Corn's Counterargument

With so many moving pieces when it comes to grain marketing it’s no wonder over half of farmers asked name marketing their grain as one of the most frustrating parts of their job. The frustration is even greater now with costs up substantially year over year and markets continuing to flirt with multi-year highs. 

I spend way too much time thinking about market structure, what’s influencing the day to day trade and what could happen in the days, weeks and months ahead that could impact my customers. Each week I’m going to share with you what is most prevalent on my mind for the week, and this week it’s corn.

The bull argument in corn is simple and clear, supply is tight with no real relief in sight for quite some time. We needed the US to have a record crop this year, with European production at least somewhat in line with historical levels and we got neither. Bring a third year of La Nina influenced fall weather and here we are, debating whether corn carryout on the year can maintain a billion bushels or will fall short. 

The corn market is obviously pricing in a good share of the short crop story with December corn futures sitting at their second highest level for this time of year ever, sitting only behind 2012. 

Early comparisons to 2008 market moves are gone, with traders now comparing the year to the 2012/13 crop year where prices remained elevated through harvest and well into March, before a sharp increase in planted acreage prompted a selloff, marking very early season highs for the year.

Of course, 2022 is 2022, how the rest of the year plays out is a mystery with a whole host of influencing factors, but here are the biggest things I am watching right now and what they could mean.

Supply surprise? We will get updated production information from the USDA with subsequent demand insight on Wednesday October 12th. Traders are currently expecting production to come in lower from last month, with many still using the crop tour from August as reasoning.

While it appears yields in areas hardest hit by drought will be in line with expectations of a substantially reduced crop, there have been many reports of better than expected yields throughout a good portion of the country, with some finding themselves pleasantly surprised with what they’re seeing cross the scale.

Illinois may be the state with the biggest shock when it comes to expectations versus reality, opposite of the way we saw things play out last year. Last year a very poor finish to the crop exacerbated by late August dryness and disease created disappointment across the state, while this year it appears many are happy with yields, with several cash grain traders saying they’re expecting this year’s state crop to be a record.

While I’m not expecting to see a substantial increase in production Wednesday, a bushel worth of national yield is worth 81 million bushels of carryout, a steady or even slight increase in yield in Wednesday’s figures could change sentiment regarding our production outlook in a big way. 

Ethanol Demand. Talking to risk managers for ethanol plants around the country and the concern is real. Fuel demand is dropping, and likely to continue falling more with this week’s Opec+ decision to cut production and crude rallying almost $20 from its lows set just a couple of weeks ago. 

Reduced gasoline demand, poor logistics and elevated costs for everything—especially natural gas, something at the foundation of turning corn into fuel—has some plants losing money on every bushel they grind. 

Some feel the loss to ethanol demand could run as high as 5% year over year, resulting in a 265 million bushel loss in corn demand if realized. This without spending much time analyzing what the loss to our export business, or cost effectiveness of importing Brazilian ethanol into California could mean.

Ethanol was an infant the last time we experienced a major global economic slowdown, so there are limited historical references to follow. However, the risk is real further upward pressure on input costs and a continued reduction in overall demand could result in further plant slow downs. 

Weekly ethanol production and stocks figures are released every Wednesday morning and will bear watching as we move ahead. 

Feed. Feed demand is likely to remain elevated throughout the remainder of the year into the first part of next year. Cattle in feed lots remains steady, pasture conditions remain poor and hay is hard to come by. 

However, reports of breeding stock being moved to feed lots becomes more prevalent by the day. Ranchers can’t afford to continuing feeding so many mouths and with the outlook not improving any time soon, many are moving heifers to be harvested when they would normally be kept to produce more cattle. 

While feed demand is likely to remain steady, the massive basis values feeders in the south are paying are not necessarily guaranteed to stick around. I have been hearing stories of major numbers being traded on rail corn that would beat deliverable values in Chicago, this type of move is not sustainable as every bushel bought is one less bushel needed to be bought. It may sound overly simplistic but it’s true. 

Exports. Finally, and most in the forefront of my mind, export pace. Our current corn export sales pace is less than half of that of a year ago. With all that is taking place in the world, Russia/Ukraine, the European drought, near historically high values for corn and soybean meal in China, interest in US corn is the second lowest in 30 years. 

Continued strength in the dollar as the Fed works to tackle inflation and the US economy remains seemingly resilient is going to keep our values elevated versus world values. In addition to currency having a role, increased production in Western Canada and a complete lack of interest in US bushels from China among other interesting shifts in global consumer habits has capped our sales volume.

Further hurting our ability to compete in the global market is our inability to feel comfortable when it comes to contract performance. With the Mississippi River at historically low levels, our ability to move grain from where it is to where it’s needed has been cut in half in the most optimistic scenario.

With poor rail performance already causing issues it is difficult for anyone selling deferred corn into the export market to sell without padding margins for anything that could arise unexpectedly, making already expensive corn even more so.

Some experts feel our export outlook could be some 300 million bushel lower than current USDA projections, with some economists even leaning towards a 400 million bushel cut.

What does it all mean? It is easy to feel incredibly bullish looking at the trader expectations of a 1.1 billion bushel carryout, however I feel it is incredibly important to take a look at the other factors at play in this market structure and recognize it is only a matter of time before the stale supply story we’ve been trading for months now transitions into a real conversation about demand.

Keeping production unchanged, adjusting beginning stocks to the new level established by the USDA last week and making just the adjustments mentioned above puts us at a 1.5 bbu carryout, not historically associated with low prices by any means, but a risk that could limit major upside without a Brazilian production issue. 

There’s obviously a ton of year left to trade and a slew of developments set to affect the market but recognizing a potential shift in market sentiment and planning accordingly will be key to surviving elevated input costs for the farmer. 

More Grain News from Barchart

• Coffee Prices Mixed on Dollar Strength and Tight ICE Inventories
• Sugar Prices Mixed as Dollar Strength Sparks Long Liquidation
• Cocoa Prices Retreat on a Stronger Dollar
• $7 Corn through Monday’s Midday