Understanding Today's Corn Market

Corn Market, Through Its Ups and Downs, Seems to Be Permanently Down

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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This chart shows monthly December corn prices from 2005 to 2013 above, with noncommercial open interest below. The ethanol mandates of 2005 and 2007 created a nice bull market, but now that corn acres have risen to record-high levels and ethanol use has plateaued, the boom is over and noncommercials have turned net-short for the first time since late-2005. (DTN chart)

To understand today's corn market, we need to go back to July 2004 when crude oil prices began climbing over $40 a barrel. World oil production was not keeping up with the demands of global growth, much of which was coming from unexpected double-digit gains in China. OPEC's oil fields were aging and post-Saddam Iraq was crippled by war. The most important statistic to watch in the crude oil markets, OPEC's surplus production capacity, had been above 5 million barrels per day in 2002, but dropped to dangerously low levels, less than 1 million barrels per day in 2004. U.S. President George H.W. Bush and Congress responded to the growing energy threat by passing the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The two laws mandated rising levels of corn ethanol consumption, starting at 4 billion gallons in 2006 and reaching a maximum of 15 billion gallons of consumption by 2015.*

Noncommercial investors, not wanting to miss an obvious opportunity, turned net long in corn in late 2005. By the fall of 2006, it was clear that a significant increase in corn acres was going to be needed to meet the new ethanol mandates and corn prices began rising to new levels.

In 2007, corn got many of the acres it needed from soybeans, but the result was that ending soybean supplies fell to low levels, 6.7% of annual use, and stayed low for the next several years. The soybean acres lost to corn returned to soybeans out of necessity in 2008 and forced corn to put acres into production that had not been employed since 1985. The bull markets in both corn and soybeans were going strong in mid-2008 when Wall Street's financial crisis hit commodity markets and intensified as the year went on. In the panicked scramble for liquidity that ensued, noncommercials liquidated their commodity holdings, but managed to stay net-long corn throughout the crisis, a testament to how strong they valued corn's potential.

Ending corn stocks managed to stay slightly below average levels through the financial panic until 2010-2011 when a record-high 5 billion bushels of corn used for ethanol brought the ending corn stocks-to-use ratio down to single digits and sent corn prices running higher again. In 2012, early hopes that high corn prices would replenish supplies were dashed by drought. In 2013, USDA expected supplies to bounce back, predicting a 16.7% stocks-to-use ratio in February, but planting turned difficult with an abnormally cold and wet spring. When USDA's June 28 acreage estimate came in at a record-high 97.4 million acres, corn prices fell and six weeks of selling followed. Facing a bearish fundamental outlook and falling corn prices, noncommercial investors finally gave up hope and turned net-short corn in July for the first time since late 2005.

From an investor's viewpoint, the bull market in corn that sprang from the world's desperate need for fuel in 2004, is over. Corn production for ethanol has reached its target, and the world's energy supplies are now at more comfortable levels. The U.S. Energy Information Administration's Short-Term Energy Outlook in August shows OPEC's surplus production capacity just shy of 3 million barrels per day in 2013 with 4 million daily barrels expected in 2014.** Theoretically, the U.S. has shown that it now has enough acres to bring corn supplies back to above-average levels. However, what no one knows yet is just how much corn production the U.S. will actually achieve in 2013. On Aug. 15, the Farm Service Agency (FSA) said U.S. producers were unable to plant 3.4 million corn acres in 2013. It is not clear how that report will change USDA estimates, but if USDA reduced its harvested acres by half of that amount, or 1.7 million acres, the new 2013-14 U.S. ending stocks estimate would come in around 1.57 billion bushels, roughly 12% of annual use.

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Aside from the question of planted acres, the 2013 corn crop still has two important challenges ahead. Much of the Corn Belt has received 25% or less of normal precipitation over the past 30 days, and 2013's late-planted corn crop has to mature before the first freeze arrives. As of Aug. 18, USDA's Crop Progress report said that only 27% or less of the corn crops in Iowa, North Dakota, Minnesota and Wisconsin had reached the dough stage. It takes roughly 34 days for corn to go from dough to maturity, so more time and warmth will be needed before this crop makes it to the bin, no small risk in the northern states.

If the corn crop survives those last two challenges and the U.S. corn ending stocks-to-use ratio is able to come in around 12%, it will be slightly below the 20-year average of 13%, but will still feel bearish because it is up significantly from 6.4% in 2012-2013. In addition, with corn acres now at record-high levels, any forecast for 2014 that anticipates normal weather conditions is going to initially look even more bearish.

Barring a major surprise between now and harvest, the next nine months are likely to see spot corn prices in a range between $4.50 and $5.50. December corn prices that traded between $5 and $8 during the ethanol boom are now more apt to trade between $4 and $6 in the next few years with investor interest largely absent. Do not ignore the weather risk to the current crop, but it is important to understand that the corn market has turned a significant corner in its long-term cycle and producers need to prepare for a new, lower-priced environment.

* "Markets, Not Mandates, Shape Ethanol Production" by Nathan Kaufmann at http://www.kc.frb.org/…

** EIA's Short-Term Energy Outlook reports can be seen at http://www.eia.gov/…

Todd Hultman can be reached at todd.hultman@telventdtn.com

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Todd Hultman

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