Todd's Take
Corn Marketing Decisions Stressed by Curious Fundamental Data, Over-Confident Traders
If I was on camera on June 28, you could have seen my mouth drop open when I read USDA's estimate of June 1 corn stocks at 4.993 billion bushels (bb), 126 million bushels (mb) above the average trade guess in Dow Jones' survey of analysts. The previous day, on DTN's Closing Market Comment video, I said there was a chance corn stocks could come in 100 mb or possibly, 200 mb (mb) below expectations, based on the strong demand clues we were seeing in the market. My brain was spinning as I tried to figure out how 4.993 bb of corn was even possible.
To explain, USDA's higher estimate meant corn demand totaled 11.734 bb in the first three quarters of 2023-24, almost 200 mb less than what was used two years prior when corn prices were much higher and supplies less available. The high June corn stocks number made no sense as U.S. corn exports were keeping an active pace, ethanol production was up nearly 4% from the previous year and feed demand was strong by all accounts. DTN's national corn basis was also relatively strong and had been steadily strengthening since harvest. Knowing it's a lot easier to sell $4 corn than $6.50 corn, saying corn had less demand in 2023-24 made no sense.
To make matters worse, I'm the guy that has repeatedly said USDA's Grain Stocks reports are the most credible information USDA provides. Tracking inventory is about as cut and dry as a report can get. For corn and soybeans, USDA's September 1 Grain Stocks reports are the best checks and balances we have for errant World Agricultural Supply and Demand Estimates (WASDE).
Partly because of USDA's high corn stocks estimate, Dow Jones' survey of analysts was looking for USDA to estimate new-crop U.S. ending corn stocks at 2.27 bb in the July 12 WASDE report. If true, it would have been the highest ending corn stocks in eight years and would have added to the already-bearish weight on corn prices. Instead, USDA went a different direction.
On July 12, USDA increased its estimates of feed demand and corn exports by 75 mb each, lowering the ending stocks estimate for old-crop corn to 1.877 bb, the lowest 2023-24 estimate USDA has published to date. Apparently, USDA had a change of heart from the findings of the June 28 corn stocks report. In a strange twist of logic, USDA's July WASDE report actually said, "Feed and residual use is up 75 million bushels based on indicated disappearance in the June Grain Stocks report."
If this tale sounds familiar, we had a similar situation in 2020. In short, USDA backtracked on an initial June 1 corn stocks of estimate of 5.224 bb and revised stocks down 205 mb to 5.019 bb in the September report. I don't know how an inventory report can go so far off the rails, but it's possible under-reporting leaves big gaps for USDA to fill with bad guesses.
In Thursday's trade, DTN's National Corn Index ended at $3.84, near its lowest prices in more than three and a half years. In terms of cash corn prices being below their production costs, the two most painfully bearish periods in my professional career were the $1.58 low in December corn in 1986 and the $1.85 double-bottom in December corn in 1999 and 2000.
The big surpluses of the 1980s were understandably demoralizing and accompanied by high interest rates. The Asian recession of 1999 and 2000 took the rug of demand out from under corn prices as the economies of some of the best U.S. customers became paralyzed. Neither period had the benefit of ethanol's ability to use 5.45 bb of corn to help keep the corn surplus moving with an added benefit of keeping gasoline prices down. Without going to the history books, I'm confident the basis in both periods couldn't match the stronger levels we're seeing today.
Yes, USDA's current estimate of a 14% ending stocks-to-use ratio leans bearish for price expectations, but corn stocks are only about 325 mb away from a supply level that has historically supported breakeven prices. Yes, it is possible corn production could come in higher than expected, but a lower number is also possible after this year's numerous hits of severe weather. From a fundamental viewpoint, it seems absolutely crazy that funds want to hold a record net-short position at prices this low. USDA has re-interpreted the mathematical meaning of 4.993 bb of June 1 corn stocks, but apparently, it's going to take more than that to shake funds' confidence in their record net short positions.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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