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Todd's Take
Monday, August 19, 2019 1:48PM CDT
By Todd Hultman
DTN Lead Analyst

Not many minutes after 11 a.m. CDT Monday morning, my phone was ringing as I was scrambling to put together a webinar to explain why and how USDA just estimated a 13.9 billion bushel (bb) corn crop on the heels of the wettest planting period in recent history.

Things were too frantic to answer the phone, but I later heard the same question on the voice message that many customers emailed later that afternoon: How can USDA estimate 90 million planted corn acres and also report 11.2 million prevented corn acres?

I am glad to say that question has been thoroughly addressed and answered now on DTN by several analysts, so I don't have to go into it again here. If you need a review, I recommend Wednesday's Kub's Den column by Contributing Analyst Elaine Kub at: https://www.dtnpf.com/…

However, just because we can answer the specific question about prevented acres, doesn't mean the market has a good grasp on where corn prices belong. According to USDA, corn prices on the farm are expected to average $3.60 a bushel, but prices don't always go by the script, and there is still much we don't know about the 2019 corn crop.

Four days after Monday's bearish report, we see DTN's National Corn Index has dropped from $4.01 last Friday to $3.51 as of Thursday's close, a 12% tumble. Heavy noncommercial selling after Monday's larger-than-expected crop estimate was one of the bearish concerns I described in last Friday's report preview.

Friday afternoon's Commitment of Traders report will give us an update of noncommercial positions as of Aug. 13, but don't be surprised if noncommercials are still net long 100,000 contracts or more. The drop happened suddenly, and it's difficult to say how many were able to get out.

Noncommercials are now zero and three in corn this year and if they're not careful, there is still time to go zero and four. Instead of reacting to trends and accepting what they hear, they need to think more carefully about where corn prices should be trading.

Where does the price of corn belong? Determining yield is the next frontier and USDA will have its first field-based yield estimate on Sept. 12. To help us understand a reasonable range of where corn prices could go, here are two scenarios.

First, USDA's August estimate of a 13.9 bb crop has to be on the bearish side of probabilities. The spring and early summer of 2019 were extremely wet and crops were planted unusually late. USDA's big crop estimate produced an ending stocks estimate of 2.18 bb or 15% of annual use.

Looking at how cash corn prices line up with USDA's ending stocks-to-use ratios over the past 22 years, the August estimate of 15% puts cash corn prices back in the same old range prices have traded since 2015 of roughly $3.00 to $3.60. If USDA's August estimate is correct, corn prices may have farther to fall, especially as we get closer to harvest.

But what if USDA's August estimates were too bearish, as many suspect? The planting estimate is not likely to budge from 90 million acres, but there is room for reductions in both harvested acres and yields. There is no recent planting period that compares to the problems encountered in 2019, and that makes it difficult to accept a USDA national yield estimate of 169.5 bushels per acre (bpa).

Just this week, corn bulls got a little hope back if they were paying attention to the DTN/Progressive Farmer Digital Yield Tour, powered by Gro Intelligence. The tour estimated yields based on satellite, weather and other public data, and found several states where estimated corn yields came in significantly lower than USDA's August estimates.

Among the findings, South Dakota was 8 bushels lower than USDA, Missouri was 22 bushels lower, Illinois and Indiana were both 28 bushels lower and Ohio was 24 bushels lower. Other states were either close to or a little higher than USDA's estimates. Later Friday, the tour will release a national corn yield estimate that will likely be lower than USDA's 169.5 bpa.

Until we get USDA's estimates out of the field on Sept. 12, we can't say for sure yet which effort is closer to reality, but we can see that the states in the Eastern Corn Belt plus Missouri and South Dakota are where the discrepancies lie -- just what we might expect after this year's wet monsoon-like planting season.

So as a simple bullish example, let's keep harvested acres unchanged at 82.0 million and assume a corn yield of 162 bpa. That gives us roughly a 13.3 bb corn crop, which puts new-crop ending corn stocks near 1.73 bb, if we assume 14.0 bb of total use.

Ending stocks of 1.73 bb translates to an ending stocks-to-use ratio of 12%, 3 percentage points lower than USDA's August estimate. Historically speaking, cash corn prices have traded from roughly $3.00 to $4.50 a bushel when ending stocks were at 12% of annual use. Statistically speaking, a 12% ratio supports an average cash corn price near $4.00.

USDA's second planting survey, revealed Monday, took the hope of $5.00 corn off the table, but it hasn't yet taken away a chance that corn prices could trade higher again in early 2020. Corn prices are seasonal, and I don't expect the highest prices at harvest time, but if this year's digital yield tour is close, corn prices are currently oversold.

Stay tuned to DTN for the final announcement of the tour's national corn and soybean yields later Friday.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BAS/SK)


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