The USDA listed a 1.552 billion bushel corn carryover in last month’s January crop report. While the carryover has been steadily shrinking, much of the price rally has already taken this into consideration. While $6 corn seemed unrealistic just a short time ago, it is no longer outside the realm of possibility.
That being said, a 1.5 billion bushel carryover does not warrant $6 corn. There is no magical number to get us to the next tier in our market rally. However, if we were to look at the previous major bull runs of 2008, 2011 and 2012, historically speaking, carryover will need to fall much closer to 1 billion bushels to get us there.
The right direction
Last week’s news that China made major purchases was a big step in the right direction. They placed the second highest purchase for a single day of roughly 85 million bushels, which brings their total imports to date to nearly 700 million bushels.
At this rate, it appears the USDA has grossly underestimated corn exports and they will have to play catch up in the February report. Based on this hypothesis, USDA February report estimates could see the corn carryover drop below 1.2 billion bushels.
That may not be enough to get us to $6, but it is yet another big step in the right direction.
China’s ceaseless appetite
China seems hungry for the world’s corn and other than perhaps Ukraine, the U.S. is the only country that has any to spare. Brazil is likely looking at an overall mediocre crop and whatever it does produce, it will likely all be consumed internally. CONAB projects an abysmal 24 MMT for their first crop. Considering Brazil will consume 36 MMT for the first half of the year, they are going to come up short about 12 MMT. From what country will they import that from?
CONAB is still expecting an above average second crop of corn; however, that seems unlikely as the planting will be severely delayed. When I was in Mato Grosso during mid-January last year, the corn planters were rolling hard and close to a third of the second crop safrinha corn had been sowed. Now we are in the first part of February and they have only 5% planted.
Two or three weeks may not seem like much, but it can make a big difference when the crop doesn’t have enough time to mature. Rainfall levels will have to perform much better than the first half of the season if they are going to get a decent crop.
A lot of this uncertainty has also been creating increased volatility. January Corn had a trading range of 74 cents. The fact that it closed toward the high end of the month is a positive leading into February. But if our final destination has us trading higher, it is unlikely we can do so without at least a correction on the monthly charts.
If you don’t like the volatility, have buy-stops working to protect you from major swings.
I believe we will need to see a further reduction in ending stocks to maintain these price levels. The market finally has the wind at its back, but the bulls will need to stay fed to keep us from drifting sideways.