Starting last August it’s been a wild and strange world in many respects. Corn has certainly participated in the “unexpected” and that will not change until at least the crop is in the ground this spring. Last July the fundamentals were all quite bearish and very few saw the upcoming dramatic change in the fundamentals as China lit a fuse under the market with aggressive buying.
Just as the majority of people were bearish last July the weight has now shifted to the bull side and it’s hard to find a bear. Momentum always swings too far in each direction. An old saying in the grain business that has almost always worked, however, is that big bulls always turn into big bears. I doubt that this one will be any different.
For the 2019/20 marketing year the carryover ended at 1.919 billion bushels and a stocks-to-usage ratio of 13.7%. This equated to a national average cash price of $3.56. In the spring of 2020 U.S. producers planted 90.8 million acres of corn compared to 89.7 the year ahead. National average yield this past year is 172 bushels per acre which even after all the very strong Chinese purchases, current estimate from the USDA is a carryover of 1.5 billion come this fall. Our estimate is 1.427 billion and a stocks-to-usage ratio of 9.7%. The bulls will argue that the rationing process in corn hasn’t even been started. Unlike soybeans, however, where the stocks to usage ratio is under 4%, is it really necessary to be rationing corn with a stocks-to-usage ratio of approximately 10%? We think not.
Planted Acreage a Key
The USDA is currently estimating planted acreage this spring of 92 million acres. In the average scenario below we are using 93 million. With a yield of 177 bushels per acre carryover would jump to 1.73 billion bushels, a stocks-to-usage ratio of just under 12% and a resulting average price at the farm in the mid-$4.00 range. As this is written, that is precisely where new-crop corn futures are trading.
Farmers like to plant corn. It’s more fun. They get to haul more out of the field which makes everybody feel good. With the current ratios of corn and soybeans, if weather is favorable this spring, we would place a bet that acreage will be at least 94 million acres of corn. As the table below indicates, that would push carryover to 2.3 billion bushels and then new-crop corn at this level is very overpriced.
Even in the bullish scenario, if one were to drop the yield to 174 bushels per acre the carryover would drop to 1.26 billion. Stocks to usage ratio of 8.5%. Playing the role of a true economist and speaking out of both side of our mouths, then the corn market is underpriced. This wide ranging scenario is very little difference from previous years. This is what we go through every February and March.
But in looking at the graph showing U.S. corn ending stocks and stocks to usage ratio back to 1995/96, the market is not even getting close to the tightness in the market in 2011/12 or 2012/13.
The Bottom Line
It will take weather problems this spring in order to start the next leg up in this market. China will stay a strong buyer of corn but their buying interest will be less than the last six months. With today’s much improved corn varieties U.S. farmers have more competition around the world now than they ever have. Current price levels are going to encourage corn production in many countries. While it is certainly possible to have another leg up in corn prices we would not put it in the category of highly probable. Certainly probable that the market could stay at current levels until the crop gets planted and the volatility will undoubtedly keep everyone on edge until we get into the month of July. Marketing is a game of odds. At this stage we would vote that the odds are high that the corn market is trading in the top 25% of the expected price range for the next six months. That being the case, while prudent management to have corn purchases covered through April, we would not see the need to be heavily covered beyond that.