Special Market Update

Because of the extremely poor start to this year’s corn crop, July corn prices rallied 37 cents last week, while December corn prices rallied 29 cents. From the lows that we made on May 10^th, July corn has rallied $1.01 and December corn has rallied 91 cents. The USDA last week lowered their estimated corn yield by 10 bpa and they lowered the amount of corn acres planted by 3 million acres, which reduced the ending stocks number to 1.675 billion bushels. Most traders believe that the acreage number is still too high, with analysts projecting that the final corn acreage number could be anywhere from 5 million to 11 million acres less than the original March intentions number of 92.8 million acres.

We will get an updated acreage figure on June 28^th, but keep in mind that this report is based on a survey taken of farmers around June 1^st. So, a farmer may have intended to plant corn on June 1^st, but the weather may have prevented him from planting those acres to corn. We may not get a good acreage number until the USDA uses the data provided by the FSA, when farmers certify their actual acres. Historically, USDA does not incorporate the FSA data into their estimates until the September or October report. So, we will not know the actual corn acreage number for several more months.

Let’s use the midpoint of these private estimates, and assume that corn acres are 84.8 million acres, or 8 million less than the March number. Let’s also assume that we harvest 90% of these acres (slightly less than the average 91.5%) and let’s assume that the yield stays at USDA’s current 166 bpa estimate. That would result in a 12.7-billion-bushel corn crop. Currently, USDA is projecting demand to be 14.2 billion bushels. Assuming we have a 2.2 billion ending stocks number, this would get the ending stocks down to 700 million bushels, or a stocks-to-use ratio of 5%. And this assumes that the yield does not get reduced any further.

Historically, we do not have carryouts under 1 billion bushels, or stocks-to-use ratios of 5%. What typically must happen is the demand needs to be cut to keep the carryout above 1 billion bushels. What price will it take to ration demand by 300 to 500 million bushels? It may take a price higher than what we might otherwise assume, because demand for corn is relatively inelastic. In other words, it may take a large increase in price to bring about a reduction in demand.

Let’s look at the 3 biggest uses of corn:

1. Ethanol usage (5.5 billion bushels) – The EPA requires refiners to blend 10% of ethanol into every gallon of gasoline, so even if the price of corn (and ethanol) increases, refiners will still have to use the same amount of ethanol (or buy RIN’s).
2. Livestock feed (5.1 billion bushels) – A cattle, hog, or chicken feeder may continue to feed his livestock even if corn prices increase by a dollar or more. If the price of livestock is high enough, the feeder may be willing to work on a smaller profit margin in order to keep his market share. He also may continue to feed if there is not any reasonably priced substitute livestock feed.
3. Exports (2.1 billion bushels) – This is the one that could be reduced the easiest, as long as there are available substitute supplies out of South America or the Ukraine, for example.

What is the point of this exercise?  We do not know what price it will take to ration demand in the event of a shorter-than-expected corn crop. As a result, we could see extreme price volatility over the next several months until we get a better handle on the supply of the 2019 corn crop.  Locking in floors while retaining the potential for more upside in prices (by using min/max contracts) is one way to market your grain in this volatile environment. Check with your Andersons account representative to figure out how to take advantage of these opportunities.