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Todd's Take
Monday, March 18, 2019 3:06PM CDT
By Todd Hultman
DTN Lead Analyst

Not that long ago, things were looking up for corn prices. Adverse weather in early 2018 resulted in smaller South American corn crops and helped the U.S. achieve record demand of 4.65 billion bushels (bb) in the first quarter of 2018-19.

This year, Brazil's soybean crop was diminished by hot and dry conditions in early January, and we wondered if Brazil's second corn crop would be planted in dry soil.

That concern did not last long as the weather pattern took a wetter turn in late January and pampered Brazil's safrinha crop with frequent and plentiful rains throughout February and into early March. On Tuesday, Brazil's official crop agency, CONAB, increased its estimate of Brazil's corn crop to 92.8 million metric tons (3.65 bb), up from 82.00 mmt a year ago.

Argentina is also experiencing a rebound in early 2019 as the Buenos Aires Grain Exchange is estimating a 45.0 mmt (1.77 bb) corn crop, up from 32.0 mmt a year ago. Not surprisingly, all this news of good weather down south has taken some enthusiasm out of owning corn. DTN's Corn Index has come down from a high of $3.52 in early February to a low of $3.34 last week and closed near $3.41 on Thursday.

For U.S. producers, there has not yet been a high enough price to make anyone happy about letting go of last fall's harvest. Assuming South America's crops come in as currently expected, has corn already seen its highest price in 2019? It is possible, but I don't think the $3.52 high will stand as the peak of 2019.

When we compare crop sizes to a year ago, this year's higher production totals for Brazil and Argentina look daunting, and yes, we can expect more export competition in the months ahead. But if we go back two years, we see a similar situation for corn. Brazil and Argentina also enjoyed good weather in early 2017 and their corn crops were on their way to high totals of 98.5 mmt (3.88 bb) for Brazil and 41.0 mmt (1.61 bb) for Argentina.

Much like now, DTN's Corn Index dipped to a new low of $3.17 in the latter half of March 2017, but that was not the end of the selling opportunities for corn that year. Noncommercials and managed futures funds turned net short in April, encouraged by South America's big crops, but eventually had to bail out of those short positions when hot and dry weather became a concern in early July. DTN's Corn Index peaked on July 10 at $3.57, and then corn's bearish fundamentals and seasonal tendencies took over from there, taking prices for brief dips below $3.00 at harvest time.

For the record, I wrote about corn's bullish potential for DTN customers on April 11, 2017. "Commercials Offer Corn Early Support" (https://www.dtnpf.com/…).

Here in 2019, I see two lessons that stand out from that experience. Even though corn prices ultimately turned bearish in 2017 and South America's large crops played an important part, taking on a large short position in late March, as noncommercials did, was an expensive mistake they ended up paying dearly for.

It is simply too risky of a bet to make that early in the year. Their over-eagerness gave producers a second chance to benefit from higher prices when the U.S. crop encountered adversity and speculators had to cover their shorts.

In effect, managed futures funds have made the same mistake again in early 2019. CFTC data shows funds net short 192,847 contracts as of March 5 -- their largest bearish bet since early 2018 (they were wrong then too).

Here in mid-March 2019, much of the Midwest is just starting to thaw out from a long winter and nearly all major U.S. crop areas are either saturated or over-saturated. As DTN Contributing Analyst Joel Karlin pointed out in his latest blog, seven states in the Palmer Drought Severity Index are showing their highest moisture ratings since at least 1960. The seven include Indiana, Ohio and Pennsylvania, with Iowa and Michigan close in line. Other producers will attest that those aren't the only areas of concern this week.

Read Joel's blog here: https://www.dtnpf.com/…

None of us have a crystal ball as to how 2019 will play out, and like 2017, we may very well see lower corn prices again by harvest time. But between now and then -- with funds heavily net short and so many unknowns still on the table -- it seems reasonable that producers should still have a chance at a higher selling price before this market becomes more confident about the 2019 crop.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman


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