By Todd Hultman
DTN Analyst
The old saying "Fool me once shame on you; fool me twice shame on me" comes to mind when pondering corn as we again see prices trying to move higher for the third summer in three years. The first two did not end well for producers as spot prices showed brief runs up to nearly $4.40 a bushel, only to turn and fall back below $4 as quickly as they rose.
Looking at DTN's national cash corn index, prices reached daily summer highs of $4.06 a bushel in 2015 and $4.01 a bushel in 2016 -- just enough to break even by USDA's calculations.* For those who own their own land, live near the Mississippi River, or had higher-than-average yields, the price opportunities were more profitable. But, on average, breaking even is not an exciting prospect for two years of work -- even if one was lucky enough to sell at the top.
So, here we are again with last week's bullish breakout in corn, enticed by hot weather in June, and wondering if prices can go higher this time. Not finding a crystal ball, let's review the main points of this year's corn market.
After four consecutive years of rising U.S. ending corn stocks, USDA is estimating a modest decline in 2017-18, from 2.295 billion to 2.11 billion bushels. That is based on 90.0 million planted acres and a trend-line yield of 170.7 bushels an acre, before taking into account any of this spring's planting difficulties, expanding drought conditions around the Dakotas, and arrival of hot weather.
Brazil is on track for record corn production early in 2017, and harvest is just getting underway for the second crop. FOB corn prices have been more volatile lately for both Brazil and the U.S., but are staying close enough to keep U.S. corn exports trickling in.
USDA's estimate that world ending corn stocks will drop from 224.59 million metric tons to 194.33 mmt (7.14 bb) in 2017-18 is supportive for corn prices and is based on what I would describe as a conservative 0.6% increase in world demand after achieving 9.3% demand growth the previous year.
USDA's numbers don't necessarily help us predict where prices will go in 2017, but they do show us a market environment that lacks serious bearish threat. At worst, corn prices should be able to hold roughly sideways in 2017.
Obviously, weather is key to this year's prices and demands daily attention to changing forecasts. Corn's market clues are mixed, but for now, the price trend based on a five-week range is up until proven otherwise. Corn's top bearish concerns are that the 10-year seasonal average for cash corn prices peaks in mid-June (basically now) and, before last week's weather concerns emerged, commercials showed no sign of paying up for front-month contracts.
On the more bullish side, commercials turned net long in late March and have kept prices well supported in their sideways range since then. Even on Tuesday, June 6, as July corn was challenging its April high of $3.79 1/2, commercials were still net long nearly 20,000 contracts -- a bullish vote of confidence from the companies that know the most about demand.
At the same time, bearish speculators were holding 482,311 short obligations at the end of May, the most in nearly two years, and in my book, do not have a strong argument for being so heavily short. As of June 6, that number was down to 450,904. But in light of Wednesday's bullish breakout and the uncertainty of a new-crop season, this market is vulnerable to more short-covering.
In 2015, 70% of noncommercial (speculative) positions were long when corn prices hit the top, and in 2016, 76% were long. Friday's Commitments of Traders report showed 48% of noncommercial positions long as of June 6. In other words, there is no sign of bullish enthusiasm or overenthusiasm yet.
As of early Monday, DTN's National Cash Corn Index is estimated close to $3.40, pressured by rain in the seven-day forecast and is roughly 45 cents below USDA's cost estimate of $3.85 a bushel for 2016. If corn prices are going to generate a significant selling response from producers around the country this summer, they are going to have to do better than this.
* USDA's cost of production estimates found at: http://bit.ly/…
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman1
(CZ/AG)
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