree with you Thursday, but I wouldn't be surprised to see them bend your way by January.
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman
Joel Karlin can be reached at jkarlin@westernmilling.com
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