Corn is a brilliant crop to grow. Its productivity is amazing, with a planting season here in North America that starts in February in Texas and ends in June somewhere in Canada.
With genetics that fight off all kinds of pests, it’s almost like there’s an explosion in the field as the crop heads into tassel and it shows its full, insatiable drive to give farmers top yield.
Weather can be the great equalizer, as we saw in 2012 when drought impacted the crop in the U.S. However, at the end of the day, for many farmers, corn remains a favourite crop to grow.
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The 2017 growing season in the U.S. has been uneven. In the northwest plains of the Dakotas, severe dryness had an impact on crops through early summer. This drought boosted wheat prices, but also had a negative impact on corn potential in that area. In the eastern and mid-southern U.S. corn belt, meanwhile, spring weather was much wetter and caused planting delays.
As the crop entered the summer, hot and dry forecasts continued to challenge the crop on many levels. However, in mid-July the forecast changed to a cooler forecast, taking some of the pressure off.
Needless to say, the USDA, as of early August 2017, was still projecting a U.S. national corn yield of 170.7 bu./ac. on 90.9 million acres planted. Private forecasts, by contrast, ranged from 170 down to 162 bu./ac.
Getting here in 2017 has been a bit of an adventure. New crop soybean prices held steady during the winter months of 2016/17 presenting a pricing scenario that seemed much more profitable than corn at the time. Many analysts had predicted that U.S. soybean acres might outstrip U.S. corn acres for the first time in many years. However, although that did not happen, the 2017 corn acreage did fall 3.1 million acres from last year, and soybean acreage was up seven per cent.
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With this reduction in U.S. corn acres as a backdrop, it might have seemed reasonable that higher corn prices might be in the offing for 2017 and 2018. However, that has not been the case. In fact, since the start of 2017, spot corn prices south of the border have been reflective of a market that is satisfied with both supply and demand.
But 2017 can make us more confident that there will be increased futures prices ahead.
Part of the issue holding back corn prices in 2017 is the onerous old-crop situation in the U.S. Even going into mid-August, the old-crop ending stocks left over from last year were projected at 2.370 billion bushels. This is with a stocks-to-use ratio currently at 16.3 per cent.
The projected ending stocks for 2017-18 are 2.325 billion bushels based on a production this year of 14.255 billion bushels. The new-crop ending stocks to use ratio is 16.2 per cent. Simply put, it is a very bearish supply-sided old-crop corn scenario, and it is weighing on new-crop price potential. It is one of the main reasons why the corn futures price is so range bound.
With those numbers, it is easy to have your eyes glaze over. What’s the point of even watching the market? However, there are glimmers of hope and there are rays of light within the corn complex, which may offer marketing opportunities in the future.
Corn demand is one of them. For the corn growing in the field now, projected demand is 14.350 billion bushels. This is an incredible figure and it requires U.S. production levels to be maintained on an annual basis. Feed demand is projected at 5.475 billion bushels (bbu), and ethanol production is projected at 5.5 bbu.
Yes, the market fundamentals present a generally bearish picture. However, at the same time the demand numbers are so dynamic that it would only take a small production shortfall in the U.S. to send prices much higher and force demand to be rationed.
But when will that production shortfall come?
It does not look like it is on the horizon in 2017, but it will eventually be here. Farmers should not lose hold of that reality, even though at times it feels like bearishness in corn will last forever.
In Canada, meanwhile, the great challenge for corn growers is to co-ordinate the two layers of crop marketing strategy. Specifically, we have basis risk, and we have futures risk. They are separate, and need to be addressed as separate.
In Ontario, for instance, there are historical patterns to the corn basis which, if watched carefully, can be rewarding. Typically, Ontario does not produce as much corn as we need, but a supply or delivery glut often leads to a very low basis level at harvest. In fact, corn is usually exported to the U.S. in the late fall and winter, and sometimes imported back into summer with a corresponding higher import basis.
This corn basis situation differs across regions of the province, however, as well as into Quebec. Generally speaking as you move east, the corn basis is higher. In fact, in Quebec, flat pricing is king. This is a constantly changing cash price situation, to some extent governed by the Canadian dollar, but also by the demand for corn in that particular area and by the proximity of neighbouring U.S. replacement corn supplies. This cash price equation for Ontario and Quebec cannot be ignored. Sometimes basis fluctuations can trump futures moves in corn. It will be a continuing challenge for eastern Canadian corn growers into late 2017 and early 2018.
The new-crop cash elevator price for corn in southwestern Ontario in early August 2017 settled at approximately $4.40 a bushel. The old-crop price for any corn still in the bin was approximately $4.25 a bushel, with prices about 50 cents higher in eastern Ontario. These prices are reflective of ample supplies in Ontario as well as a Canadian dollar which rose to 80 U.S. cents from the 72 U.S. cents level on May 2, 2017.
The U.S. replacement price for corn was approximately $4.92 in early August. It is a classic Ontario market situation, where ample supplies are keeping the cash prices down.
Successive USDA reports going into January 2018 will help define U.S. total corn supply for this year and next. These USDA reports serve as flashpoints in the corn market as speculators embrace USDA data. The USDA had predicted 170.7 bu./ac. corn crop earlier in 2017, but we will see how well this holds up as we get into harvest, with the final yield report due in January 2018. Corn producers need to be aware of these reports as they always have a significant effect on corn futures prices.
There are a myriad of market factors at play that still could affect corn prices. Brazil and Ukraine corn production continues to expand and challenge U.S. export markets, especially at certain times of year. Geopolitical events can also disrupt markets. There is always the prospect of a “black swan” event (unexpected sudden major event), which could impact corn prices higher or lower.
Standing cash corn market orders can be a good tool to use in this corn market environment to sell grain.
Corn might be a brilliant crop to grow, standing tall and handsome, but the corn market has a life of its own. The challenge for farmers is to immerse themselves in the various market factors. Daily market intelligence will always be key.
This article originally appeared in the September 2017 issue of the Corn Guide.
