March 6, 2023
The recent price adjustment to both old and new crop corn futures was both swift and aggressive in nature. USDA’s February Ag Outlook Forum seemed to be the catalyst for funds to liquidate some of their corn length with an outlook for new crop carryout to approach 1.9 billion bushels.
Even though many will argue trend-line yield is difficult to use for a forward-looking balance sheet due to the fact it is 4+ bushels per acre higher than our current record national corn yield, we must also be cognizant that USDA used an additional 600 million bushels of demand year over year for their outlook. Bottom line is that 91 million acres of corn seedings with an adequate yield could grow the domestic balance sheet 400-600 mb in one crop year.
The good news about corn’s repricing event is that March corn caught last week, while in delivery, at $6.235. Why is that good news? December 2022 corn also underwent a sharp liquidation event, while in delivery, scoring a low at $6.23. That low scored in early December eventually led the March contract to push to $6.85 by month’s end.
March WASDE report
As we approach this week’s report, the focus will be twofold. Pace analysis would suggest it would be reasonable for the USDA to further adjust corn for export lower on the domestic balance sheet.
However, we will almost certainly see USDA revise the Argentine corn crop lower due to ongoing dry conditions paired with high temperatures. Argentina also had a freak frost event that needs to be addressed. It would be an earlier than normal adjustment, but late planting could give USDA pause on their current crop estimate for Brazilian corn.
So, even though pace analysis would lead us to believe exports could be revised lower, the USDA must be careful continuing on that path with South American production under duress.
When we consider the long-term implications of a large new crop, but also factor in expectations of corn available for delivery in the month of July to be very tight, it is entirely plausible that we see old crop and new crop corn trade their own independent narratives.
With the U.S. now the seller of the cheapest corn in the world, we would expect economics to change the course of export demand as we work through the second half of the marketing year. With the Argentine crop already shrinking and the possibility of Brazil’s Safrinha crop potential eroding due to planting issues, initial expectations of an additional 10 million metric tonnes of corn available year-over-year from South America could end up being closer to only 0-3 MMT more production than a year ago. Should South American prices continue to respond to decreasing supply, U.S. corn should aggressively attract world demand.
2013 versus 2023
Only three times in history have we seen old crop world stocks-to-use ratios (less China) comparable to the current scenario. If Brazil’s Safrinha crop starts to have a perceived problem, additional demand will come for domestic old crop supplies. If intentions for corn plantings come in at or above 91 million acres, a long term bear market could develop, similar to the one seen a decade ago in 2013.
With that being said, it is appropriate to point out several similarities to 2013 from both old and new crop perspective.
Old crop stocks in 2013 were 1.232 bb with a stocks-to-use ratio of 9.2%, which compares to current old crop estimates of 1.267 bb and 9.1% stocks-to-use.
In 2013, the December contract made the high for the year on the first trading day of the year, just like the December 2023 contract, so far.
In 2013, the December contract started the month of February at $5.90 and had a sharp break in values by month’s end, very much like the recent break in December 2023 futures over the last week after finishing the first day of February with a $5.95 settlement price.
The eventual outcome in 2013 was a July corn contract that traded as much as $1.38 premium to the next contract, September, prior to First Notice Day at the end of June. However, the December contract maintained a down trend from June until expiration, eventually making lows at $4.10 come fall.
Based on this whole conversation, the message would be that if you want to be bullish corn, be bullish with old crop. Do not get sucked in to being bullish new crop because of the old crop story; they can and have traded distinctly different issues.
Do not let the fact you are delivering $7 corn dissuade you from selling $6 new crop. There are plenty of ways to protect your downside while leaving flexibility to benefit from rallies.
Feel free to contact me directly at 815-665-0463 or anyone on the AgMarket.Net team at 844-4AGMRKT for assistance. We are here to help.
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