Weekly Corn Market Update 03/13/20
December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week lower by $0.0850/bushel (~2.23%) to settle at $3.7300/bushel. The 11.50-cent (~3.01%) range in corn this week was similar to last week's 11.25-cent range. We view this week's selloff to be surprisingly gentle, given the moves in outside markets - particularly the crude oil and livestock markets.
April 2021 crude oil futures were down ~15.06% for the week (we reference April of 2021 because it is approximately halfway through the 2020 corn crop's usage lifetime). According to its most recent World Agricultural Supply and Demand Estimates (WASDE), the USDA expects ethanol and byproducts to account for ~39.62% of the corn produced in the United States during the 2019 crop year. According to the same report, ethanol and byproducts accounted for ~38.37% and ~37.50% in the 2017 and 2018 crop years, respectively. According to its 2020 Grains and Oilseeds Outlook, the USDA estimates that corn used for ethanol will be up less than one percent from 2019.
The story isn't much better in April 2021 Live Cattle or Lean Hog futures, which were down ~9.74% and ~10.27% on the week, respectively. The most recent WASDE shows the feed and residual category accounting for an average of 38.18% of U.S. corn production in the 2017, 2018, and 2019 crop years. The USDA is a bit more friendly here with its 2020 outlook, estimating a ~4.98% increase from 2019 levels.
Given the recent drop in the value of these related products (which occurred after the February 20th release of the Grains and Oilseeds Outlook) and the USDA's expectation of a ~13.20% increase in corn production in the same report; we find it challenging to build a long term bullish case for corn on a fundamental basis. Of course, that fact in itself might be the most optimistic of all, since it's often darkest before the dawn. That said, we prefer to manage risk in a careful and disciplined manner, not predict the future.
On the technical side, Dec20 corn futures remain in a downtrend. Currently, a channel formed by combining the highs of 1/24 and 3/4 with the lows of 2/28 and 3/12 is containing that downtrend. We don't have much faith in technical analysis, but, barring an external catalyst, we would not be surprised to see this channel hold until the March 31st release of the USDA's Grain Stocks and Prospective Plantings reports. Here again, as always, we recommend careful and disciplined risk management - not speculation.
In the corn options market this week, we note a general increase in implied volatilities (the cost of options) across almost all new crop timeframes. This increase is particularly evident in the near-term short-dated new crop options. Given that, we see it as relatively more favorable to hedge with longer-term options or outright sales than a week ago.
In the shorter-term, looking ahead to next week, we see a 52.05% chance that Dec20 corn futures will finish the week higher. We'd consider movement within the $3.6225-$3.8325 per bushel range to be unremarkable. Noteworthy moves would extend to the $3.4500-$3.9875 per bushel range. Price action beyond that would be considered extreme.
Looking further ahead to the Fall 2020 Crop Insurance Price (the average settlement of Dec20 corn futures in October), we see a notable shift to the downside corresponding with this week's lower settlement price (see the chart below). We believe there is a 58.75% chance the average will come in lower than this week's Dec20 corn futures settlement of $3.7300/bushel. (see our prior note on Risk Premiums for a discussion of one possible reason for this case)
Thanks for taking the time to read, and we look forward to your questions and feedback. Please feel free to contact us via our contact form, Facebook, Twitter, or by phone or email. Best of luck in the coming week, and we hope you enjoyed this week's report.
