Have Corn Prices Already Achieved the Seasonal Low?
From the war in Ukraine to extreme heat in both the U.S. and Europe, 2022 has thrown volatile ingredients into the typical formulation of corn prices. As a result – and counterintuitive to typical seasonal expectations – to date, December corn prices appear to have hit their seasonal low in July rather than around early October, when seasonal contract lows are typically thought to occur. Are lower prices yet to come?
As you set your post-harvest pricing strategy, you might wonder about the impact of this year’s unusual conditions and current fundamentals on prices for the rest of the year. Has a fairly-priced corn market already hit its low for 2022? Or does 2022 have the potential to offer up a typical seasonal low before the year is out? Let’s take a look at data and analysis to help answer these questions.
Point 1: Making It Through October Doesn’t Mean We’ve Passed the Potential for a Seasonal Low
If you look at the seasonal corn chart below, corn prices tend to be higher when there is greater uncertainty about the health of the corn crop and expected yields. As the market then becomes more certain of the health of the crop upon pollination in late June and early July, prices tend to peak with the assumption of “normal” weather to come. Prices soften as harvest approaches, increasingly reflecting growing yield certainty in combination with increased supply, as farmers act on pressure to make sales.
Conventional wisdom would tell you that, once October has passed, we’ve moved beyond the low. That’s true of both the 30-year and 15-year averages. Interestingly, averages over the past five years follow a different pattern. Rather than following the typical October low, the average low over the past five years has occurred in late November. As a result, recent history suggests that you need to be prepared for the potential for harvest lows later in the season than you might otherwise expect.
Point 2: Still, While Uncommon, July Contract Lows Do Occur
Since 1985, there have been only four years in which seasonal lows for the December corn contract occurred in July: 1991, 1997, 2003 and 2007 (Source: ProphetX). While it’s not typical for lows to occur over the summer, it’s certainly a possibility if we take history into account. The question for 2022 is whether it will become the fifth year that a seasonal low occurs in July or if 2022’s prices behave more like the recent five-year seasonal average.
First, let’s look more granularly at the past five years as we think about the possibilities. The chart below details the prices of December corn since 2017, including 2022 through the last full week of October.
A few observations:
• 2019 rallied after an August/September low and then broke again the first week of October.
• 2018 went sideways and 2017 went lower.
• Much of the post-harvest price declines or increases are relatively flat, especially in relation to the increase in price for 2022.
In other words, comparing the prior five years, 2022 seems to stand out to some degree in terms of the strength against previous lows. This seems to lend some credence to the thought that factors contributing to corn prices in 2022 may produce an atypical early contract low. However, we also need to remember 2022 is still facing headwinds that may interfere with the strength of the price of corn. More specifically, we need to balance expectations with recession fears and reduced U.S. export demand due to a strong dollar and resulting higher export prices, especially as the Fed continues to raise interest rates in its fight against inflation.
Point 3: Carryout Suggests that Corn Is Overpriced
Beyond an examination of seasonals, another good indicator of price potential is to assess actual vs. expected price based on anticipated demand and supply. At a high level, our analysis estimates that using current beginning stock levels and the USDA’s yield estimate of 171.9 bu per acre (“bpa”) with 88.6 million acres of corn planted, corn could be poised for a downward correction from current prices of $6.75 to $7.00 to a range of $4.60 to $6.00.
Take a look at the following table and chart together for a more in-depth explanation. The table outlines stocks-to-usage (or the percent of supply as a percent of demand) based on expected production.
• Carryout (also known as ending stocks) is equivalent to total remaining bushels at the end of the U.S. marketing year.
• The stocks-to-usage ratio expresses U.S. carryout as a percent of total domestic usage (that is, demand).
The intersection of the dark blue shading highlights the estimated carryout of 1,172 million bushels and a stock-to-usage ratio of 8.3%, based on USDA estimates.
In the next chart, we plot that key stocks-to-usage ratio of 8.3% against a historical best fit line of actual stocks-to-usage ratios versus actual prices. This allows us to analyze a historically “fair” price given current carryout estimates. In general, as the stocks-to-usage ratio increases (and supply increasingly outpaces demand), the price of corn goes down. In contrast, as the stocks-to-usage ratio decreases (and demand increasingly outpaces supply), the price of corn goes up. Based on our best fit line, the shaded green box identifies the range of prices that we expect for any stocks-to-usage ratio.
The red star in the chart below represents the current price for corn. In contrast, the red line represents the expected “fair” range of prices with a stocks-to-usage ratio of 8.3%. As you can see, the current price for corn exceeds even the highest expected “fair” price. For current prices to line up with the historical stocks-to-usage vs. price fit line, the stocks-to-usage ratio would need to fall to 5.5% to justify current prices, equivalent to 167.0 bpa.
To summarize, although unusual conditions leave open the possibility that December corn has already hit the low for the year, a reading of the fundamentals suggests that preparing for a seasonal low in November is prudent. Clearly, the market could turn in either direction, and it’s critical that you are prepared for any scenario.
Current uncertainty presents an excellent example of why we at Total Farm Marketing believe market scenario planning is so critical to your success. Though you cannot know exactly where the market will move, you can build a strategy to help you capitalize on wherever the market eventually goes. At TFM, we take this into account in every recommendation we develop to help you manage the price on your hard-earned production.
If you have any questions about market conditions, how to plan for different market scenarios, or anything related to the price you’re building for your crop, please contact your advisor or the Total Farm Marketing team at 800.334.9779.
©November 2022. 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. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. 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 may have already factored in the seasonal aspects of supply and demand. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Total Farm Marketing and is, or is in the nature of, a solicitation. 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 refers 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. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency. A customer may have relationships with any of the three companies. Total Farm Marketing is an equal opportunity provider.