The December WASDE report seldom offers significantly new inputs for the US balance sheets;
occasionally, we see some compelling revisions, particularly in the world estimates, but these seldom
alter the US S&Ds dramatically. This is simply because the December Stocks report, the initial US winter
wheat planted area report, and the final 2019 row crop yield estimates (and possibly a serious 2018
revision) will arrive in mid-January 2020. Nevertheless, we look at the potential revisions below for the
US and world corn matrixes.
ENVIRONMENT
The US corn market is facing an unprecedented situation as it comes to the end of calendar 2019.
Roughly 10% of the crop still sits in the field – call it 1.3 billion bushels (39 MMT) – and while this crop is
not lost and will likely be gathered prior to March 2020, there will no doubt be losses in both yield and
quality in this supply. Add to this the market’s desire to see the December stocks report, wondering if it
will confirm the September 2019 stocks estimate or repudiate it, one that ‘lost’ over 300 million bushels
of last season’s supply. The export situation in Argentina is anything but clear with a new, seemingly
pro-export duties regime moving in this month. Finally, all are still unclear whether the USDA will reduce
or increase the current yield for the 2019 crop. So a significant level of uncertainty still exists as calendar
2019 rolls to a close.
You might think that such a situation would be reflected in the Chicago corn derivatives market, but that
is clearly not the case – not unless you think ‘fair value’ is $3/bushel. The December corn contract
hovers in the mid $3.60s per bushel, roughly the same level that this contract was trading at BEFORE the
Spring weather problems caused significant delays in sowing across the US Corn Belt. In fact, the CZ9
contract has been in a steady downtrend since peaking in mid-October 2019, and few seem concerned
about the US or world corn fundamental situation. After all, US corn export shipments are well behind
last year’s total – a bit over 6.5 MMT versus 15.0 MMT plus a year ago. Even with the production
‘issues’, the US ending stocks level may grow back to greater than 2.0 billion bushels – similar to the
previous two seasons’ level – as we all feel that the current US export demand estimate, at 1.85 billion
bushels (47.0 MMT), is much too optimistic.
The bears see a sizable tonnage of Ukrainian corn unable to find nearby demand, they see the silos in
Europe plugged with feed grains, and they expect plenty of new crop supply flowing from first Argentina
and then Brazil. Finally, the corn bears have the macros in their favor; countless forecasters see
‘commodities’ as a weak, over-supplied sector in the years ahead, and while the term ‘commodities’
here almost always means ‘petroleum and petroleum products’ (as this sector comprises some 50% of
most commodity indexes), the impact on the corn complex (and soybeans and wheat) is easily felt in the
form of index and speculative selling – despite the occasional short-covering rally – that keeps pressure
on US corn derivatives.
US
The changes to the US balance sheet will likely come (if anything is revised) on the demand side of the
ledger, we just can’t imagine a serious supply revision prior to the January reports. Last year’s December
revisions came in imports (5 million bushels lower) and ethanol demand (50 million bushels lower). The
WASDE may lower US imports in this coming report (we will explain why later) but we do not expect any
cuts to domestic demand forecasts. Indeed, after four straight week of massive US pork shipments to
China, and with the potential for US poultry exports revived via the new Chinese agreement to allow US
imports, we might expect a higher US feed estimate. The current corn-for-ethanol estimate, 5.375 billion
bushels, is low enough for now.
That leaves the popular export demand projection; at 1.85 billion bushels, the figure is about 150 million
bushels higher than the level we are carrying in our balance sheet. Yet we continue to find the almost
myopic focus by some in the trade on weekly export sales and shipment, well, humorous. If we are
correct, exports will be lucky to comprise 12.25% of total US corn demand – less than ONE-EIGTH – and
yet the bears see it as such a compelling number because it is a demand sector they get to see nearly
every day…via Monday’s weekly shipment report, Thursday’s weekly export sales report, and the daily
export sales reports (or lack of same). It is easy to ignore the export of US ‘corn’ via pork and poultry
shipments…
This is particularly relevant this year given the production issues in the Eastern Corn Belt – a center of
pork and poultry production. Here, we see cash premiums in Ohio at $0.20 over to $0.48/bushel OVER
CH0. In Iowa and Illinois, domestic bids hover in the low single digits to $0.15 over CH0. More critically,
values in North Carolina and Delmarva – BIDS – are in the mid $0.50s to nearly $1.00/bushel OVER CH0.
