Lower supplies supportive for corn

PEORIA, Ill. — Tighter domestic and global corn supplies have resulted in a new trading range for the time being.

“There are lower corn supplies. (USDA estimates ending stocks of 1.18 billion bushels last month). If we take off some of the export estimate, 1.3 billion bushels ending stocks might be more reasonable for the year, but that’s still a far cry from ending stocks of 2 billion bushels,” said Todd Hultman, DTN grain market analyst, at the Greater Peoria Farm Show.

“With this lower supply scenario, I think over the next year or two we’re going to likely be trading a $5 to $8 range in corn.”

No new supplies will enter the global market until Brazil harvests its second corn crop in July, and that has yet to be planted.

“With no threats of new corn supplies for the next several months, it seems to me with corn stored away that’s a good recipe for end-users having to come to you to bid-up those prices if they want corn,” Hultman continued.

“So, I think you’re in a very good position on corn and time is on your side. I don’t see any rush to run out if you don’t need the cash.”

Trend Path

During his presentation, Hultman described the road that led to the current environment of higher corn prices.

In tracking corn price trends back to 2010, Hultman noted stable prices from 2014 to 2020 with a ranging of $3 and $4.50 a bushel. Corn ending stocks stuck around the 2-billion-bushel range during that same period.

“There was a little bit of nervousness within that period with weather scares and whatnot, but overall it was a very stable period of prices in the big picture and for the most part they were rather cheap prices. We had that because we had very stable supplies during that time,” Hultman said.

That all changed in late 2020, led by China’s entry as a corn importer.

“China bought a lot more corn than anybody realized they needed in late 2020 and early 2021. USDA at that time had an estimate on the books and actually still has an estimate on the books that China has an 8-billion-bushel corn surplus,” Hultman explained.

“That’s just not true and we finally figured out it was not true in 2021 when China ended up buying 846 million bushels of U.S. corn in a single season. That was a big surprise. Nobody realized they had that big of a need to buy corn.”

The shift by China into the corn import market was necessitated because it was no longer self-sufficient in producing enough corn for its domestic use.

“They were growing from a very poor country into a much more prosperous economy and with that growth they wanted to stay as self-sufficient as possible for corn. They did that until about five years ago and none of us realized it. That’s when China’s production basically leveled out to just over 10 billion bushel and they’ve no longer been able to keep up with their growing demand,” Hultman said.

China’s arable land is limited by a desert in the west, and “they’ve basically reached their production potential,” he said.

“They can still try to do better on yield, and of course they’ll try to do that, but they’re already using very heavy amounts of fertilizer just to get the production they’re doing. They use almost four times more fertilizer per acre than we do here in the U.S. It’s just that they’re running out of land.

“I think in the future you’re going to see China become a bigger and bigger importer in the world corn market in the years ahead, and that’s good bullish news for corn.”

Global Supplies

The U.S. Department of Agriculture estimates year-end global corn supplies of 3.73 billion bushels, the second lowest in nine years. That supply could end up being lower due to the war in Ukraine.

Ukraine is estimated to grow roughly 60% of its normal corn crop this year and is having problems harvesting what they have due to fuel supply issues and Russian attacks on fuel and power grid infrastructures.

“It’s estimated Ukraine’s harvest is 50% complete which is slower than normal and they’re concerned that maybe one-third of their crop is going to sit in the field over winter,” Hultman said.

Competition

While U.S. corn acres have been basically unchanged over the last 13 years at around 89 million to 90 million acres, Brazil corn acres have increased 76%.

“The thing about Brazil is they have plenty more land mass to increase their cropland. That doesn’t include the whole Amazon rainforest situation. That’s a separate topic,” Hultman said.

The USDA recently reported it expects Brazil to increase its cropland by 49 million acres over the next nine years.

“That’s almost like adding another big country of corn and soybean production. That is where the competition is going to be, and if we ever have a time again of too much corn and soybeans, big surpluses and low prices, Brazil is going to be the likely culprit,” Hultman added.

Domestic Demand

The corn market is currently experiencing the strongest basis nationally in the last 20 years. It’s happening at a time when export sales are off to a slow start and there are low water problems on the Mississippi River hampering barges.

“One of the hot spots for corn right now is in the southwestern Plains around the Texas Panhandle where we have cash bids above $8 a bushel. We had a very dry fall in Kansas, Nebraska and Missouri where we have $7-plus bids on corn. That’s adding to the basis situation there,” Hultman said.

“Basis to me is the most important indication of demand because those cash bids are not someone’s opinion. Those are from the firms that know the corn market the best and are actually bidding out there on the market. So, to me, that says a lot about the need for corn.

“When you see a strong basis after harvest, that typically points to higher corn and soybean prices the next five to six months ahead. There’s going to be mix of factors coming up, but that’s a very strong argument for not selling all of your corn right away.”

Ethanol Market

Ethanol demand has been relatively stable throughout the year, and gasoline and diesel prices have come down after the summer spike.

“Those gas prices have come down significantly since then, but a lot has been helped by 200 million-plus barrels from the strategic petroleum reserve. Keep in mind we will not have that extra supply available next year,” Hultman said.

“Overall, we still have a tight supply situation for oil and gas. Crude oil inventory is down 12.6 million barrels. We have a tight market and until we can boost domestic production, I don’t see a quick relief. That’s somewhat supportive for ethanol and also supportive for soybean oil and biodiesel in this market.

“The other bullish tip-off in ethanol right now are the (Renewable Identification Numbers) prices. They have been creeping up to new highs for the year. Any time you see the RIN prices creeping up, it’s a sign that refiners need more ethanol.

“When they can’t get the ethanol, they need to meet their blending requirements, they have to go out in the market and buy RINs. That’s another supportive factor for corn demand at this time.”

Market Speculators

“Markets are people and people are emotional and people sometimes do the right thing and sometimes do the wrong thing. In the case of speculators, they often do the wrong thing at the wrong time,” Hultman noted.

There was a large roller coaster in the corn price this year largely due to a spec move that lasted from about the middle of May to mid-July.

“We saw the March corn price go from over $7 and was briefly trading below $6 in mid-July. That had nothing to do with the fundamentals of corn. There was no big supply of corn supply that showed up. There was no change in the supply and demand of corn. It was all related to when Federal Reserve Chairman Jerome Powell first came out and said he was worried about recession,” Hultman said.

“There had been talk of inflation. There had been talk of having to raise interest rates. Everybody knew that was coming and then it seemed like when he said the recession word that’s when the specs took their clue and bailed out.

“Overall, the good news is, after that washout, the specs are largely sold out of that market. They’re still net long overall, but not the way they were earlier, and in spite of that we’re still holding up very well on our corn prices without spec participation.”