Driving Forces in the Corn Market & World Weather
Update for December 31st, 2020
Corn prices have escalated to their highest levels in 6.5 years. It appears speculative traders see little risk with holding on to current long positions or with adding to them through year-end. Monday’s estimate indicated that funds were net long 307,000 corn contracts, the largest long position held since September 2012. Since then 25,000 more long contracts have been added surpassing the 2012 peak. The only other time since these records have been kept when more long corn positions were held was during a period from 2010-2011.
Strength in the corn market can be attributed to a few sources. The latest infusion resulted from the announcement from the Argentine Ag Ministry saying that the country was suspending all corn exports until March 1 in an effort to control food inflation within the country. This notice came as a surprise to everyone, including Argentine farmers. The head of one of Argentina’s corn groups stated, “We are absolutely surprised. It does not make sense. There was never a lack of corn in Argentina.” The Ag Ministry explained that the objective of the measure is to save the remaining 4.27 million tons for domestic consumption in order to ensure the supply is available during the summer months when the supply of cereal tends to be scarce. This move is considerably significant as Argentina is the world’s 3rd largest corn exporter and accounts for 18% of all global exports according to USDA data.
Weakness in the U.S. Dollar is also a likely source for strength in prices as the value has now dropped to its lowest level in 2 years. In addition, there have been rumors that China is “shopping” the marketplace for corn and thoughts are they may come to the U.S. for that supply to fulfill that need while also working towards the fulfillment of the Phase 1 trade agreement.
While high corn prices offer many benefits to producers it also brings with it some issues for users. The ethanol industry suffered right along side U.S. farmers through the pandemic and while things have turned around for farmers, we can’t say the same for ethanol. Weekly production is down by -4.3% on the week and -12.4% from a year ago. According to Reuters profit margins are in the red by $0.20-$0.25 per gallon in states like South Dakota, Nebraska, and areas of Northwest and Northeast Iowa and around $0.08 per gallon in the Eastern Corn Belt. There has been some talk of possible sales of U.S. ethanol to China, so far there has been no confirmation of such a deal. Such a move would finally be the boost the U.S. ethanol industry has waited so long for.
Weather conditions across South America continue to be of major importance. Forecasts from this week indicate that many key growing regions are expected to receive below normal rainfall through January 10th. Sometimes we tend to assume below normal rainfall means the total absence of precipitation when in fact that is incorrect. Brazil will receive below-normal rainfall amounts but most of the country is still forecast to receive 2-4 inches during the next 10 days. Argentina will also see slightly below normal precipitation but is expecting some rainfall over the forecast period as well. Brazil has seen some improvement in crop conditions, but many regions of Argentina remain dry. The Buenos Aires Grain Exchange reports this week that soybean acreage for this season could be lowered if the dryness continues.
South American crop consultant Dr. Michael Cordonnier updated his production estimates for this week. His latest findings are shown in the chart below:
Brazil’s precipitation outlook through January 5th.
Argentina’s outlook for the period through January 5th.
Source: Soybean & Corn Advisor, Inc.
U.S. outlook for the first full week of the new year.
Our old friend Polar Vortex is not expected to visit the U.S. anytime soon. Instead Asia and Southern Siberia will get an opportunity to enjoy his company for at least the next 10 days.