Corn Coming Out of Our Ears

In the past few weeks, however, sudden bearish demand and supply winds have borne down on CBOT Corn and broken it to pre-ethanol era seasonal depths of USD 3.20/bu. The successive blows from disease, energy price wars and near-record farmer planting intentions have shattered corn’s long-standing robust constitution and exposed its kernel fragility.

Indeed, without a catastrophic drought, there are few ways to avoid US corn stocks from hitting 33-year highs of 3.5bn bu in 2020/21. In the sections that follow, we inspect each bearish headwind to CBOT Corn and evaluate their cumulative contribution to the impending wave of corn bearing down on US farmers this fall that will likely take years for them to dig out of. We expect CBOT to chart a course to the doldrums of USD 3.25/bu-USD 3.50/bu next year.

US ethanol prices hit record lows last month, after an internecine OPEC price war ravaged energy markets. Multiple ethanol plants have shut down rather than run at negative margins, stifling a vital (~40% of total demand) outlet for US corn farmers. The USDA cut its 2019/20 ethanol demand this month by 425m bu, to 5,050m bu, the lowest in seven years. In Brazil too, corn Ethanol’s rapid growth (1.4bn bbl in 2019, up 212% YOY) will also slow.

Though an OPEC cut was recently agreed, some damage has already been done; with fewer people on the road due to Covid-19, those extra barrels exacerbated the oversupply. The result for corn will be a greater reliance on the global feed market. For US farmers who have watched the emerging dominance of South American corn exports, and who see Covid-19 uncertainty permeating the US feed industry, it is a fraught proposition.

Because of the demand destruction in ethanol, US corn exports carry an unusually heavy demand burden that, judging by past performance, is unlikely to be carried out. The USDA’s US 2019/20 corn export projections have foundered since last May, cut by 550m bu to 1,725m bu, the lowest in seven years. US export and market losses are made particularly stark when compared to the 75% growth in global imports (from 95m mt to 166m mt) during the period. Even with the USDA’s low expectations, the current pace of US export commitments is 21% behind. Still, one of the major reasons for disappointing US sales has temporarily subsided: the record, front-loaded South American export program. China, meanwhile, recently bought ~1m metric tons of US corn under its trade agreement. With further Chinese procurement, and trade competition limited through spring, the US may just reach the USDA’s lowball target. There is scant potential to exceed it though, as there is growing evidence that some critical corn-importing regions, in particular Southeast Asia, will experience recession-strapped meat consumption and opt to wait for Brazilian and Ukrainian harvests instead. With US ethanol and exports (-715m bu YOY) major contributors to CBOT Corn’s demand woes, its hopes must turn reluctantly to domestic feed.

US feed demand is an unlikely demand savior for CBOT corn bulls. Growth in the last five years has averaged a tepid 2%. USDA’s lofty 2019/20 expectations of 5% growth are being tested by Covid-19, which is closing packers and restaurants, and threatens feedlot economics.

Until last month, US protein and global feed demand was expected to grow sharply, driven by Chinese restocking from African Swine Fever and trade deal procurement. The pernicious rise of Covid-19 will delay the global feed demand recovery for a second year. Rabobank expects China to gradually lead the world out of its feed recession later this year, driven by falling stocks and high food CPI (~18%). Indeed, the growing price dislocation between Chinese wholesale pork prices (+125% YOY) and US lean hog prices (-50% YOY) could be an incentive for higher trade flows. The historically-high wheat-corn spread could also drive higher corn feeding. However, with US meat plants shutting down and prices languishing, the USDA’s feed growth projections appear stretched.

The steady drip destruction of US corn demand (-3% in 2018/19, -3% in 2019/20) will not deter US farmers from near-record plantings of 97m acres in 2020/21. Our bearish inclination for CBOT Corn is postponed until after the summer by the imminent weather market that should restrain fund short positioning in CBOT Corn; though only just, and from currently sizeable levels of -165,000 lots. In 2019/20, US corn farmers (90m acres) and yield (168 bu/acre) exhibited Teflon-like qualities through a record wet, delayed season. With 97m acres going in the ground, weather adversity will need to be both intense, and ubiquitous, in order to prevent 2020/21 US ending stocks from rising.

While a CBOT corn pop is unlikely, we also remain measured in our prediction for a drop along the curve. Farmer sellers become scarce below USD 3.50/bu as evidenced by the current commercial net short positioning. Looking ahead to next year, one thing is clear: Corn will be coming out our ears.