The latest balance sheet estimates from USDA showed modest tweaks to the demand side numbers, but overall the prevailing view continues to hold: Corn carryout should balloon in 2020, while soy stocks are expected to fall between 2019 and 2020.
Certainly, there is a lot of growing season left for production and stock estimates to change, but with a good start to the growing season, USDA estimates are a reasonable starting point.
If these balance sheets prove true this fall, what might we expect for futures prices at harvest? To answer that question we used 15 years of futures prices and balance sheet data to look at fall futures prices as well as exchange rates.
Generally speaking, two key metrics influence U.S. corn and soy futures prices: the amount of ending stocks relative to total use (sometimes called the “stocks-to-use” ratio, which we abbreviate as SUR) and foreign currency exchange rates.
The comparative impacts of these two metrics are straightforward. When SUR is higher (lower) this tends to be associated with lower (higher) prices and when the U.S. dollar is stronger (weaker) this tends to be correlated with weaker (stronger) grain prices.
Here’s what this model says in light of where USDA’s balance sheet stands today and where exchange rates are:
SUR for corn gets really large under current assumptions going from a 15 percent level in 2019 to 22.5 percent projected for 2020. Baked into that large carryout is a 97-million-acre corn crop and record high yields of 178.5 bushels per acre, pushing total production to nearly 16 billion bushels.
The good news is that exchange rates have started to improve for U.S. exports, helping cause the U.S. dollar index to slip 6 percent in the last month, and Brazil’s currency has gained 15 percent against the greenback over that time.
Nonetheless, using a 22.5 percent SUR as currently projected by USDA and exchange rates holding steady at today’s levels would suggest December futures prices this fall at around $3.25.
On the other hand, if we see stocks fall to 18.5 percent, for example, that gives prices a shot at $3.50, or we could also get to $3.50 if we saw the U.S. dollar erode another 4 percent. These are possible outcomes, but either of these events happening seems improbable at this point. Downside risk could be as severe as below $3 with a bigger carryout or a reversal in the U.S. dollar.
Here, the story is a bit more positive. A tightening carryout and a return of China plays well into supporting prices. USDA slightly trimmed new-crop carryout to 395 MBU from 405 MBU in May, which puts stocks-to-use at 9 percent, well below the 15 percent mark in 2019.
Here again, currencies play a role, and we see U.S. soy values being extremely competitive into China at current values.
With U.S. stocks-to-use at 9 percent and given currency values, our historical model suggests a fair value of November futures at around $9.10 a bushel.
If stocks were to drop down to 8 percent or currency values to continue to push the U.S. dollar lower, we could then see mid-$9 futures prices. Risks of $8.60 on a return to 11 percent to 12 percent stocks-to-use could be possible.
The fundamentals suggest possible weakness in corn futures but strength in soy futures. However, the June 30 acreage report will be the next data point to watch. Will farmers cut back on their 97-million-acre number by a wide enough margin to matter? FBN looks for less than a 1-million-acre drop in corn plantings, which would keep the balance sheets mostly on par and not impact our price outlook. Although a wider variance in corn/soy plantings in June could change that.
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