January 30, 2023
As a corn producer in a perfect world, you want global and local demand to increase; global and local supply to decrease; and your personal production to skyrocket. This is a recipe for money in the bank.
Of course, there’s a corollary to this that’s harder to swallow. In a less-than-perfect world, the last thing a corn producer wants to see is decreased demand, increased supply, and a decrease in personal production. While we can’t speak to the conditions for your own possible production, a current reading of the market unfortunately points to some rough times ahead. Now more than ever, be vigilant and prepare yourself to take action against potential downside risk.
Is Corn Already Overpriced?
Before we look at where supply and demand might go, it’s prudent to get a handle on how stable today’s healthy prices really are. Based on our analysis, current supply and demand imply that corn is currently overvalued. A fair value may be much closer to a range somewhere around $5.40 rather than the current prices approaching $7.00. Let’s take a closer look at how we arrive at this fair value estimate.
The chart below estimates a fair value price curve for corn (the curve in black) by plotting August, September, October, November, and December corn prices against their stocks-to-usage ratios for every year back to 2006. As expected, as the amount of corn in excess of demand increases, price generally falls. Conversely, as the amount of available corn in the market tightens, price increases.
The green box along the curve indicates the range of expected prices given a specific current stocks-to-usage ratio (as shown by the red line). At our current level of about 8.9%, you could generally expect a price somewhere close to $5.40, with $6.60 on the high side and $4.10 on the low side. Again, the current expected range of prices is below the current price of almost $7.00 (as indicated by the red star in the chart). This suggests that prices are already near the top or have topped, given current supply and demand.
Will Demand Carry the Market?
Given an environment that seems poised for a price decline, might upcoming demand nonetheless help support current corn prices? A recent Syngenta article Price Pressure ahead for Corn (Jan 9, 2023) summarizes a pertinent discussion by Chad Hart, an agriculture economist at Iowa State. Mr. Hart highlights a number of reasons why we may see a long-term decline in demand for corn:
• The threat of a global recession resulting in potentially fewer exports
• Waning feed demand sparked by shrinking beef herds in the drought-devasted Central Plains
• A mature ethanol market with less opportunity for expansion, exacerbated by more fuel-efficient cars and less driving than in the pre-pandemic days
• Continued low water levels on the Mississippi River, extending the logistics issues elevators have been facing and the resulting hit to basis at the local level
Furthermore, our reliance on exports to China in particular may be at risk, as China works on looking outside of the U.S. for more of its food sources. China has been making a huge presence in Brazil, including a recent billion-dollar port investment in Sao Luis among its other infrastructure spends over the past decades. A return on this investment is already reflected in Brazil’s role as China’s top food importer. China plans to continue expanding its network of agriculture suppliers, including further imports from Brazil and Russia.*
Droughts, La Nina and Other Supply Calamities
The past year has brought a lot of uncertainty to the market: the war in Ukraine; dryness and drought throughout large parts of the U.S. Corn Belt; the promise of smaller crops in South America due to La Nina. This all culminated in a January WASDE report that reduced the USDA estimate for carryover of corn by 15 million bushels and a rally on the news. Does this lend any hope to reduced supplies as we move into 2023?
Unfortunately, it doesn’t look that way. For one, the adjusted USDA estimate was not large enough to have any real impact on stocks-to-usage, which remained steady at 8.9%. In the meantime, conditions on the ground look in favor of increased supplies globally.
More specifically, the USDA is anticipating that dry weather will recede in the U.S. and that production will soar in 2023 to 15.26 billion bushels, up from 13.93 billion in 2022. In unofficial baseline estimates released in November, the USDA projected an average 181.5 yield on 92 million planted acres.
At the same time, it appears that the effect of La Nina in Brazil is waning, as Brazil continues to aggressively expand production. While we tend to think of La Nina’s drought impact on Argentina’s soybean crops, La Nina also negatively affects conditions in Brazil’s corn-producing southern region. As a matter of fact, that region experienced a 15% drop in production last summer because of dry weather brought on by La Nina. Nonetheless, Brazil was able to expand production crop for a record-breaking second harvest (their safrinha crop) in June-August, 44% more than the previous safrinha. In combination with the first crop of the year, Brazil produced in impressive 271 tonnes in 2022.**
As for 2023, the NOAA says that there’s an 82% chance that La Nina will have ended sometime in March-May.*** This makes the Brazilian combined crop target of 300 million tonnes in 2023 seem more than achievable.
An Important Caveat
On the heels of the past couple of weeks, continued dryness may build in a weather premium on both the South American and U.S. growing seasons.
Note the increased likelihood of a seasonal high by the beginning of May, especially for the 5-year average. This is a potential sales opportunity for you that you’ll want to keep an eye on.
It’s More than Fundamental
The fundamentals of supply and demand, as we’ve just reviewed, all point to the need to stay on top of what’s happening in the market and the potential for downside risk. For those of you who don’t believe it until the charts tell you, the technicals also point to the potential for a decline in price. Let’s take a look at the nearby corn chart back to 2011.
The first thing of note is the run-up in price during the drought of 2012 and the big decline in price as production rallied in in 2013 and 2014. These conditions are quite analogous to what we could be heading into in 2023, and the peaks we’re facing in 2023 look disappointingly similar to 2013.
Just as alarming is the head and shoulders formation that appears poised to occur, starting in about 2021. As a reminder, a head and shoulders formation occurs when a chart exhibits a peak and decline, another higher peak and similar decline, and a third peak about the same height as the first peak. This sets up a situation for a meaningful fall in price if the trendline is breached. In the case of this current chart (which is a zoomed-in focus into the monthly nearby corn chart we just looked at), the trendline rests near $6.35. If this is broken, support could fall to $5.60 (the low of the second decline in price in the formation) and even lower to $5.00 (the low of the first decline in price in the formation).
Do these numbers ring a bell? They should, because they’re right around that $5.40 expected price of corn at the beginning of this discussion, based on the fair value price in the stocks-to-usage chart.
Prepare to Take Action
Unfortunately, when it comes to the market, there’s no crystal ball to tell you what will happen. However, it’s important to keep an eye on scenarios that could happen in the market and to take appropriate action to protect your price. As we’ve seen, corn producers are facing some pretty stiff headwinds, from declining demand, increasing supply and a price in the market that seems to be balancing on unstable ground. How are you prepared to meet the challenge? A change in your production mix? Strategic marketing planning and execution? What else?
Whatever you decide, we’re here to help you design a plan that can both protect you and help you capitalize on the volatility in the market.
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.
*An Urban’s Rural View, Wanted: An Ag Trade Strategy, Jan 10, 2023
**Second Corn Crop Helps Brazil Achieve a Harvest of 271 million tonnes, Aug 25, 2022
***January 2023 La Nina Update, Jan 12, 2023
©January 2023. 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.