Weekly Corn Market Update 05/15/20

December 2020 (Dec20) corn futures (the benchmark for new-crop corn) finished the week down 3.75-cents (~1.12%), settling at $3.3200/bushel. Price action this week took place in an 8.75-cent (~2.61%) range. All of this week's trading took place within the unremarkable price band we published last week.

The fundamental demand picture we first visited on March 13th weakened this week. April 2021 futures for Crude Oil fell ~0.95% this week. Relevant livestock markets also fell this week. Live Cattle futures for April 2021 dropped ~3.83%, and Lean Hog futures for April 2021 fell ~0.20%. On the supply side of the ledger, the USDA's weekly Planting Progress report released on May 11th continues to show planting progress remains well ahead of average.

In addition to its weekly Planting Progress estimates, on May 12th, the USDA released its monthly World Agricultural Supply and Demand Estimates. The USDA estimates 16-billion bushels of corn production this year along with increased usage on both the "Feed and Residual" and "Ethanol & by-products" categories. As noted above, we find this increase suspect due to the fall in long term futures prices for those markets. If those demand numbers come to pass, it would take about a 7.63% decline in estimated production to get 2020/21's ending stock below 2019/20's. In other words, planted acres would need to fall below 89.6 million (harvested below 82.8 million acres), or national yields would need to be below 165 bushels per acre, to match last year's ending stocks levels. Those are significant impacts on the production side, and the scenario still assumes a rosy demand picture. We continue to believe building a bullish fundamental case is challenging at best.

On the technical side, Dec20 corn futures remain in a downtrend. Dec20 corn futures failed to make a new contract low for the third straight week, and appear to be consolidating in a bearish pennant formation. We'd consider last week's failed upside breakout from this pennant to be a bearish signal. The spread between Dec20 and Mar21 corn futures narrowed for the second week in a row, contracting by a half-cent this week to 12.75-cents/bushel - perhaps the only technical sign on which the bulls can hang their hat. Overall, we see the technical picture as less murky and more bearish than last week.

In the corn options market this week, implied volatilities (the cost of options) for all new crop expirations traded lower on the week. Near-term short-dated new crop options led the decline. Given the recent stability in the corn market, we do not find these declines surprising. We believe that further reductions in the cost of options could represent a chance to increase the proportion of options in the hedging portfolio naturally as opportunities present themselves. However, we would not actively increase that portion unless option prices declined considerably.

Looking ahead to next week, we see a ~50.9% chance that Dec20 corn futures will finish the week lower. We'd consider movement within the $3.2300-$3.4175 per bushel range to be unremarkable. Noteworthy moves would extend to the $3.0650-$3.6175 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 believe there is a ~52.9% chance the average will come in below this week's settlement of $3.3275/bushel. We continue to see a higher chance (~27.2%) that the October average will come in below $3.00/bushel rather than above $4.00/bushel (~9.5%). See the attached chart for a visual representation of our expectations for the Fall 2020 Crop Insurance Price from this week and last.

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, by phone at (970)294-1379, or by email.