Until Jan. 6, the last time spot corn futures traded above $5 was May 14, 2014. At that time, old crop ending corn stocks were estimated at 1.146 billion bushels (bb), or 8.4% of annual use. Drought was threatening the Western Corn Belt and 59% of the new corn crop was planted -- in line with the usual pace.
The drought threat of 2014 eventually retreated and the corn harvest went on to have a good year, reaching a record high 14.22 bb on a record yield of 171 bushels per acre (bpa). Ending corn stocks increased to 1.73 bb in 2014-15, which was the start of a six-year run that would put spot corn prices in a slump, averaging $3.70 a bushel and falling as low as $3.09 during the coronavirus-related selling panic in April 2020.
As we now know, there's been a remarkably bullish about-face in corn prices since that April low, due in part to a smaller corn crop in 2020 than was earlier anticipated and unexpected buying from China. As I have often discussed, China appears to have shortages of feed grain and oilseeds, and it is difficult to tell how much more corn China might buy.
From a fundamental point of view, the recent rally in soybean prices is completely understandable. USDA's ending soybean stocks estimate of 175 million bushels (mb) is less than 4% of annual use and is the tightest supply situation in seven years, but USDA's estimate is too high. U.S. soybean export commitments already total 2.01 bb and deserve a higher export estimate than USDA's 2.20 bb.
Crush demand has also been active in the U.S., running 7% above last year's pace in the first three months of 2020-21. Some private analysts estimate U.S. ending soybean stocks below 100 mb. Historically speaking, soybean supplies have rarely been below 4% of annual use the past 23 years, but cash soybean prices often trade above $15 when the ending stocks-to-use ratio drops below 5%. This is a genuinely bullish soybean market and prices may climb higher yet.
In the case of corn, USDA's ending corn stocks estimate of 1.70 bb is 11.5% of annual use. It is a lot more bullish than the 3.32 bb estimated last June, but not close to the tight scenario we're talking about for soybeans. USDA may adjust its corn ending stocks estimate modestly lower in their World Agricultural Supply and Demand Estimates (WASDE) report on Jan. 12, but for now, the history of cash corn prices at an 11.5% ending stocks-to-use ratio points to a target of $4.20 per bushel, which is far below the $4.94 per bushel that March corn settled at on Jan. 7.
The 10-year average of spot soybean to spot corn prices is 2.5:1. Over the past 20 years, the ratio has ranged from roughly 2:1 to 3:1. The current ratio of 2.74:1 ($13.55 1/4 for March soybeans/$4.94 for March corn) is remarkably normal, given the much tighter fundamental supply concern in soybeans.
The dilemma here is that if soybeans continue to trade higher on tight supplies, as their price history suggests they will, it seems likely that corn will keep trading higher as well.
At what point do corn traders get nervous about prices above $5 without adequate fundamental support?
Markets are often more emotional than scientific, especially when prices are as high as they are starting to get. The fates of corn and soybean prices are largely in the hands of China and the weather -- two forces that are difficult to guess.
If soybean prices continue to trade up to $15 or higher, it is difficult to imagine corn won't go along for at least part of the ride, with or without the proper fundamental support. But we shouldn't fool ourselves into thinking there is no downside risk in this situation, especially where corn prices are concerned.
From what we currently know, the likely path for soybean prices continues to be up, but for corn, the path is not so clear. As we learned from two powerful examples in 2020, the future can be full of surprises. China may surprise us with more large corn purchases in 2021 or it might not.
For anyone holding corn and wondering what to do, I would suggest there are many reasons why corn hasn't traded this high over the past six years, and these opportunities don't come along often.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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