Can Corn Come Back?

Source: By Todd, Hultman, DTN Grains Analyst • Posted: Thursday, June 23, 2016

For a year that started out with plentiful grain supplies and bearish concerns about an expensive U.S. dollar, 2016 is turning out to be much more bullish for grain prices than expected, and we’re not even at the halfway mark yet.

As I wrote about in “The Third Week In April,” the first bullish surprise in 2016 started as a strong surge of commercial demand for soybeans and meal. Technically, the soybean rally seemed like a surprise because there was no obvious news at the time to explain the move. But, actually, it was another show of a long-term trend that we have described many times — a prospering world’s growing appetite for more protein in the diet, which requires more soybean meal.

At the same time that was going on, corn prices in Brazil climbed as it became clear that Brazil’s second corn crop was suffering from dry weather. All of a sudden, U.S. corn prices that had been depressed by a big U.S. harvest and adverse currency moves in 2015 found themselves in a bullish demand scenario — something that corn has not seen since 2012.

If the demand changes described above were the only bullish factors in 2016, they would be enough to change the row-crop landscape for producers from unprofitable to modestly profitable prices. But the year is not over yet, and last week, the ears of grain bulls were tickled as the D-word became a possibility.

Wait a minute, you might say — apart from abnormally dry areas around Missouri and Indiana, last week’s U.S. Drought Monitor looks good for the Corn Belt.* And what about last week’s Seasonal Drought Outlook map from the Climate Prediction Center (CPC)?** Outside of an area around Tennessee, there is no official expectation of drought in the Midwest.

A closer look shows that the CPC did not forecast drought expansion in the Northern Plains, Midwest and Southeast because of the possibility of wetter conditions later in the season. But that does not mean that crops won’t be vulnerable to yield loss before then. As DTN Staff Reporter Todd Neeley explained in his June 16 article, “climatologists are watching closely for signs of flash drought — often brought on by a drop in precipitation and increased temperatures and winds.”***

One- and three-month forecasts are never written in stone, but as things now stand, both July and the July-to-September period are expecting above-normal temperatures for most of the central U.S. So far, the western half of the Corn Belt has borne the brunt of the heat.

As promising as all that sounds, December corn prices on Tuesday morning were 36 cents lower than where they finished on Friday. And therein lies the frustration of building market expectations on weather. You can go home with a hot and dry forecast on Friday afternoon and watch 8% of corn’s value disappear in a blink after conditions change over the weekend.

Clumsy noncommercials that built up the largest net-long holdings since September 2011 quickly became a bearish weight on prices after expectations changed.

But unexpected short-term changes in weather don’t mean that everything is hunky dory in the Corn Belt. 2016 corn yields are likely to do well in the Northern states where crops are protected by cooler temperatures. But given this year’s hotter summer forecast, other crop areas are suspect, and it seems reasonable to put corn’s production estimate back below 14 billion bushels. Just how far below remains to be seen.

I know comparisons are being made to 2012, but be careful not to miss a more important point: With corn supplies tight in Brazil and USDA estimating 14.2 billion bushels of total use here in the U.S. in 2016-17, corn doesn’t need a 2012-style drought to fire up prices. Last week’s early hint of bullish potential may have slipped into the shadows, but it is not gone. For row crops in 2016, the fat lady hasn’t even begun to warble.