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YEAR ROUND COMMENT ON THE GLOBAL GRAIN AND OILSEEDS MARKETS

SHRINKING CORN SUPPLY? THE HIGHTOWER REPORT


Published July 2019 by David Hightower, President, The Hightower Report


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The USDA shocked the corn market with its US Planted Acreage Report on June 28th. The report showed producers planting 91.70 million acres of corn this year, down 1.09 million acres from the USDA Prospective Plantings Report in March. Traders were expecting a drop of 5.1 million acres for the report, and many had believed that actual lost acres could be ultimately reach 6-10 million acres. After the report’s release, it did not take long for December Corn to go to limit down at $4.26. The range on the day was 42 cents, a new record. The market came off of limit down on news from the USDA that they would resurvey 14 states and release updated data on August 12th.
 

Keep in mind that while the June 28th Acreage Report showed a decline of only 1.09 million acres from March, the USDA WASDE team put the decline at 3 million acres in its June 11th supply/demand update. In light of the slow planting progress exhibited in the weekly USDA Crop Progress reports in June, an additional drop in planted acreage is expected for WASDE’s July 11th update.
 

Corn open interest was up 16,973 contracts on the day of the report and up another 18,586 contracts on the day after the report, which suggests that new buyers were active on the break. The market does not seem to believe the Acreage data, and rightfully so.

 

US Crop Gets a Late Start

The USDA report was so unbelievable that the market may have to rely on other sources to come up with a working number for planted acreage this year. As of June 2nd only 67% of the US corn crop had been planted versus a 10-year average of 95% for that date. This means 30.6 million acres needed to be planted in June! As of June 16th, 92% of the crop had been planted versus 100% for the same date last year. Illinois was only 88% planted, South Dakota 78%, Indiana 84% and Ohio 68%.

Crops planted after June 16th could be vulnerable to pollination problems, and they could have difficulty reaching maturity by the normal freeze date. (Corn planted this late, especially if temperatures into late July and August run below normal, may not reach maturity until very late October.)

By mid-June, much of the US Corn Belt was facing prevent-plant deadlines, which meant that areas remaining unplanted by that date would face sharp reductions in coverage for crop insurance. If the 8% that was still unplanted on June 16th was not planted at all, it would amount to a loss of 7.42 million acres from the March estimates.

Planted Area Revisions The data for the Acreage report was collected by surveys issued to producers between from June 1st and June 17th. As in the past, the survey asked producers how many acres they “intended” to plant. This is normally not an issue, as most of the corn is usually planted by early June and the surveys produce an accurate picture of what actually gets planted. However, this year the delays in planting may have meant many producers were still undecided when they were answering the surveys. As of the final date of the survey, 17% of the intended corn acreage (15.5 million acres) was still unplanted. In the last four years, the amount left unplanted on the final survey date averaged less than 2%. In the late-planted years of 2009 and 2013 that number was 3%. This suggests that the revised survey will show a reduction in corn planted area.

We strongly believe that the USDA Acreage report will prove to be wrong, and we will assume that planted area will be down 7.42 million acres from the March 29th Prospective Plantings estimate. This would leave total planted area at 85.38 million acres.


Many traders believe the acreage loss could be even greater because of prevent-plant options that the producers have taken and that the final planted acreage number could be as much as 10 million acres below the March estimate. The Michigan state weekly crop progress report on June 17th stated the following: “The percent of corn planted advanced not by planters, but the decision of many farmers to opt for preventative plantings.” This suggests that the increases percent planted that week resulted not from more crops being planted but from a reduction in overall planted area as farmers made the decisions not to plant on certain acreage.


Corn Usage Could Decline Slightly

Traders already see the potential for fewer exports than the USDA has forecast for 2019/20 and for lower feed usage because wheat is both cheap and plentiful. In our forecasts we have lowered the export forecast by 250 million bushels and feed usage by 150 million bushels from the current USDA estimates.

Brazil's June corn exports came in at 1.37 million tonnes, well above May’s 143,000 tonnes and a record for the month of June. The previous record for June was 803,000 tonnes from 2007. Brazilian corn exports totaled 9.7 million tonnes for the first half of the year, up 87% from last year.