This is not normal for the period immediately post-harvest, and such a situation – where the domestic
cash market is basically on fire – does not often suggest a lethargic derivatives market environment.
But…here we are… One factor that may be keeping the US farmer from marketing his freshly harvested
corn could be the significant cash shower that has flowed from US Federal coffers. This flow of funds will
represent 2019 income, and the need to raise additional capital in tax year 2019 may be very limited
due to the government’s largesse. The US farmer’s marketing strategy in calendar 2020 will be very
interesting and likely depend on the South American harvest, US new crop prospects, and various other
macro issues – including, of course, the US/Chinese trade talks.
WORLD
Most traders will focus on revisions that might come in the Argentine and Brazilian corn balance sheets.
Brazil is basically sold out until this Summer (July 2020 forward), and while there likely will be a small
flow of corn from that major grower/shipper over the next few months, we do not see much of a chance
that the WASDE Board makes serious revisions to both production (101.0 MMT) or exports (36.0 MMT)
for the 2019/20 MY. While the Brazilian export number is lower than last season’s 41.0 MMT level, that
record tonnage was supported by a fairly large carry over inventory from the previous season. Today,
‘old crop’ Brazilian premiums have moved sharply higher – a major factor behind our belief that the
WASDE could (but should NOT) reduce US corn imports – and we wonder whether next year’s 36.0 MMT
export program can be achieved given Brazil’s increased domestic use of corn for ethanol; the last
WASDE had Brazil’s domestic corn use unchanged year-on-year at 10.0 MMT…and note that the current
WASDE balance sheet for Brazil concludes the season with a relatively small ending stocks level of 5.1
MMT. Ideas that the Brazilian new crop might be closer to 105.0 MMT, while certainly possible, seem a
bit premature – at least for the WASDE Board; that does not mean that the December report might not
‘need’ some additional global supply to make the numbers work…
This should bring much of the focus in the December WASDE upon the Argentine corn estimates. The
current production estimate is 50.0 MMT, and the 40% of the crop now pollinating has faced some
dryness early; recent rains have been helpful as the crop fills cobs. We are using a 48.0 to 48.5 MMT
crop size, to be clear. The 50.0 MMT estimate would be just slightly below last year’s record, and the
current export forecast of 33.5 MMT is 2.5 MMT lower than last season’s projection; we could see that
number move to 35.0 MMT – on paper – if the WASDE kept the ending stocks roughly unchanged year-
on-year. The issue the market must deal with regarding Argentina does not revolved around supply (yet)
or demand as much as it centers on the policies of the incoming government. Few expect a continuation
of the current policies supporting exports and relatively low taxes on exports; rather, the market is
seemingly trying to determine how negative the unannounced policies might be and the impact these
new programs might have on production, export tonnage, and export values going forward.
Today, Argie has some ‘old crop’ corn to sell while Brazil is largely sold out; that leaves Ukraine, with
much of another very large crop (35.5 MMT) in the bins, and the US with available, marketable supplies
for importers. Much of the recent Asian demand for Jan-March 2020 shipment has seemingly been
priced from Ukrainian origins, and given the firmness in the US domestic markets, US corn does not
really compute. But given the current WASDE global corn balance sheet (one that already features near
record South American crops that will not be harvested until March through September 2020 and
already incorporates sizable exports from those nations) that envisions an 8.0 MMT year-on-year decline
in world corn ending stocks (ex-China), we wonder whether the world corn market can deal with 1)
another Brazilian corn crop production issue, 2) a US corn planting issue in early 2020, 3) a serious
decline in Argentine corn exports, 4) some incremental demand via a US/China trade ‘deal’. The
likelihood of any of these occurring may not be that large, but the Chicago corn derivatives are
apparently not pricing in any potential for anything that disrupts the global supply chain.
All said, we do not expect any major changes in the US and/or World corn balance sheets in the
December WASDE report. As long as the corn derivatives remain under pressure – influenced by macro
factors not necessarily directly related to the production of or demand for corn – cash corn premiums
will likely remain significantly inflated. That means ‘new crop’ Argentine and Brazilian corn premiums
may still be a relative value despite trading at what some see as ‘rich’ levels already. There are simply
too many political issues for us to be bearish global corn premiums…until we see some of the corn
balance sheet concerns manifested in Chicago derivatives, that is.