***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****
As planters start to break free of the ice I thought I would spend some time doing some quick and dirty speculating about what the balance sheet for the 2018-19 corn marketing year might look like. Below are projections based on historical data and the most recent prospective plantings report. USDA will have its projections out in the next report on May 10.
Being adhoc I only projected off of the last three years of data for the key balance sheet items. The idea is to get a rough back of the envelope look at the implications of the major fundamental factors for the fall harvest and price environment using the projected stocks to use ratio.
U.S. Corn Balance Sheet 2018-19
Projections
April 24,2018
Supply:
Planted Acreage (million acres)
88
Harvested Acreage*
80.96
Yield (Bushels/Acre)*
173
Beginning Stocks (million bushels)*
1920
Total Production*
14006
Imports*
58
Total Supply
15984
Consumption:
Feed and Residual (million bushels)*
5377
Other Food, Seed, and Industrial
6844
Exports*
2039
Total Consumption
14260
Ending Stocks (million bushels): 1724
Ending Stocks/Total Consumption (%): 12.09%
*based on or derived from recent historical data - will update with better data when available
Given these assumptions, this is a pretty low stocks to use ratio relative to the last couple of years. This is assuming basically trendline yield and planting every acre as expected (which is already 2 million acres fewer than last year).
What are the major threats (bullish factors) at this point? With the historically cold april (the coldest April on record since the late 1800s) there is concern about the impact on yields. Mike Tannura comments recently on AgWeb:
“You have to start at 1960 when analyzing the U.S. corn crop, because technology was so different prior to then that it’s hard to compare what yields might have done before 1960,” he explained. “Seven [of those 20 coldest Aprils have] occurred since 1960, and of those seven, six had below trend corn yields.”
Tannura was quick to point out that while April weather is typically not the driver of the U.S. corn crop, a cold April leads to later planting which does influence yield.
“Six out of seven times you can’t get back to trend line yields because of it,” he said.
I think it really depends on how late planting interacts with the possibility of heat stress this summer. However one thing we have seen is that with modern planters and GPS we can plant a lot of corn fast. If we get two good weeks the first or 2nd week of May in addition to modern genetics we could still get close to trendline yields unless we get some sever conditions. One thing though, is how much prep work (pre-plant herbicide and fertilizer applications) will get done properly prior to planting and how much of a rush to plant impacts this. Lets look at the impacts of some yield scenarios on implied prices (based on a basic historical regression of prices and stocks to use):
Yield Harvested Acres Stocks to Use Implied Price Scenario
173
81
12.09
3.901 Average Yield Projection
175
81
13.32
3.778 Average Yield (2 years)
168
81
9.25
4.185 Lowest Yield (3 years)
If we had significant yield reductions over last year, as low as 2015 levels, estimated stocks to use would be as low as levels seen in 2013 the first year after the 2012 drought.
However, maybe even more likely, if the cold April and late planting ultimately materializes in fewer planted or harvested acres we could see just as drastic of an impact on stocks to use.
Harvested Acreage Yield Stocks to Use Implied Price
81
173
12.09
3.901
80
173
10.93
4.017
79
173
9.86
4.124
What if we got a slight reduction in both yield and harvested acres?
Harvested Acreage Yield Stocks to Use Implied Price
80
172
10.41
4.069
While this is very quick and dirty (its only based on 3 years of historical data from WASDE reports) its the dynamics (how much the needle moves on price with changes in yield and harvested acres) that are most interesting. This basic analysis definitely seems to provide some fundamental support for the $4.00 range of corn prices we have recently seen with the December 2018 corn contract.
Huge Caveats
So besides the crude estimates on limited data, there are some other factors to consider as well. My model relating stocks to use and price doesn't factor in a number of market factors that could bias these results. I could be underestimating price quite a bit in all of these scenarios. Also, there is a lot of talk from analysts about usage being high and rising. My average estimates on feed and residual use as well as exports could also be leading to higher levels of stock to use making my price projections too low. So in a sense, my projections while providing support for current price levels, could be relatively bearish compared to more realistic numbers. With additional updates and better projections from USDA in the coming weeks these biases should be addressed. Plus, I need to invest some time in more sophisticated price models besides the basic stocks to use regression on extremely short time horizons.
(at the time of writing December 18 corn futures was at $4.0650/bu.)
Additional Readings and References:
Weekly Outlook: Is Corn Setting Up for a Rally?
http://farmdocdaily.illinois.edu/2018/04/is-corn-setting-up-for-a-rally.html
How Many Days Does It Take to Plant the U.S. Corn Crop?
http://farmdocdaily.illinois.edu/2018/04/how-many-days-does-it-take-to-plant-us-corn-crop.html
This Historically Cold April Might Mean Lower Yields
https://www.agweb.com/article/this-historically-cold-april-might-mean-lower-yields/
***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****
