Breaking down the friendly corn fundamentals: 5 facts you need to know

Corn futures may have a bright, shining future in the months ahead. The reality is that corn demand globally remains robust, and the world, quite frankly, is darn lucky there has not been any major weather events in the past five years to inhibit global production.

There are quite a few “question marks” out there in terms of what 2019 will bring, and here are the things you need to know.

1. U.S. corn supply/demand

United States corn production for the 2018-19 crop year (based on the December 2018 World Agricultural Supply and Demand Estimates/U.S. Department of Agriculture data) was pegged at 14.6 billion bushels, with a national yield average of 178.9 bushels per acre.

Yet, U.S. corn total demand usage was 15 billion bushels. Did you catch that? We did not grow enough corn to meet demand. Yet corn futures have not yet responded to that information thanks to multiple years of prior domestic production surplus, which made for enormous piles of ending stocks/carryout. Current ending stocks for the 2018-19 crop year are pegged at 1.78 billion bushels, which is a comfortable amount.

Be aware, some feel that the 2018-19 yield should be reduced. Some feel that the current yield of 178.9 bu/acre is too generous, and that the USDA will lower yield in future USDA reports. (Had the government/USDA been open, the Jan. 11, 2019 USDA report would have potentially provided us with that important information). If yield is lowered by 1.5 bushels to 177.4, then ending stocks drop down to 1.66 billion bushels. Remember, the market moves on perception. If the perception is that ending stocks are getting smaller, that is what makes futures prices trade higher.

2. Global corn supply/demand

Global corn production for the 2018-19 crop year was 1,099 million metric tons. Global corn use was 1,297 million metric tons. Again, similar story to the above, not enough corn was grown globally to meet demand last year, but thanks to years prior of global productions surplus, global ending stocks are also viewed as sufficient. Global ending stocks are currently pegged at 308 million metric tons, which has been trending lower over the past few years.

If you imagine a circle pie graph, the United States produces roughly one third of total global corn production. China produces approximately one quarter of global corn production (yet exports none). Brazil and Argentina combined, account for just under one quarter of global corn production with Ukraine, Russia, the European Union and South Africa providing much of the rest. Think about how geographically, that most all of the world’s global corn production happens in the Northern Hemisphere. Global weather watching will be paramount this summer.

3. The China factor

China uses all the corn they grow for domestic consumption. According to the Hightower Report, “China is currently running an annual production deficit of 26.5 million tonnes. This is the equivalent to 1.043 billion bushels.” Again, right now, this news is not a “market mover” as China has been diligently using up piles of corn that had been accumulated since 2012. Not too long ago, China had stockpiled half of the world’s ending stocks. That corn was getting outdated and because of that China increased corn demand for ethanol. In September 2017, the Chinese government announced a new nationwide ethanol mandate that expanded the mandatory use of E10 fuel to the entire country by 2020. With the smoke and mirrors of the trade war, it is hard to know for sure how much ethanol is being used and created in China, how much corn remains in China, and if China will need to import U.S. ethanol, distiller’s dried grains, or corn itself in the coming months. Some feel they will definitely need to import, especially since they are encouraging their farmers to plant soybeans this spring rather than corn. In November 2018 China told their farmers that they would increase subsidies for soybeans and decrease corn subsidies.

4. 2019-20 U.S. corn acres increase?

Trade is anticipating already that corn acres in the U.S. will increase by 2 million acres this spring.

Assuming demand stays the same, and assuming no weather issues (resulting in trendline yield of 177 bushels per acre), then ending stocks will still drop to closer to 1.5 billion bushels for the 2019-20 crop year.

5. Understand the technical picture

Knowing how to read technical futures charts is important. The Weekly December Corn Futures chart accompanying this article shows how ultimately, December corn futures will have a hard time clearing the $4.50 a bushel price hurdle. The $4.50 a bushel is a major technical resistance line that goes back to 2014. Price targets for this upcoming crop year realistically revolve around the $4.10 to $4.25 price areas (which have been the highs for the past two years). Also keep in mind that “seasonally” the corn market has a tendency to put in a high between May and early July. Use that to your advantage when it comes to forward contracting.

These five corn fundamental factors are ultimately important to monitor over the coming months. If any one of those factors “flares up” in news headlines sooner than later, use it to your advantage for cash grain pricing opportunities. And do be mindful to have a realistic expectation of prices this year. The greatest odds are that corn prices will continue to be trapped in the same trading range that has held us captive since 2014, with $4.50 as extreme overhead technical resistance.

But do scenario plan what your plan of attack will be if there is a perfect storm of bullish news, to catapult prices above that ever so persistent $4.50 futures resistance line. That synchronized perfect storm of friendly fundamental news would be: less yield for the 2018-19 crop, China importing corn, ethanol or DDG’s from the U.S. in the coming months (to increase our demand fundamentals) and weather issues in the United States this summer. If, and only if, those three things can occur simultaneously, watch out—you can make quick argument for $6 a bushel corn futures.

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Editor’s note: Naomi Blohm is a marketing advisor with the Stewart-Peterson Inc. and she is a regular contributor to the Iowa Public Television series “Market to Market.” She can be reached at [email protected].