December 2015 corn futures traded as much as 30 cents lower on Aug. 12 following the USDA's surprisingly large yield forecast and closed 20 cents lower for the session. The price of that contract rallied about 15 cents in the following week, but started moving lower again late last week.
According to University of Illinois agricultural economist Darrel Good, recent price weakness is not coming from the supply side.
"There is a general sentiment that the USDA production forecast will not increase from the August forecast of 13.686 billion bushels," Good said. "Instead, market commentary seems to suggest the trade is expecting the yield forecast to decline from the August forecast of 168.8 bushels. Expectations appear to be retreating to the 164- to 165-bushel level reported as the average trade guess prior to the release of the USDA August forecast. Continuing weakness in corn prices reflects perceived demand weakness."
Good said that concerns about demand may stem from two sources.
First, the concern that exports of U.S corn will fall short of the current USDA projection of 1.85 billion bushels. Second, the concern about weak commodity demand in general resulting from slow economic growth and severe weakness in financial markets.
"Weakening demand implies that a lower price will be required to entice a given level of consumption," Good said.
According to Good, domestic consumption of corn during the 2015-16 marketing year is not of immediate concern. The USDA projection of 5.25 billion bushels for ethanol production is consistent with the 5.2 billion bushels expected for the marketing year just ending and a modest increase in domestic gasoline consumption next year. The projection of 5.3 billion bushels for feed and residual use next year equals the projection for the current year.
"Another large crop implies large residual use of corn, and low corn prices along with steady to higher animal numbers should support actual feed consumption of corn," Good said.
The USDA projects corn exports during the 2015-16 marketing year that begins on Sept. 1 at 1.85 billion bushels, equal to the projection for the current year, Good said. However, total outstanding sales of U.S. corn for export during the 2015-16 marketing year are relatively small.
"The USDA reported those sales at about 223 million bushels as of Aug. 13," Good said. "Sales were at 365 million bushels at the same time last year. Sales are at the lowest level for this time of year since 2005. It is recognized that the magnitude of early sales is not a good predictor of marketing-year exports because 2005 sales as of mid-August as a percentage of marketing-year exports have ranged from about 8 percent (2005-06) to 42 percent (2012-13) and averaged 18 percent. Current sales represent 12 percent of the USDA projection for the upcoming marketing year. Still, the small export sales total is raising concerns in the context of potentially weak world demand, the relatively strong U.S. dollar, and expectations of large supplies of corn in other exporting countries. With nearly 55 weeks remaining until the end of the 2015-16 marketing year, export sales need to average about 30 million bushels per week in order for exports to reach 1.85 billion bushels," Good said.
Weak demand for corn resulting from poor economic performance means that the equilibrium market price of corn for a given level of supply is lower than if demand were strong, Good continued. Some measure of demand weakness currently reflected in the corn market may be provided by the relationship between the projected 2015-16 marketing-year-ending stocks-to-use ratio and the current average farm price offered by the market.
"Based on the relationship between the ending stocks-to-use ratio and the average farm price of corn for the period 2007-08 through 2014-15, the projected ratio of 12.4 percent for the 2015-16 marketing year points to a marketing-year average farm price of $4," Good said. "With smaller exports than projected and a year-ending stocks-to-use ratio of 13.3 percent, an average farm price of $3.80 would be expected. Based on a model developed by the USDA's Economic Research Service, current futures prices (December futures at $3.77) point to an average farm price of $3.60. It appears that 2015-16 corn prices are currently at least 20 cents lower than would be the case with a stronger demand outlook."
With the start of the Midwest harvest approaching, Good said producers will need to evaluate the corn storage decision.
"Current low prices mean that producers will likely choose to store much of the crop that has not yet been priced," Good said. "The current basis in the cash market and the carry in the futures market give some indication about the potential return to storing corn. In central Illinois, for example, the average cash bid for harvest delivery reflects a basis of about –30 cents relative to December 2015 futures and –52 cents relative to July 2016 futures. If the July basis improves to about –5 cents by June 2016 (as it did this year), the market is offering about 47 cents per bushel to store corn for about nine months after harvest. That return would cover the out-of-pocket costs of farm storage, but may be closer to breaking even for commercial storage costs for some producers.
"The only way to capture the storage return, however, is to forward price the stored crop in the cash or futures market," Good said. "The spot price of corn will have to increase by more than 47 cents by next spring for the return on corn stored unpriced to exceed the likely return to a storage hedge."