By Todd Hultman
DTN Analyst
As Elaine Kub reminded us last week, this is pollination time for corn and the hit or miss of those liquid drops from heaven have billion-dollar consequences. The sudden drop in corn prices the past three weeks has been dizzying as rain across the Midwest erased over $4 billion from the value of old-crop holdings and lopped off another $12 billion from the price tag of what USDA expects for this fall's crop.
Rain was the main reason for corn's dramatic fall in the latter half of June, but it can't shoulder all the blame as noncommercials also played a role in this year's love 'em and leave 'em price action, enhanced by concerns over Brexit. From a technical perspective, this year's rise and fall of corn prices looks remarkably similar to what we experienced last year and it's tempting to wonder if the rest of the year will also follow the same path. While the charts are similar, this year's corn situation is much different and, unfortunately for producers, it is potentially more bearish.
If you recall, last year's corn rally in late-June was brought on by persistent waves of heavy rain which took a half-million acres of corn production out of Missouri and contributed to 2.4 million acres of prevented plantings. Sensing opportunity, noncommercials jumped on the buy-corn bandwagon until about mid-July when the rains backed off and prices tumbled.
It took noncommercials four months to liquidate the 323,000 net longs they had accumulated by mid-July, but as bearish as the hangover-selling was, spot corn was able to hold above $3.50 through harvest, largely because corn acres actually were lost and USDA's U.S. ending stocks estimates stayed close to the previous season's total.
In 2016 however, the outlook for corn is already becoming more bearish. Dow Jones' survey of analysts before Tuesday's WASDE report expects USDA to peg corn production at 14.5 billion bushels and increase the estimate of U.S. ending stocks from 1.784 billion bushels in 2015-16 to 2.189 billion bushels in 2016-17. Keep in mind that Tuesday's estimates probably won't yet account for conditions in the field -- conditions which currently suggest higher yield estimates ahead.
Of course, weather will have the final say, but given this year's large corn planting, it will only take a national yield of 173 bushels to give us a 15-billion-bushel crop and domestic ending stocks of 2.5 billion bushels or more. With that kind of bearish possibility on the table, corn remains at risk of trading lower in 2016.
The lower end of corn's cost-based value range that I described in February is $2.95 a bushel for 2016. Normally, a 15-billion-bushel crop would be bearish enough to take prices to the low end of that range, but thanks to tight corn supplies in Brazil, I don't expect prices to drop that far. Last year, Brazil's grain prices benefitted from a falling real, but this year, corn prices at Brazil's ports are 31 cents higher than corn at the U.S. Gulf, which means demand should remain active for U.S. corn throughout the year.
As it now stands, corn's July peak in 2015 and the June peak in 2016 stand as two matching bookends. Where prices go from here is largely up to weather, but we can't ignore that the bearish risk in 2016 is greater than it was a year ago. If crop conditions remain favorable, the similarity to 2015 prices will soon be over.
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman1
(CZ)
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