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Dr. Ken Rietz Normally, we are in an unsettled season for most crops. The early growth is highly dependent on weather, which is difficult to predict. The South American soybean harvest looks great, but the estimates for their corn crop have been cut. The futures market for US crops is unsteady, and generally lower. (Remember that futures for grains are complex, but lower futures are often a harbinger of larger harvests.) In this commentary, we look at the situation specifically for US corn, First, here is the graph of CBOT corn front-month futures. |
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Figure 1: CBOT corn front-month futures prices
The graph makes it clear that corn futures don’t move a lot, an indication that the information regarding the crops is quite detailed and accurate. Let’s first look at the current conditions of the corn crop. The May WASDE is optimistic. They predict record supplies and total use, and larger ending stocks. The NASS also reports that 97% of the crop is planted (right at the 5-year average), and if it is all planted, it will be the largest area in more than a decade. Total US use of corn is expected to rise slightly, but the US export of corn is expected to rise considerably, due to the lower cost of US corn. The crop conditions are reported at 71% good to excellent, higher than last year. We can now turn to corn prices and futures. Again, the WASDE is one of the best sources of information. The season-average price of corn is expected to drop 15 cents per bushel, to $4.20, or −3.6%, a trend that will be welcomed by consumers. There is also a modest effect on gasoline prices, since corn is the main source of ethanol that is routinely mixed into gasoline. The futures prices of corn are also dropping slightly. The international markets (Brazil, Argentine, and Ukraine) are also experiencing overall declines in corn futures. It makes the decline in futures prices seem inevitable. But, of course, there is more to the story. It is in the international markets that the dark side of corn is hiding. The nightmare of tariffs and trade negotiations could sabotage the rosy picture of corn for the US farmer. Conab predicts Brazil will produce slightly less than 5 billion bushels of corn, the second-highest amount in its history, mostly due to second-crop corn (safrinha). Ukraine is also producing more corn than last year. The wild card is always China, the largest importer of corn, who will not buy US corn until the last minute, traditionally. So, generally, corn futures have no serious reason to be nervous right now. How does a trader handle this information? It seems most likely that the price and futures prices of corn will drop for the rest of the year, although the weather could create problems that can’t be predicted at this time. |