I’ve been working on a project since USDA released its June 1 stocks-on-hand report last Wednesday. This time around I’m taking a look at corn, with soybeans and wheat to follow soon after. Why start with corn? There are a number of reasons, most notably it continues to be one of the Three Kings of Commodities, ruling over the US grain and oilseed complex in good times and bad. It’s also corn where we see the clearest example of USDA systematically incorrectly reporting US stocks, again because as goes the King so goes the kingdom. Lastly, you can add the production from all the rest of the crops grown in the US and you still wouldn’t match what the US grows in corn. And it’s not even close given the roughly 14.0 bb of corn grown annually, 4.0 bb of soybeans, and less than 2.0 bb of all wheat along with a variety of feed grains and cereals.
One of the charts I post when discussing corn’s supply and demand is the correlation study between the marketing year daily average of the cmdty National Corn Price Index (NCPI, weighted national average cash price), the intrinsic value of the market, and ending stocks-to-use. If we go back to the 2015-2016 marketing year, the NCPI posted an average price of $3.41, correlating to a 12.7% ending stocks-to-use calculation. This was in line with USDA’s final 12.7% ending stocks-to-use, resulting from ending stocks of 1.737 bb and total demand of 13.664 bb. And while a lot of things happened to the US the fall of 2016 that carried over into early 2017, in the all-important corn market we started to see USDA break from reality.
Take a look at the rough table I’ve attached to this column. Are my numbers 100% accurate? Of course not for there is no way to know exactly what supplies are at any given time. However, by using the NCPI we can come up with the Unknown Variable Solution for stocks-to-use, then reverse engineer total demand and total supplies. We also have to account for the 300 (400, and sometimes 500) Consistency that tells us USDA’s corn ending stocks number tends to be off by at least 300 mb, and possibly as much as 500 mb when all is said and done. This occurs a number of different ways, with the most common being a miscalculation of production.
I start my table with the 2016-2017 marketing year based on the idea the 2015-2016 ending stocks number of 1.737 bb was relatively close to accurate. However, by the time USDA released its September 1, 2017 stocks-on-hand figure of 2.293 bb, with total demand pegged at 14.649 bb, ending stocks-to-use was calculated at 15.7% as compared to the 13.1% implied by the $3.20 average of the NCPI. By my calculation this put 2016-2017 ending stocks at 1.993 bb, the 300 mb difference I mentioned earlier. The biggest disagreement was my calculation of total demand of 15.2 bb as compared to USDA’s final figure of 14.6 bb. The next marketing year saw another 300 mb difference as my ending stocks-to-use came in at 12.9%, then a 400 mb overstatement by USDA at the end of 2018-2019. Then came the Missouri River flood of 2019 and a 500 mb difference between USDA’s ending stocks figure of 1.919 bb and my calculation of 1.419 bb. Problems with the official system were littered up and down its supply and demand tables, most notably USDA overestimating production by roughly 3.0 bb. With this as a backdrop, the most logical path for the 2020-2021 marketing year was some sort of recovery.
Some of you may recall my corn bullishness from October 2019, my last appearance on a well-known market show’s panel discussion. This, along with confirmation of what I was seeing in futures spreads, was why I was so adamant that evening.
Anyway, what has been fascinating to watch over the course of the 2020-2021 marketing year has been the latest version of USDA slicing away at US corn stocks like it was playing Fruit Ninja. In its Supply and Demand report last September, USDA pegged 2020-2021 ending stocks at 2.5 bb. By the time its January report was released it had cut roughly 1.0 bb off the bottom line, with another 450 mb hacked away through the June estimate of 1.1 bb. Note this is now slightly below my end of June calculation of 1.172 bb, with stocks-to-use comparing at 10.0% versus USDA’s most recent 7.4%. Looking at the trend of my end of the month figures, the NCPI has added an average of 19 cents per month putting the target through the end of August at $5.40. This price correlates to a stocks-to-use calculation of 9.4% indicating USDA could start to add some stocks back, or ride into 2021-2022 underestimating beginning stocks.
Which brings us to the fast approaching new-crop marketing year. In its June 30 Acreage report, USDA came up with a corn planted area of 92.7 million acres (ma), up 1.6 ma from its always entertaining but seldom informative March 31 Prospective Plantings report. Again, I don’t want to spend much time on acreage conjectures based on the murky history of this particular set of data.
The bottom line is the market doesn’t think the US will solve its tight supply and demand situation over the course of the 2021-2022 marketing year, based on the fact the Dec21-July22 futures spread (used as a proxy for studying the trend of the 2021-2022 forward curve) closed Friday, July 2 at a carry of only 7.75 cents and covering 12% calculated full commercial carry (with a bullish reading being 33% cfcc of less). The question as we make our way through early July is if the noncommercial side of the market starts buying again in corn. Since its most recent large net-long futures position of 543,300 contracts the week of April 13, noncommercial traders have cut this position to 353,000 contracts as of Tuesday, June 29. This reduction of 190,300 contracts has led to a selloff in Dec 2021 corn from its high of $6.38 to a low of $5.00. However, there were signs this group had started doing some new buying following the June 30 reports with more expected early this week if the weather stays dry.
If so, this could be the catalyst for the Dec 2021 contract to move into a contra-seasonal uptrend similar to what was posted by the 2011 contract. For the record, cash corn posted an average daily price during 2010-2011 of $6.15 with an ending stocks-to-use of 8.6%. Remember, I don’t think the 2020-2021 supply and demand situation is as bullish as a decade ago, based on my projection of a $5.40 cash price and 9.4% stocks-to-use.
In the end, as always, it will depend on what happens with the weather. But for now, all things considered the new-crop corn market looks like it still has room to the upside.
Until next time,