Houston, we have a problem…

NegativeOil

In most years the 60-day period from the first week of May through the 4th of July provides the best opportunities for selling corn and soybeans for the rest of the year.  Even though prices are painfully low right now, with the highs for the year most likely behind us, I believe producers need to be taking action now to sell down leftover old-crop inventories.  While I don’t believe (but I don’t know) that corn futures could ever go negative (like we saw in oil futures last week, see chart above), I do believe the current upheaval in energy and livestock markets could break corn prices down to price ranges not seen since the early 2000’s.

In the past 60 days, demand destruction catalyzed by the COVID-19 pandemic has flipped the US corn S&D balance from being sort of tight, back to oversupplied, while at the same time producer selling has nearly ground to a halt.  At 11:00 next Tuesday (May 12th), USDA will release their first S&D estimates for the 2020 crop in the May WASDE report.  According to analyst estimates for what that report will say, we should anticipate total corn supply to exceed 18 billion bushels this fall, which exceeds the previous record by more than 1 billion bushels.  Carryover stocks are projected over 3.2 billion bushels, which would also be >1 billion bushels higher than we’ve seen in the past 32 years.  The only years with larger carryover stocks were 1982, and 1985 thru 1987.  In terms of carryover stocks/use ratio, these estimates are projecting >22%, which will be the second highest since the 80’s.  In case you’re wondering, these figures assume ethanol production will dramatically recover to consume >5.4 billion bushels of corn during the next marketing year, which would be a tie for the second most ever.

So, what does all of this mean?  I believe it means that corn prices are at great risk of falling even further during the next six months.  Consider the trendline relationship between stocks/use ratio and price shown below, which suggests we could see DEC corn futures dip below $3/bushel; well below where the contract is trading today.

PriceScatterchart

You might be thinking “If it’s so obvious, why isn’t price already lower?”.  At any given price, in order for corn prices to go lower, there have to be more sellers than buyers.  Corn consumption is still mostly happening, so end-users are in the market buying cash or futures every day, but farmer selling has slowed to almost nothing, and “managed money” speculators have already sold short, and are waiting for evidence the new crop all but made before pushing harder on their short positions.  When is that going to happen?  My hunch is sometime in the next 60 days…or less.

AnalogChart

I created the “analog” price projection chart (above) using the corn futures price data for all years since 1990 with harvest stocks/use ratio >15%.  The chart is scary enough, but the summary statistics are very conclusive.  The average maximum percentage gain between May 1st and October 1st for those years was 5%, which suggests a price target about 15 cents over todays price has a reasonable chance of getting hit.  However, if you want to use targets to sell your corn, you need to set an expiration date, and if the price isn’t achieved by that date, just let it go.  Among the analog years, the average price change between May 1st and October 1st was -23%, which equates to DEC’20 futures of $2.50, or a cash price just over $2.00; in none of those years was the corn price higher on October 1st than May 1st.

SummaryTable

If you haven’t made the decision to pull the trigger by May 22nd, or if your targets aren’t hit by then, consider enrolling your old-crop bushels into our Seasonal Averaging Program (click here for information).

One thought on “Houston, we have a problem…

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