From Drowning in Corn to Corn Drowning: Impact of US Planting Delays on Supply, Demand, and Prices

The spring of 2019 has increased the corn price risk. For sellers and buyers, corn price risk and volatility have increased due to fewer planted/harvested acres (following late spring snow and excessive rain during planting season) and potentially lower yields. This will likely result in lower corn production than previously expected and the potential for a tighter US and global corn balance sheet, which has already sent prices higher and has increased volatility.

We looked at two relevant years: 1993 (the year of the Great Flood) and 2013, when prevent planted corn acres were a record 3.617m acres. Using these two years to create scenarios for the baseline model, we are able to quantify the potential impact on corn prices.

For the week ending May 26, 2019, corn planting was 67% complete versus 1993 and 2013 at 93% and 91%, respectively. This year’s planting progress is the slowest on record.

There are differences between 2019 weather and 1993, our worst-case scenario. Corn Belt rainfall from October through April 1993 was 3.16 inches or 23.5% above normal, compared to 5.23 (+38.9%) inches above normal for the same 2018/19 period. The heaviest rains in 1993 came in June and July, which caused a major yield decline. The following learnings from 1993 were applied to the 2019/20 US corn balance sheet:

- A 7.7% reduction in planted acres from previous year, which results in planted acres 6.5% below the USDA 2019 prospective planting estimate.

- A planted-to-harvest ratio of 85.9% compared to the ten-year average of 91.6%.

- A ~20% below trend yield

Under a 1993 production scenario, significant demand cuts need to be made to reach a realistic pipeline ending stock of approximately 800m bushels. Exports need to be cut to post-2012 drought levels and feed/residual use to 4.5bn bushels. Ethanol corn usage is left almost unchanged due to the federal mandate. Based on this worst case scenario, our baseline model projects 2019/20 annual average national farmgate price above USD 6.50 per bushel.

The second scenario for the 2019/20 balance sheet is based on record corn prevent plant acres of 3.6m acres, which is the more likely scenario for the current planting season. Using the record prevent plant acres of 2013, conventional planted-to-harvested ratio, a four-year low yield of 171.7 bushels per acre (1960-2018 trend) and the USDA’s 2019/20 demand projections, ending stocks are reduced by nearly 600m bushels or 27.4%, resulting in a stocks-to-use ratio of 10.4%. Using our baseline model, a 2013 scenario would result in 2019/20 average national average farmgate price above USD 4.25 per bushel. Using the same scenario, but with the USDA’s current 2019/20 yield projection of 176.0 bushels, ending stocks decrease by just 125m bushels to 1.971bn bushels, suggesting an annual average farmgate price of just under USD 4.00 per bushel.

The corn market has rallied on weather. Weather markets are characterized by volatile price moves which can whipsaw both buyers and seller, but are usually short-lived. Coverage decisions should be made based on producer margin goals and the buyer’s cost-of-goods budget.

For producers and sellers of corn, this is a positive development:

- December corn futures temporarily rallied USD 1.00/bu from their mid May 2019 lows and since stayed over USD 4.00/bu. Still, it is uncertain how many producers were willing to sell..

- A market rally can be considered a selling opportunity and to extend coverage into the next crop year.

The buyer has a tougher decision:

- The decision is based on how much coverage is already in place. If there is no coverage, there will be some short-term pain. If there is coverage, buyers have room to weather the storm.

- The buyer’s decision may come down to extending coverage on pullbacks or buying insurance (options) to guard against a run-away market.

The two scenarios provide a worst case (1993) and best case (2013) with respect to price potential and demand rationing. Corn production and price outcome will flow from number of planted acres and yield. Delayed planting negatively affects yield potential. This is where improved genetics may cushion the impact on yield. However, there is limited downside price potential. Upside price risk is significant, with less planted acres, especially if yields are negatively impacted.