From the US Quarterly Grain Stocks report on June 28th, US corn stocks as of June 1st came in at 5.202 billion bushels versus expectations of 5.314 billion and 5.305 billion last year. This indicated better than expected corn demand for March through May. The USDA had already lowered corn usage by 425 million bushels from the May to the June USDA supply/demand updates.

Late Start Threatens US Corn Output

A study from Iowa State University has suggested that corn planted after June 20th would see a 40% drop in yield. University of Illinois analysts agreed with the June 1st assessment from the USDA that the late-planted crop should see the average yield slide to 166 bushels per acre. With so many high-yielding acres still unplanted as of June 15th, that same analyst now sees the possibility of a 153 bushel per acre average yield this year.

As of June 30th, 94% of the US crop had emerged versus a 10-year average of 100% for that date. In Illinois 89% of the crop had emerged, while in Indiana 88% had emerged and in Ohio 83% had emerged. Nine percent of total Illinois’ production last year plus 12% of Indiana’s and 8% of Ohio’s equals 373 million bushels or 22% of USDA ending stocks. A total of 5.5 million acres of corn had still not emerged by the first week of July.

The focus of the market during July will be on the condition of the crop, with special attention being paid to the weekly crop conditions reports. The corn rated good/excellent (G/E) as of June 30th came in at 56%, unchanged from the previous week and down from 76% last year and a 10-year average of 69%. Major producing states with declining conditions included Illinois at 42% G/E, down 5% for the week, Indiana at 39%, down 4%, and Ohio at 31%, down a whopping 8% in just one week.


Tightening US Supply

If final yield comes in at 163 bushels per acre and planted area declines 7.42 million acres from the March plantings number and usage declines by 400 million bushels, it would leave 2019/20 ending stocks at 1.150 billion bushels and result in a stocks/usage ratio of 8.3%. This would be the fourth tightest set-up for the US corn crop since 1973. If yield slips to 159 bushels per acre, ending stocks would slide to 837 million bushels and result in a stocks/usage ratio of 6%, which would be the second tightest set-up on record (going back to 1960). With late plantings and the poor crop ratings registered so far, we cannot rule out a yield of 155 bushels per acre. If this were the case, ending stocks would come in around 523 million bushels and result in a stocks/usage ratio of 3.8%, at a record low.

Armyworms Threaten Asian Corn Output
The market so far has not paid much attention to the arrival of fall armyworms in Asia. These insects originated in the Western Hemisphere and were first reported in Africa in 2016. They have been discovered in Southeast Asia for the first time ever this year and are moving north into China. In their first year of arrival, they can have a devastating impact, as they are difficult to control and can eat through a crop in just a few days. Armyworms have already been reported in 19 of the 33 provinces in China, and there is concern that the infestation will spread to the high-producing provinces in the north. Producers in Thailand have also reported losses.

Southeast Asia's 2019/20 corn production (Thailand, Indonesia, Philippines, Malaysia and Vietnam) is currently estimated at 31.7 million tonnes, and China’s is estimated at 254 million. If the infestation were to result in a 5% decline in production in those regions, this would mean a drop of 1.6 million tonnes for Southeast Asia and 12.7 million tonnes for China. The chart below shows the drawdown in world supply that would result from a 5% decline in production in Southeast Asia and US ending stocks dropping to 985 million bushels.

Price Outlook
We see the market recovering from the bearish USDA report news, and we expect that any minor weather issue will spark a resumption of the uptrend. Look for support in December Corn $4.20 (which would fill a gap on the charts) and then $4.18 ½ (the 50% mark of contract range). Look for resistance at $4.46 ¾ and $4.53. A close over $4.53 would leave $4.93 as the next target. If the weather is less than perfect, look for longer-term objectives of $5.04 and $5.66 ¾ (which would be the 50% mark between the 2012 peak and the 2016 lows.

 

-The Hightower Report

info@hightowerreport.com

This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness.  Opinions expressed are subject to change without notice.  This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon.  The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.  Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited. Violators are subject to a $15,000 fine per violation.

 

You can hear more from David at Global Grain South America, taking place on 11 - 12 September 2019. 

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