Pricey corn could help fix feeders
Was your corn knee high by the Fourth of July? Based on USDA crop data, most of the country’s corn more than exceeded this time-honored measure.
The most recent Crop Progress report, released last Monday, shows 30 percent of the monitored corn crop silking. This is above the previous five-year average of 27 percent for the week. It is additionally well above last year’s progress at only 19 percent.
Unfortunately, this year’s corn is not doing as well as last year’s, even if it has developed more quickly. Ten percent of the corn crop last week was in poor or very poor condition. The same time last year, only 5 percent of the crop rated that badly. Similarly, this year sees 65 percent of the crop as in good or excellent condition, compared with last year’s 76 percent.
Unsurprisingly, a good portion of the decline in the nation’s overall corn crop condition comes from the Dakotas. The states, along with Montana, are currently facing concentrated drought conditions that developed quickly in late May and through June.
North Dakota’s crop was 20 percent poor or very poor, and South Dakota saw 28 percent of its crop in that condition. This compares to the same time last year when 5 percent of the North Dakota crop and 9 percent of the South Dakota crop were so badly off.
Despite this condition situation, the most recent World Agricultural Supply and Demands Estimates (WASDE) report upped its estimated planted and harvested corn acres projected a new-crop production of 14.26 billion bushels (bb). The projected yield remained the same at 170.7 bushels per acre from previous reports.
Several elements moved in corn between the June WASDE and the July WASDE, beginning with the year’s beginning stocks of oldcrop corn. The category gained 75 million bushels in estimated stores, bringing the total to 2.37 bb. Expected feed and residual use and ending stocks for this year grew to absorb the increased supply.
Not everyone looks to the future however. Darin Newsom, DTN’s senior analyst, told attendees to his market webinar last week that the most interesting detail in last week’s reports was the old crop.
“To me, the ending stocks numbers—as part of the supply and demand report—are far more important than the continued guesses in new crop.”
Newsom pointed out that the current old crop numbers (beginning stocks) are still “guesses.” The final results do not come out until later in the summer. The July numbers are survey-based, however, giving them more weight. He also noted that the most recent USDA projection were well above average industry projections.
Newsom showed webinar attendees an interesting correlation. Historically, average corn prices tend to be low when old-crop stocks are a relatively large portion of a year’s total use, and vice versa. For example, estimate old-crop stocks were 16.5 percent of estimated use for this year, according to the July WASDE report (2.37 bb old crop stocks ÷ 14.35 bb estimated total use = 0.165). This is relatively high.
In the past decade, the highest average corn prices were seen when the old stock-to-use relationship was down around 7 percent, which is relatively low. The trendline between the two extremes was fairly linear.
“So based on history going back to 2006/7, at this point—given what we think we know about old-crop ending stocks—it looks like cash corn is still overvalued,” said Newsom, noting that the national cash average price earlier last week was around $3.50.
Corn futures are up even higher. As of last Thursday, the near-term contract of July corn was $3.61. The December contract—theoretically indicative of newcrop corn prices—stood at $3.83. Both of these are well above even the USDA’s estimated average farm price for corn of $2.90-3.70.
Still referring to the relatively high relationship between old-crop corn estimates and 2017 usage estimates, Newsom added, “Fundamentally, this makes the argument that we shouldn’t be up this high. That the corn market is overvalued. One reason it is so high is because we’ve seen a round of non-commercial buying—covering their short positions—pushing the market up.”
He estimated that the cash price should be in the low $3/bu. area.
“Bottom line: Corn looks to be a little bit overpriced.”
Answering a WLJ question, Newsom saw this dynamic as being a potential boon to feeder cattle.
“If we see the corn market break, I think that is going to provide that fundamental boost to the feeder cattle market. It’s going to lower the cost of feed. We’ve seen both markets sell off here recently, but I think we could see some support start to build if we are able to break this corn market back a bit.” — Kerry Halladay, WLJ editor