Corn bulls continue to point to extremely strong U.S. demand and weather complications in Argentina. Exports here in the U.S. have surprised many inside the trade, just as I had suspected. In addition, ethanol demand, though weakening this past week, is still extremely strong. I think these headlines will continue in the days and weeks ahead.
From what I'm hearing in Argentina, the lack of rainfall is severe and the crop is in trouble. The USDA recently cut their forecast from 42 MMTs down to 39 MMTs, and each day I hear lower and lower numbers, some now talking sub-35 MMTs. Several sources inside Argentina are reporting 50% to 60% of the crop is rated "poor-to-very poor" on extremely poor soil moisture profiles.
I'm also bulled up, because I don't think Brazil is going to have the crop the USDA has forecast there either. The USDA held their recent estimate at 95 MMTs, and I'm hearing talk now of potentially sub-85 MMTs, simply on a large reduction in planted second-crop acres.
I also like the demand story that I believe is building inside China. There's more talk of Chinese logistic problems. Increased subsidies and incentives that China has recently put in place to process more domestic corn has created some shortages in areas where rail is slow to deliver, mainly to the south. This is creating better margins on imports and could continue to fuel better than expected demand headlines.
Bottom-line, I am a longer-term bull. As a producer, however, I have to remind myself to keep my risk-management hat on. With that in mind, I like finding ways to reduce risk as the market works itself higher. I heard some producer yesterday, buying the DEC18 $3.90 puts and selling (2) DEC18 $4.50 calls to finance. This provides a floor at $3.90 and double the sales on the board at $4.50 should we explode higher.
The position carries margin risk, but makes a lot of sense to me for those who want to reduce longer-term downside exposure to lower prices. I keep thinking WHEN we are in an over-supplied environment, sitting on over 2.0 billion bushels of supply, best practice is trying to reduce longer-term price risk when given the opportunity.
As a spec, I am staying with my bullish positions, but am not yet in a major hurry to add additional length.
USDA Long-term projection highlights for corn (View the full report.)
Corn acres will continue to decrease
Averaging nearly 257 million acres during the recent peak in 2012-14, the planted acreage of the 8 major U.S. crops (corn, soybeans, wheat, upland cotton, sorghum, rice, barley, and oats) has averaged nearly 253 million acres since, and is expected to remain between 252 and 255 million acres over the next decade. Sustained increases in yields keep total production increasing, even for corn, which is expected to lose the most acres over the next decade. Corn acres are projected to fall to 87.5 million by 2027.
The USDA used an average yield estimate of 173.5 bushels per acre for 2018/19. That's well below last year’s 175.4 average. Interestingly when moving 10 years out on the horizon they are using a 191.5 bushel per acre average yield estimate.
Corn-based ethanol production is projected to rise slowly over the next couple years and then decline to levels consistent with those in 2016 by the end of the decade. This reflects infrastructure, geographical and other constraints on growth for higher level ethanol blends (E15 and E85), and falling U.S. gasoline consumption due to rising fuel efficiency, rising real costs of fossil fuels, and changing consumer lifestyles and urban transport modes. Falling demand for fuel ethanol and a growing demand for corn for other uses means that by the end of the next decade, corn used for ethanol production declines from a high of over 38 percent of total use to below 35 percent.
The United States remains the world’s largest corn exporter over the projection period. Rising incomes, particularly in developing economies, translate to increasing demand for meat, bolstering demand for corn for feed. A projected slowly weakening U.S. dollar will improve export prospects. However, combined with greater competition from Brazil, Argentina and Ukraine, and growing domestic feed use, the U.S. market share of global corn trade will slowly fall below 30 percent over the projection period.
Average farm price
The average corn farm price is projected in the range of $3.20 to $3.60 per bushel over the next 10 years.