Column: Is the High Already in for CBOT December Corn Futures?

(Reuters) – Chicago corn futures have traded at multiyear highs since late May on a record late-planted U.S. crop. Speculators have built a sizable net long position and farmers remain hopeful of even higher prices.

But what if corn futures have already hit their highs? This is uncertain as there is still a long way to go for the U.S. crop and a lot of pieces that need to fall in place for it to be even somewhat successful. However, market-watchers must not forget just how globalized the corn market has become in recent years, and this could prevent higher prices, or at least sustained higher prices.

I conducted a Twitter poll late last week asking users whether new-crop corn futures have already hit their high-water mark. Of the 1,044 voters, some 77% voted no, meaning they believe that December corn will surpass $4.73 per bushel, the current contract high set back on June 17. The contract settled at $4.41-1/4 on Tuesday.

Most market participants believe that the U.S. Department of Agriculture has a far too optimistic view on this year’s corn crop with its 13.875 billion-bushel forecast and that reductions in both area and yield will eventually be realized. Ahead of last Thursday’s USDA report, the average of analysts’ personal estimates was 162.8 bpa for yield with an output of 13.1 billion bushels.

It is possible that the poll would have had fewer “no” voters if it had been conducted early this week as the weather models have increasingly showed more favorable weather ahead for the U.S. crop.

The latest weather models suggest a much more supportive end to July than what they showed on Friday, which was excessive heat and dryness. The new outlook is for heat to build through this weekend across the Corn Belt but cool off for the next 10 days or so. The rainfall forecast is not overly generous throughout, but the lack of extreme heat will be especially important as corn enters pollination.

However, with so much uncertainty over the crop regardless of the weather forecasts, it will take more than favorable weather conditions at this point to ease production concerns, and particularly for market participants to feel confident that all of the risk has been priced in.

If new highs are not made before USDA’s next round of reports on Aug. 12, it will be awfully hard to do so if that data does not support the market’s thinking. USDA will offer survey-based yield estimates, the results of its acreage resurvey following the June 28 area report, and preliminary acreage registration data that will indicate how many acres were prevented from planting.

The Aug. 12 USDA data should give traders a lot more confidence and understanding of the U.S. crops. But there have been rare cases where the August report was not a good measure of final results.

THE 2012 EFFECT

In recent years, the summer high for December corn typically occurs at or before mid-July, and it is uncommon for price to rally into harvest as the market typically feels the crop size is more or less known by late summer.

But with enough ongoing crop uncertainty, as is the case with the U.S. harvests this year, futures can top out even later than normal. That happened with poor U.S. production between 2010 and 2012.

The 2010 season is one that some analysts have bookmarked when considering scenarios for 2019 because large reductions in the U.S. harvest were only realized, and recognized by USDA, later in the season and even after harvest finished. At 12.45 billion bushels, the 2010 crop came in 7% smaller than what USDA had predicted that August.

New-crop futures were relatively subdued during planting in 2010 and averaged below $4 per bushel through June and July. Prices did not start to take off until August and by Sept. 1, new-crop corn was at $4.47, some 19% higher than on June 1. The contract went off the board in mid-December at $5.75, some 53% higher than on June 1.

Past examples such as 2010 have excited the bulls given the premise that the 2019 crop will end up smaller than the current projection. But the global market is a very different place now than it was then, and the United States is no longer the world’s only place to get corn.

Poor weather during the growing season reduced U.S. corn production in both 2010 and 2011, though 2012 put those years to shame after severe heat and drought slashed yields 24% from the long-term trend. Production hit a six-year low of 10.76 billion bushels, and new-crop corn futures topped out at $8.49 per bushel in early August.

Producers in other corn-growing countries had already begun to catch on in the previous year or so, taking advantage of the U.S. shortfalls and planting more corn. Between 2009-10 and 2012-13, harvested corn area outside the United States rose 17%, by far the largest increase for any other three-year period in records back to 1960.

The United States also never recovered from the 2010-2012 crop shortfalls in terms of export domination. In 2010-11, U.S. corn exports were 51% of the global total, and that share averaged 60% in the previous decade. In 2011-12, it dropped to 33% and bottomed out at 19% in 2012-13. In the years since, it has averaged 36%.

In recent years, Brazil has accounted for 19% of annual corn exports, Argentina 17%, and Ukraine 14%. USDA projects these three countries will export a total of 95.5 million tonnes of corn in 2019-20, exactly double what those countries were averaging between 2010-11 and 2012-13.

Argentina and Brazil have doubled their corn production over the last 10 years, but Ukraine has more than tripled it thanks to major strides in both area and yield. This increasing foreign supply has put less pressure on the U.S. crop than in the past.

In 2018-19, Argentina, Brazil and Ukraine produced a record 188 million tonnes of corn, some 36% more than the previous year and 12% more than the prior record set two years earlier.

USDA expects combined production to fall to 185 million tonnes in 2019-20, but if the U.S. crop shrinks even further, this could encourage South American farmers to plant more corn later this year. And their track record proves that they can pick up the slack.