Todd's Take

Is Corn More Bullish Than We Know?

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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USDA's ending stocks estimate of 2.17 billion bushels is in line with where corn supplies have been the past four years and suggests cash prices will trade a similar range between $2.80 and $4.00. Or is there a bullish change coming? (DTN ProphetX chart by Todd Hultman)

If you've been so busy harvesting corn lately you haven't noticed prices, you'll be glad to hear December corn was up the first four days of this week and closed at $4.16 1/4 Thursday (Oct. 22), the highest in over a year. If you're trying to feed cattle or buy corn for your ethanol plant, these higher prices are getting annoying and don't make sense when you look at USDA's latest supply and demand estimates.

As DTN's lead market analyst, I have mixed feelings. On one hand, I'm glad corn growers have a terrific opportunity to sell at these higher prices after a brutal start to 2020 and hope they have time to take advantage of these prices for at least part of their crop this fall. Like those needing to buy corn, however, I'm also scratching my head, wondering why the market is treating corn prices with so much optimism. Earlier in October, USDA estimated 2.17 billion bushels (bb) of U.S. ending corn stocks for 2020-21, based on a 14.72 bb corn crop.

USDA's ending stocks-to-use ratio works out to 15%, which historically correlates to roughly $3.50 a bushel. USDA's average farm price estimate for 2020-21 is $3.60 a bushel. DTN's National Corn Index of cash prices closed at $3.90 a bushel Thursday evening, its highest close in over a year.

Explaining the higher corn price is not easy. It is possible that the market thinks corn supplies are tighter than USDA is estimating, or it is possible speculators have gotten too enthusiastic. As I've often said, markets are human and humans are emotional; humans can also be wrong.

As I look for a flaw in USDA's numbers, I don't see any obvious targets. Last year's production estimate was too high, but this year's 14.72 bb should be close to the final number. Feed demand at 5.775 bb is reasonable and so is ethanol demand at 5.05 bb. The export estimate of 2.325 bb has the most uncertainty and brings up another conversation.

USDA's weekly export sales report showed U.S. corn export sale commitments at 1.115 bb as of Oct. 15 or 48% of USDA's entire export estimate for 2020-21. Of the total, 415 million bushels (mb) or 10.55 million metric tons (mmt) was bought by China, a country that seldom imports much corn.

This year, however, China has not only bought more corn than usual, it has bought more soybeans, pork and sorghum than usual. China has been scrambling for food supplies and that has the speculative side of the market excited. The most recent CFTC data shows 259,987 noncommercial net longs have piled into the corn market -- the most in over a year.

Recently, there has been a widely circulated estimate that China is shopping for 30 mmt (or 1.18 bb) of corn. I don't know where that number came from or what it is based on, but it's been quoted so much, many are apt to accept it as true.

The estimate is not beyond the realm of possibility as the price of January corn on Thursday's Dalian exchange was the equivalent of $9.79 a bushel. However, I seriously doubt China has been going around telling people they're going to buy 30 mmt of corn and don't worry because we're going to give you plenty of time to get into the market first.

If anyone knows the source of the 30 mmt buying rumor and what this hot tip is based on, I'd be happy to hear from you. For the record, I agreed not to trade when I took this job, so DTN customers can be assured I'm not talking my position.

Technically speaking, corn prices are currently trending higher and aren't showing any sign of slowing down yet. Fundamentally, however, corn prices are on thin ice and China seems to be holding all the cards.

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Todd Hultman