Wednesday, June 19, 2019

Smart Talk On Grain Futures: "The Other Side of the 2019 Corn Rally"

The corn and soybean markets, because of substitution effects from the producer level on down, are very intertwined despite being very different and having very different end-uses.
From DTN Progressive Farmer:

The Other Side of the 2019 Corn Rally
We haven't seen Friday's close yet, but we can already say it's been a good week for corn prices. USDA's somewhat surprising decision on Tuesday to go ahead and reduce its estimate of new-crop ending corn stocks from 2.485 billion bushels (bb) to 1.675 bb didn't have much hard data behind it, but few can argue it wasn't a more accurate step in the right direction. 

I'm not shy about pointing out disagreements with USDA's estimates at times, but this was a decision I have to applaud. It's refreshing to see an act of common sense while we're all waiting for more reliable data to emerge. Speaking of data, the work for USDA's acreage report is being compiled during the first two weeks of June, with results due out June 28.

After USDA reported 83% of corn and 60% of soybeans planted as of June 9, we can see USDA's June 28 estimates will be rough approximations and in need of further refinement. The June 28 report will not be as accurate this year as it normally is, but it will offer an improvement to the 3 million acre planting reduction that USDA set out June 11. USDA's second shot at planting estimates will be released on Aug. 12.

We can all keep making guesses about how things will turn out but talk is cheap at this point. Every June day that goes by with a wet seven-day forecast staring us in the face (especially in the Eastern Corn Belt) adds more weight to the argument that corn's bull market chances are for real.
On Thursday evening, the DTN National Corn Index settled at $4.20 a bushel, the highest selling opportunity since late June 2014, and a bullish indication of how quickly market sentiment has changed since May 10 when the same index closed at $3.27. 

That quick gain of nearly a dollar a bushel is nothing to sneeze at, as it represents the difference between holding corn in a bin at a loss and now having a chance at a modest profit. Of course, everyone now wants to know how high corn will go and that's why we're all punching various acreage and yield estimates into our calculators, trying to get a handle on what's possible.
Two weeks ago, I gave two examples in this column.

I don't believe in betting on magic predictions, but I do think it's important to keep in mind any scenario that puts U.S. ending corn stocks under 1.2 bb is at risk of seeing corn prices trade sharply higher, possibly at prices with a $5 or $6 label in front.

Again, I am not interested in whipping up a bullish frenzy, but for anyone thinking about selling December 2019 corn futures as a hedge on 2019 production, make sure you have financing in place for adequate margin. This summer's prices could get frothy.

As 2019 corn prices go higher -- fueled by unusually harsh planting conditions -- 
the outlook for 2020 corn prices is becoming more bearish. (DTN ProphetX chart) 
Related to that point, as this 2019 rally in corn prices plays out, it is also a good time to keep an eye on the December 2020 corn contract. Priced at $4.20 1/4 on Thursday's close, the more bullish the 2019 corn market gets, the more bearish the outlook for December 2020 corn prices becomes.
USDA's current U.S. ending stocks-to-use ratios for corn and soybeans are currently 12% and 25%, respectively for 2019-20. That is the widest supply imbalance between the two crops, weighted toward soybeans in at least four decades.

Suppose, for example, we get to the end of 2019 and see 2019-20 estimates of U.S. ending corn stocks at 1.4 bb or 10% of annual use and at 1.1 bb or 26% of annual use for soybeans (or maybe more). Just imagine the off-the-chart incentive to plant corn in the spring of 2020 in that situation.
If a producer can get a favorable price, making forward cash sales of 25% of 2020 corn production may not be a bad idea this summer. Going above 50% of production increases the danger of not knowing how much corn one may be able to produce in 2020....MORE
See also his May 31 piece  "Estimating Ending Corn Stocks, Prices"

Just to make things interesting, in Kansas farmers can shift between corn and wheat and in fact last year acreage devoted to wheat declined to 100 - year lows while corn production ranks #6 in the country.

Wheat 7.7 million acres
Corn   5.3 million acres