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Why Corn Prices Continue to Consolidate

Sick of these corn prices stuck in a rut for NINE months? Yes, it HAS been that long. This corn price is seriously STUCK at a 35¢ cent trading range since October 2016! What gives? Part one, as you very well know, is the overall fact that the U.S. grew a record crop in 2016. Ending stocks have been more than ample since harvest. Even though farmers are still moving old-crop corn sitting in bins since fall, for the time being, there is plenty of corn available in the U.S. and around the world.   

However, there may be something sinister lurking out in the fields of the U.S. right now, a smaller-than-expected corn crop. I think trade overall is in agreement that the crop will not be better than trendline yields (171 bushels per acre). However, how much below trendline IS the question. Some feel it could be as low as 160 bpa, with others citing 166 bpa. The market seems to be content, patiently waiting for more of a “true” yield estimate. This will come in upcoming crop tours and scouting reports. Until then, we sit and wait.

The July 2017 USDA report pegged 2016-17 ending stocks at 2.370 billion bushels. The 2017-18 ending stocks are pegged at 2.325 billion bushels (with the USDA still assuming trendline yield in the July report). The stocks-to-use ratio is at 16.2%. World ending stocks for 2016-17 came in at 227.51 million tonnes with the 2017-18 world ending stocks projected at 200.81 million metric tons. The global-stocks-to-use ratio is now pegged at 18.9% vs. close to 22% a year ago. The question going forward is, if yields do end up smaller, what will that do to ending stocks and the stocks-to-use ratio?

We have touched on the concept of ending stocks in previous blogs, but I’d like to take things one step further and focus on Ending Stocks to Use Percentage.

How to Calculate the Ending Stocks to Use Percentage: When breaking down a USDA report, the term “total production” represents the total grain produced in a given year. The term “total usage” is the sum of all the ways and means that a commodity is consumed. Examples include human consumption, exports, seed, ethanol, and feed consumption. Every year, there is an amount of grain remaining – the ending stock. Right now, the ending stock from 2016-17 is large. And when you add lots of leftovers to the total potential of what is growing in fields now (the 2017-18 crop), the USDA is able to anticipate total grain supply for the upcoming year.

This is how it comes together and explains the importance: The carryover stock divided by the total usage can be expressed as a ratio. When you compare both the ending stock, along with the stocks-to-use ratio against previous years, this gives the market an indication of the relative supply/demand balance for a particular commodity.

This ratio can be used to indicate whether current and projected stock levels are critical (and justification for higher prices) or plentiful (oftentimes when prices move lower). By comparing the current year’s stocks-to-use ratio with years when carryover stocks were below normal as well as years when carryover stocks were above normal, you will be able to develop an estimate as to the direction of the price trend. You’ll also be able to anticipate how low a price move might go, or how high a price move could run! Thus, ultimately helpful with your farm market scenario planning!

Summary: When market scenario planning, it is essential to be aware of the possibilities that prices can work either higher or lower so you’re ready to capture opportunities and minimize price risks. By having a fundamental understanding of supplies, demand, ending stocks, and the stocks-to-use ratio, it empowers you to make better marketing decisions for the current marketing year. It also allows you to think outside the box at possibilities in the future. As you know, having the upper hand on possible price scenarios allows you to have more consistent marketing, thus keeping your farm on top!

Be ready for anything. If corn yield ultimately comes in at 162 bpa nationwide (and assuming demand stays in step with the July USDA projections), ending stocks will be slashed to 1.595 billion bushels. That would be a game-changer heading into 2018. A game-changer for higher prices! Step back. Look at the numbers. Take emotion out of marketing. By doing so, you could be prepared for some unexpected (or in my book, expected) final yields and market changes.

 

If you have questions, you can reach Naomi at nblohm@stewart-peterson.com .

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report.  Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2017 Stewart-Peterson Inc. All rights reserved.

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