The News & What it Means – Bullish on Corn but Not that Bullish

By John DePutter – April 24, 2018

 

The news:

“The price of corn could soar to US$8 a bushel….An unusual confluence of factors could propel prices higher over the next couple of years. These include declining output, an ethanol-led demand surge in China, and likely brutal weather.”

– Barron’s, April 7, 2018

 

What it means:

This article is a wonderful example of a piece of work with a grain of truth, but also with errors, omissions and misunderstandings – all of which are too common in commodity market reporting.

 

Let’s pick this story apart, piece by piece, and then conclude with what’s really important.

 

First, it should to be said the very fact a newspaper editor had the courage to use such a bullish headline is itself a sign that at least in the short-term, the corn market will probably fall, not go higher.

 

Fact is, for several weeks before Barron’s featured this story on April 7, corn futures had been moving generally higher. Typically, it is after gains have already taken place that you’ll see lots of press coverage (like the Barron’s report) about why a market should keep going higher.

 

Remember, it is after a market has responded to bullish fundamental factors that reporters swarm to comment on such factors, not before the market has responded.

 

Ag-Alert actually used the rising tide of optimism about prices as a signal to advise a small incremental sale of corn, two trading days after this bullish Barron’s report was released. We figured corn futures had gone up a long way and were vulnerable to a break. The fact Barron’s released a bullish report actually supported our notions. It was what you might call a “contrary opinion indicator.”

 

Since the time of the Barron’s report until today, the May 2018 corn future has dropped about a dime to $3.87, July 2018 has fallen around 13 cents and July 2019 is down 6 cents.

 

 

Okay, now the flaws in that news report:

 

  1. 1. The story quoted an analyst saying $8 is “very possible.” The analyst wasn’t actually out-and-out predicting it, just saying it was possible. There is a difference between possible and probable.

 

But even with that said, we would suggest that such a price is highly improbable, especially within the next couple years. Anybody can throw out big targets like that. They get attention but are not of great value for farmers trying to do a good job of their marketing.

 

  1. 2. The story suggested that traders wanting to profit from the (upcoming rally) should consider buying July 2019 corn futures. What wasn’t said, and should have been said, is that July 2019 was already trading 42 cents/bu above the nearby May 2018 futures price.

 

So the buyer of July 2019 futures would face a disadvantage from the start. That is, a higher price than nearbys. Some of the expected gains down the road were already reflected in that deferred futures contract; You were buying into a carrying-charge futures contract.

 

  1. 3. The wild bullish outlook was predicated partly on ideas China will institute a mandate for 10% ethanol in its gasoline by 2020, lifting China’s corn needs by “an additional 36 million tonnes per year.

 

Don’t be sure of that. Yes, China has an official goal to raise ethanol use. Whether it is reachable for all vehicles in the country is questionable.

 

A separate report by China’s starch industry, noted by Reuters, pointed to an increase in China’s corn demand of 15 million tonnes in 2018, an approximate 7% increase from 2017. Let’s say the increased consumption is actually more like 20 million tonnes and then let’s say a surprisingly large amount of that, such as 10 million tonnes, comes from the US. Highly unlikely, but let’s just pretend that happens. Well, 10 million tonnes (394 million bu) would be looked after by an average US yield of 170 bu/acre on 2.3 million acres. It’s no stretch at all to foresee a US acreage increase of 2.3 million in 2019 and hold it there in 2020. It wouldn’t take anything close to $8/bu to tempt US farmers to boost their acreage that much.

 

Meanwhile, it’s widely known that China holds extra corn in reserve and has recently been selling it for domestic consumption.

 

  1. 4. The news report said China’s production is slumping. Well, that is true but the slump is not severe, as the chart below shows.

 

While it is true the central government is encouraging more soybean acreage at the expense of corn acres, China’s corn production won’t plummet. There is a lot of potential in China to achieve better corn yields, as a means of partially offsetting a smaller acreage.

 

 

China’s corn production was estimated slightly lower in 2017-18.

 

  1. 5. The article implies that corn production could soon suffer weather-related yield reductions, based in part on sun-spot cycles which could create lower than normal temperatures.

 

Again, there is some truth to this. The chance of a poor yielding year in key production areas is definitely out there. South America’s corn crop is down this year. The US, which hasn’t had a bad production year since 2012, could quite easily run into some problems, especially considering this year’s slow start to planting.

 

But is the anticipated low sun spot cycle a serious threat for 2018 or 2019? Sun spot cycles are hard to pin down precisely. Their impact on yields still harder to predict. To suggest the market will go to $8 on “brutal” weather would require an absolute catastrophe in the US.

 

Bottom line:

There are certainly some fundamental forces in play that could conceivably push corn prices higher, over time. Indeed, Ag-Alert listed a bunch of factors and indicators many weeks ago when the market was bottoming, before it was fashionable to be bullish. And we do have a long-term bullish outlook toward corn.

 

The message is this: When our bullish ideas get company from the public media, we usually advise caution and suggest to our clients it might be prudent to pull in their horns, even if just for several days or a few weeks.

 

Meanwhile, don’t get us wrong. We’re long-term friendly toward corn. Our long-term expectations for corn, though positive, are much more modest than US$8/bu.

 

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