By Todd Hultman
DTN Market Analyst
Last week's look at wheat in this space was a rough exercise for producers to confront as we found spot Chicago prices at their lowest level in 10 years, and also the most unprofitable in at least three decades. Big supplies of cheap wheat are also weighing on corn prices as it becomes economical to substitute wheat into the feed mix, and it is fair to wonder just how low corn prices might go this fall, with many expecting at least 15 billion bushels of new supply on the way.
As bearish as these factors are for corn, it is good to keep in mind the advantages that the corn market has over wheat. First of all, corn has a better demand trend. Over the past 30 years, world demand for corn has increased by 108% (2.5 percent per year) while the demand for wheat has increased just 39% (1.1 percent per year), less than the pace of population growth.
Corn has always benefited from its place in the livestock feed mix and has also seen its rate of demand increase in the past decade as ethanol became a valuable oxygenate in the fuel supply. USDA estimates that 5.275 bb or 36% of U.S. corn demand in 2016-17 will go for ethanol production. That is a big boost that was not available in the 1980s and 1990s.
The next factor in corn's favor is that U.S. producers encounter less competition from other producing nations than they do for wheat. Wheat is famous for being grown on six continents. Corn, on the other hand, needs good soil, soil moisture and mild temperatures overnight. The U.S. Corn Belt is still the world's garden spot, accounting for 37% of global production, with China a distant second at 21%.
Of course, China does not export corn, so the top three U.S. competitors are Argentina, Brazil and Ukraine. Due to this year's dry stretch of weather, Brazil's pork and poultry producers are out of corn and have had to buy from Argentina and Paraguay. Brazil's government is soon expected to grant permission to import a small amount of U.S. corn this fall.
In any other year, 14.5 bb of estimated corn demand would be nothing to sneeze at, and would be moderately bullish for prices. Yet in 2016, the weather has been so good since June that expectations for a record crop of 15 bb or more has pushed all demand talk to the back of the line.
Corn prices have been trending lower since mid-June and last week's spot trade at $3.01 was the lowest it has been in seven years. Friday's estimate of 15.3 bb from Informa Economics suggests that there may still be a few more bearish gasps before USDA is done estimating this year's crop.
In spite of corn's bearish behavior, corn prices seem close to finding support. Friday's CFTC data showed commercials net-long 85,367 contracts as of Aug. 30, the most since April. The December/March futures spread currently shows March 10 cents over December, which is 42% less than the full cost of carry, but not yet a sign of urgent buying.
With Brazil's competition out of the way this year, new-crop export sales of corn are doing much better, up 13% from the pace for this date in 2014. Corn's bearish behavior is understandable but doesn't have the same hopeless feel as wheat fundamentals. At some point, traders will put this year's corn harvest in the rearview mirror, and when they do, prices are apt to show greater appreciation for all of corn's aspects.
Todd Hultman can be reached at todd.hultman@dtn.com
Follow Todd Hultman on Twitter @ToddHultman1
(BAS/SK)
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