Todd's Take

Corn Bulls Come to Life

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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On Oct. 27, December corn closed back above its 100-day average for the first time since Aug. 18, 2021. Shipping disruptions from Hurricane Ida and 15.0 billion bushels of new supplies have not been enough to hold corn prices down. (DTN ProphetX chart)

All in all, corn prices had a pretty good summer this year, helped by tighter-than-normal supplies. USDA's August World Agricultural Supply and Demand Estimates (WASDE) report showed a U.S. ending stocks estimate of 1.117 billion bushels (bb) for old-crop corn. At the time, it was the lowest surplus the market had seen in eight years.

Part of the drop in old-crop corn supplies came from a dry finish to the 2020 growing season, but the main bullish surprise of the year was China's record purchase of 845 million bushels (mb) of U.S. corn. For a country that rarely imported much corn and had never purchased more than 203 mb from the U.S., the 845 mb purchase was a stunning game-changer that lifted DTN's national index of cash corn prices from trading below $3 in August 2020 to a high of $7.48 by May 7, 2021.

With old-crop corn supplies tight and drought clinging to the northwestern Corn Belt in early 2021, there was plenty of interest from producers to see where December 2021 corn prices would land in the new season. For much of the summer, selling opportunities were good with December prices holding a wide, sideways range between their May 7 high of $6.38 and a May 26 low of $5 1/4. It was the highest December prices corn had seen in eight years.

As summer progressed, corn's back-and-forth trading formed a narrowing triangle formation with support defined by its 100-day average. It was impressive prices were not breaking lower after May, as they typically did.

On Aug. 20, 2021, corn's bullish Cinderella carriage turned into a pumpkin, hit by several bearish concerns. On that day, December corn fell 13 3/4 cents to $5.37, finishing below the 100-day average for only the second time since the rally began in August 2020.

Prices were pressured by rain in the Dakotas that was expected to spread into the northwestern Midwest, including Iowa. On the same day, Reuters posted an article that said the Environmental Protection Agency (EPA) would recommend lower blending mandates for renewable fuels. If that were not enough, the spread of the COVID delta variant was raising concerns about grain demand from China.

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With traders already anticipating the approach of harvest, the sell-off on Aug. 20 was hard to argue with, and prices eventually traded lower, also succumbing to an extra bearish hit from Hurricane Ida at the end of August.

As gloomy as the combination of bearish factors looked at the time, December corn prices held together surprisingly well, and to their credit, noncommercial net longs did not jump ship. Prices briefly dipped below the $5 mark once, just before USDA's Sept. 10 WASDE report.

USDA's September report was technically bearish for corn, increasing its estimate of the 2021 corn crop and ending stocks. Traders, however, were relieved to find the crop estimate wasn't larger, and December corn posted an outside bullish reversal -- a higher close that set the harvest low for the season.

On Oct. 27, December corn closed above its 100-day average for the first time since the Aug. 20 sell-off. The current outlook for prices is technically higher and fundamentally confusing.

USDA's most recent estimate of U.S. ending corn stocks is pegged at 1.500 bb, a higher amount that suggests cash corn prices somewhere near $4.60 a bushel. However, DTN's National Corn Index of cash prices closed at $5.45 a bushel Thursday, well above $4.60. Clearly, the market thinks USDA's assessment is too bearish and, given the uncertainty remaining this season, it is difficult to disagree.

Wednesday's report (Oct. 27) from the Energy Department showed the previous week's ethanol production within a whisker of an all-time high and helped ease fears that EPA may propose a lower blending mandate. So far in 2021-22, ethanol production has averaged 989,999 barrels per day, which translates to 5.40 bb of corn demand, if the pace holds up.

The big wild card, that none of us yet know, will be the size of China's U.S. purchases in 2021-22. USDA currently estimates China's production deficit at 21.0 million metric tons or 827 mb. January corn on China's Dalian exchange was priced at the equivalent of $10.28 Thursday (Oct. 28), an expensive price that suggests China needs to buy corn. China is already on U.S. books for 469 mb. Just how much more China needs is difficult to say.

There will also be other issues for corn in the months ahead. How much will this year's shipping problems and higher shipping costs hurt U.S. exports? Will Argentina's corn production suffer from La Nina conditions in 2022? Will problems obtaining affordable fertilizer get so bad that corn acres will switch to soybeans in the spring of 2022? And what about the chronic drought in the western U.S.?

I don't have all the answers, and it is difficult to see too far ahead. But I can say this week's close back above the 100-day average is an impressive sign of bullish market behavior, not to be taken lightly. If Hurricane Ida and 15.0 bb of new corn supplies can't break prices lower, I'm not sure what can -- at least in the near term. For producers, the good news is that corn's seasonal tendency for prices to trade higher from early October until late May has a chance of repeating in 2021-22. With this week's bullish change in trend, corn prices seem to agree.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1

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Todd Hultman