Corn Price Reset

What’s Happened…

In less than six weeks, the corn market lost 15% of its value, as December futures dropped from nearly $5.50 to near $4.70. While price corrections are expected, what happened to the corn market was more than a correction. A reversal from a trend of tightening supplies to rising inventory and crop expectations had traders exiting long positions, while money managed by large investors also began liquidating from its record net long position, which also peaked in early September. The backdrop to this change in price trend came from several angles, including a rising U.S. dollar, slumping wheat prices, and harvest. However, the primary drivers to the harsh price reversal were back-to-back USDA reports that surprised both farmers and traders. 

The first reset for price was the Quarterly Stocks Report released on September 30, which indicated stocks on hand were about 170 million bushels more than expected. This sent prices down in a significant fashion, with December futures losing 21 cents on the session (4%). Prices then consolidated until the October 12 USDA WASDE report (World Agriculture Supply and Demand), which sent a shockwave of surprises, raising yield 2.7 bpa to 181.2 bpa. This is now the second highest yielding crop on record, despite weekly crop ratings indicating 18% of this year’s crop being rated poor or very poor. To say the market was caught off guard may be an understatement. The average pre-report trade estimate expected yield under 178 bpa. December futures lost 20.5 cents on the day, or another 4.1%.

Why this is Important…

There is an old saying; “it is what it is.” Basically, this implies that it is nearly impossible to guess what a report will say and how the market will react. Nonetheless, the additional old crop inventory coupled with higher yield projections for new crop increases carryout to a level where the market likely feels more comfortable with supply on hand. End users will now probably buy as needed. Demand will stay strong, yet the form of demand will change from more aggressive to more complacent. The phrase for this type of buying is “just-in-time inventories.” 

For producers, the bullish winds have been tempered with a new reset where Chicago Board of Trade contracts are trading between $4.50 and $5.25 in the more immediate future. Another saying is “perception is everything.” Until something else changes, the view of the market is that the perception of tightening inventory has been reversed. This suggests less aggressive end user and trader buying, particularly if a vision of sharply higher prices is absent. Producers, in the foreseeable future, may need to temper bullish expectations and re-adjust selling targets that are more reflective of the projected carryout. Though carryout may be considered snug, it is not likely to encourage speculative buying at higher prices. Bottom line is that price rallies will likely be sold by both farmers and speculators. It is also likely that dips will generate end user and speculative buying, creating a sideways pattern for prices. 

What can you do about it?

Corn producers should consider setting reasonable targets on price rallies to be a seller. End users should recognize the opportunity to secure cheaper inventory that you didn’t think was possible just a month ago. At a minimum, end users of corn should consider long-term coverage by either booking inventory or buying call options. There are still several reports that will reflect this year’s yield and usage, which will be subject to change. Early harvest results (less than 50% of the crop harvested) suggest mixed yields. The current yield estimate of 181.2 could change. 

The other “thing” you can do about price movement over the last month is to learn. Recognize that even the most bullish scenarios can run out of gas quickly. Scenario planning and utilizing the right tool to manage potential changes, particularly in front of major reports, is paramount to good marketing and helps to create a balanced approach to decision-making.

Find out what works for you… 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally-charged responses to market moves, which are always dynamic. 

About the Author: With the wisdom of over 36 years at Total Farm Marketing and following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of Brokerage Solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the markets and marketing tools, an excellent listener, and communicates with intent and clarity to ensure clients are comfortable with their decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation. 

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Bryan Doherty