Corn Bears and Bulls

Corn Futures: A Look at Bullish, Bearish Influences

Dana Mantini
By  Dana Mantini , Senior Market Analyst
Corn export sales commitments are the lowest since the drought year of 2012 and the second smallest on record since 1990. Corn sales as a percentage of USDA's estimate through Oct. 31 are only 24.6%, compared to the five-year average of 38.3%. (Photo by USDA)

As we are in the midst of one of the most challenging planting, growing and harvesting years on record, and as we grapple with newly revamped trade deals, I wanted to take a new look at the corn market.

While many farmers and grain analysts have, throughout 2019, postulated on the potential for a sharp decline in corn yield, production and acreage, USDA has surprised us with not-so-disastrous numbers on each successive report; we'll find out in the latest World Agricultural Supply and Demand Estimates (WASDE) on Friday, Nov. 8, if that changes. But following heavy snows and too much rain in parts of the Western Corn Belt and Northern Plains -- and recent freeze events on a crop that has lagged badly in maturity -- perhaps the true effect will not be completely realized until the final crop numbers are revealed in January.

With December corn futures now sitting just 23 cents per bushel above the contract low -- 98 cents under the June high -- where is this market going and what are the factors driving it?

Here is a look at some, but certainly not all, of the bullish and bearish ingredients that may influence corn trade.

BULLISH

-- Managed funds, as we approach the Nov. 8 WASDE report, are estimated to still carry a net short of close to 165,000 contracts or 825 million bushels (mb).

-- The third slowest U.S. corn harvest on record could lead to surprising declines in yield, production and acreage, as frequent snow, rain, high winds and freezes may have negatively affected corn, especially in the Northern Plains.

-- USDA will revise both North Dakota and Minnesota acreage downward in the Nov. 8 report.

-- The U.S. corn basis, especially in the Eastern Corn Belt, is the strongest in years. Farmer selling has been lighter than usual with on-farm storage more than adequate. (Short-term bullish only.)

-- The recent trade deal with Japan, along with the prospect of a new USMCA trade pact (expected by Thanksgiving) with Canada and Mexico, could increase export quantities of corn or byproducts to these countries.

-- The new U.S.-China trade agreement may be signed by late November and could possibly include China sorghum, ethanol and DDG imports in addition to corn imports. China's feed grain supplies are supposedly very tight.

-- Until recently, Brazil has been very dry on a historical basis in September and October 2019, but rains appear to be picking up for November. Failure to get the normal rainy season, as planting has been delayed, may lead to lower second crop corn (safrinha) acres.

-- World corn carryout for 2019-20 is expected to fall to the lowest level in five years at 299.5 million metric tons (mmt), according to the average trade estimate. This compares to 324 mmt in 2018-19 and 341.3 mmt in 2017-18.

-- Although Brazilian corn production is pegged at a hefty 103 mmt for this coming year, Argentine corn acreage is expected to decline 6% and production to fall to 46.5 mmt, down 3.5 mmt. Argentina potentially faces much higher grain export taxes under their new president.

-- The November to the final U.S. corn production numbers has seen a decline in five of the past six years. If November corn production is lower, as many expect, then we can assume January will also be lower, as freeze, wind, snow damage and abandonment becomes more quantifiable.

-- The Dow Jones' survey of analysts suggests both corn yield, production and acreage on the Nov. 8 WASDE will be lower. Corn yield is estimated at down 1.1 bushels per acre (bpa), with harvested acreage falling by 500,000 and production dropping by 177 mb.

-- In their recent baseline projections, USDA projects a sharp rise in feed and residual use as meat exports are predicted to rise and the number of animals on feed remains large.

BEARISH

-- U.S. corn demand is the slowest since 2012, with export sales running 47% behind last year, and export inspections down over 62% from a year ago.

-- USDA can be expected to drop exports by 100 mb in November and ethanol usage by 25 mb on weak demand, further adding to ending stocks.

-- U.S. ending stocks of corn, currently pegged at 1.929 billion bushels (bb) for 2019-20 could rise close 2.1 bb if the above cuts happen and yield and production doesn't decline.

-- USDA's baseline numbers for 2020-21 suggest acreage will increase by 4.5 million acres (ma) to 94.5 ma. With a yield of 178.5 bpa, ending stocks could go to a burdensome 2.754 bb next season, even with an increase of close to 600 mb in feed/residual use and exports. Other private acreage estimates are close to 96 ma.

-- Brazil looks to raise a large crop estimated to be 103 mmt, while Ukraine had a record large corn crop of 36 mmt.

-- Ethanol margins beyond November are called at breakeven or worse, suggesting lower corn usage.

-- There is potential for large pockets of feed grade wheat to compete domestically with U.S. corn demand.

-- Argentina, Brazil and Ukraine are expected to continue to provide very stiff competition into 2019, unless, with respect to Argentina, export taxes are increased. Those three countries in 2019-20 will export an estimated 97.5 mmt compared to U.S. at just 48.3 mmt. Compare that to 2017-18 when those three exported just 64 mmt versus 62 mmt from the U.S.

CONCLUSION

These are a few of the factors that may go into corn futures prices in the weeks ahead. Mother Nature, macroeconomic forces and currency gyrations are tough to predict, and they can all affect corn prices. While corn stocks are certainly moving in the right direction -- with the lowest world stocks in five years -- the U.S., South America and the Black Sea are still awash in corn. In the U.S. (if the USDA baseline projections are to be believed,) it would appear that -- given good weather -- we will have plentiful supplies for 2020-21 and years to come. The rise in corn acreage for 2020-21 is a given following the prevented plantings and abandoned acreage of 2019.

As burdensome as supplies look to be next year and beyond, it is demand that may continue to be a real challenge for U.S. corn. South American and Black Sea farmers and exporters continue to ramp up crop production and infrastructure to export those crops, as their percentage of world exports continues in an upward trajectory.

While we await the WASDE report on Nov. 8, it may be prudent to set a plan to market some corn -- both remaining old crop and new crop -- in the event of a bullish report. Granted, the report could be bullish and the potential for a new U.S.-China and USMCA trade deal could be supportive to corn, but the current demand pace suggests USDA is far overstating U.S. export demand.

With the prospect for a huge acreage increase in 2020-21 and a monstrous ending stocks number (with good weather), there is little for corn bulls to get excited about. A rally to $4.00 to $4.10 on old- or new-crop December futures could warrant some aggressive sales.

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Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.

Dana Mantini can be reached at dana.mantini@dtn.com

Follow Dana Mantini on Twitter @mantini_r

(BE/CZ)

Dana Mantini