Why the corn rally isn’t over

Validation? Yes, absolutely for many producers who had argued that supplies of recently harvested corn was smaller than the USDA had been indicating.

Let’s circle back to last week’s USDA report and Quarterly grain stocks report. The report was bullish, sending corn futures limit up and to prices not seen since 2014.

Two resounding corn fundamental truths jumped out to me after last week’s report: supply indeed had been overstated not only in 2020 but also in 2019, and global demand for corn remains strong.

The truth is out about supply

Let’s start with the 2020 crop. The aftermath of the Derecho storm and extreme heat of August took a toll on U.S. yields. On last week’s report, 2020-21 yield fell from 175.8 bushels per acre to 172 bushels per acre. This yield reduction led to an overall production loss of 325 million bushels.

Next let’s look a very unexpected surprise. USDA revised its Sept. 1 stocks estimate lower by 76 million bushels, (this would represent the 2019-2020 ending stocks). On paper USDA showed this truth as an increase to the 2019 feed and residual category, increasing demand to 5.9 billion bushels. That Sept. 1 stocks number is now 1.919 billion bushels, which then also becomes the number pegged as old crop carry-in for the 2020-21 marketing year.

This lower carry-in number was not expected and is validation for many who argued that the 2019 crop had low test weight, therefore more of it needed to be used in feed to achieve the normal weight gain in livestock.

Because of the lower 2020 production, and the lower than expected September Quarterly Stocks data, the Dec. 1 Quarterly stocks number came in at 11.322 billion bushels, well below trade estimates. This is actually record disappearance for this category. Lower corn supplies from the United States is officially on the books.

Corn demand looks strong

Let’s start with feed demand. On the January report the USDA lowered the 2020-21 feed/residual category by 50 million bushels to 5.65 billion bushels. I am skeptical of this number, especially when I look at the record milk production by the dairy industry, and heavy weights of both cattle and hogs coming to market. The fact that the USDA already lowered demand for feed tells me that they think corn prices will be going higher in the coming months, therefore they are reducing demand now. This reduction for demand seems pre-mature, and feels a few months too early.

Export demand was reduced by 100 million bushels. Let’s keep our eye on this category. Last week corn in China was selling near $11.35 a bushel. Understanding that China uses all the corn they grow, and the fact that they officially raised their import needs from 7 million tons to 10 million tons keeps the door open to U.S. grain. Trade will be eagerly monitoring how this new administration will tango trade deals with China.

Corn for ethanol demand on the January report was lowered by 100 million bushels to 4.95 billion bushels. Had the USDA not reduced demand for these three categories, the ending stocks number for corn would have been closer to 1.3 billion bushels, which may have sent corn futures limit up for more than one day, providing substantial price support to both old crop and new crop prices.

But as it is, ending stocks are for the 2020/21 corn crop are pegged at 1.552 billion bushels; sliced in half from industry expectations back in July of 2020.

The current stocks-to-use ratio for corn is at 10.6%. Looking at the chart you can see how out of the past 26 years, only 7 years have seen a tighter final stocks-to-use ratio than what we have now, in January, with over 7 months of the grain marketing year to go.

The years when the stocks-to-use ratio was tighter were: 1995-96, 1996-97, 2003-04, 2010-11, 2011-12, 2012-13, and 2013-14. If you remember, in the mid-1990’s, that was the first time the futures market saw $5 corn. And in the early 2010’s, that was the first time the industry consistently saw $6 to $8 corn futures. Corn prices will likely hold firm due to the low ending stocks

In February, USDA will hold its Outlook Forum where it will throw out its first planted acreage guesstimates for both corn and soybeans to be planted in the United States this spring. The industry is already expecting an increase in corn and soybean acres. But once we hear their official guesstimate the industry will used that number to pencil in different supply/demand scenarios that could unfold into summer and fall. Price will likely waiver, correct, trade sideways, possibly have a seasonal price correction lower in March and April.

But now that the cat’s out of the bag about lower U.S. supplies, overall, the grain markets will be well supported going into spring. And make no mistake about it, the world cannot afford for the United States to suffer any weather issues this spring or summer. It will be a ripple effect that is then felt around the world that could make that $6-$8 price range for corn futures a reality sooner than later.