With new-crop Dec 2020 corn setting a new life of contract low this week at $3.70, there was seemingly little news to support a quick turnaround. The global coronavirus pandemic, an oil market that is imploding—and, on top of that, an expectation that 2020 U.S. corn supplies will be growing—all seem to point to a challenging year for farmers and pricing corn.
Increasing corn supplies are probably the biggest threat to corn prices over the next year. In February, USDA’s Ag Outlook Forum provided a grim view of how ugly the 2020 U.S. corn balance sheet could get. Based on USDA economist estimates of a 4 million acre increase and a return to normal yields, which they peg at 178.5 bushels per acre, that translates into a record-large production of 15.5 billion bushels, up 1.7 billion bushels from this year’s drought-impacted crop. But the worst thing is that USDA has stocks soaring to 2.6 billion bushels from this year’s number of 1.9 billion. That represents an 18 percent stocks relative to total use ratio in the coming year versus only 13.4 percent this year.
If that is what is in store for the coming crop year, what does that suggest about the likely price trajectory for the coming growing season? Is there a decent chance of a “summer weather rally” and how does the upside versus downside risk potential look?
To explore these issues, we examined data on Dec corn futures for the growing season from March prior to planting up until harvest in October. We looked at daily closing prices during this period covering the crop years 1990-2019, giving us 30 years of data. In addition to futures prices, we want to understand how early season reports on new-crop stocks and how those metrics compare to the old-crop situation. Throughout this article, we will refer to the stocks difference between new-crop (NC) as of the first report in May and the same reading on the old-crop (OC) balance sheet in May relative to total use.
Although we are not yet in May, we do have data from USDA’s Ag Outlook Forum in 2020, which points to an estimate of 18% for stocks to use and the last OC balance sheet estimate sits at 13.4%. So, we will use that difference of +4.6 percent increase in stocks in that analysis that follows.
Using our 30 years of data, we examined how this reading of stocks to use difference has impacted the potential for upside prices as well as downside risk. We did this look at 30-day intervals with the starting point at March 1 and concluding in September. The chart below illustrates the reading of NC stocks less OC stocks on the x-axis and the y-axis illustrates the percent up moves (in green) and percent down moves (in red) relative to March 1. The vertical line on each grid illustrates what the expectation is for stock changes this year, which is a 4.6 percent increase.
The important point of this chart is first and foremost that when we have a big jump in stocks (positive x axis value), we see that the trend is for downside risk to heavily outweigh upside potential as the season progresses. For example, upside potential by May is 3.4 percent but downside risk is more pervasive at 5.3 percent, and that only amplifies as we get to harvest around September when upside potential is 10.6 percent but downside risk is larger at 16.4 percent. An important point to note is that this upside vs downside skew can flip in a year when stocks are actually falling in a marketing year. For example, if stocks-to-use were falling 5 percent instead of expected to increase 4.6% like this year, then the September upside/downside would flip to 20 percent/7 perecent, making upside potential a much better play.
We take the same data we discussed above, but now want to gain a better understanding of seasonality. To better illuminate possible trends based on stock differences between NC and OC, we partition the data into three buckets:
(1) Years when stocks are declining. These years are averaged together in the left pane of the below chart. Not surprising, in years when we see NC supplies expected to fall, the new-crop corn prices build a weather premium into summer.
(2) Years when stocks are increasing. This is what we are expecting this year, and the historical norms are illustrated in the right-hand pane in red. Here we see little to no rally potential. Indeed, on average in these years of building stocks, the long-run average seldom exceeds the early season price in March. Adding to the woes, the downside risk only gets worse as we get into harvest in October and November with prices discounted 10% on average relative to early spring prices.
(3) Years with no significant change. This is illustrated in the middle pane. This also exhibits similar seasonality as years when stocks are increasing.
Without a major change in acreage expectations or yield potential, it seems likely we are entering a year of grain stock building. With that as the hand we are dealt, holding out for a big summer rally or waiting for big moves to the upside seem like losing propositions. In years when stocks are expected to grow, there is significant downside risk in substantially lower harvest prices expected relative to spring. While we are not suggesting going out and selling now, as the market falls sharply on fears of coronavirus and oil prices, we do think it means being disciplined to sell as the market bounces up. Further, it means the bounces we should sell on will likely be smaller than rallies in past years.
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