Where is the bottom for corn?

Reasons for optimism among analysts such as those at Nutrien include an expectation of a smaller American corn crop than what the U.S. Department of Agriculture is estimating and positive developments on the demand side, such as some ethanol plants coming back online.  | Reuters/Bryan Woolston photo

Analysts say signs suggest that the bear market may be ending, which would also be good news for wheat prices

There are encouraging signs that corn prices have bottomed out, but don’t expect a bull run anytime soon, says an analyst.

“Maybe we’re OK for stable trade,” said Rich Nelson, chief strategist with Allendale Inc.

“(But) I don’t have the trigger yet for higher prices.”

December corn futures hit a low of US$3.25 1/2 on April 21. Values since clawed their way back up to $3.42 by the close of markets on June 4.

The price appreciation occurred despite heavy fund sales, which gives Nelson the confidence to suggest the market has reached a market bottom, which would be good for wheat as well.

Many analysts and economists have been forecasting sub-$3 corn in 2020-21 but some are now suggesting that is unlikely.

Nutrien chief executive officer Chuck Magro believes the corn market has gone too far in its bearish sentiment.

“It seems like the crop commodity markets only want to factor in the bad news right now,” he said in a presentation delivered at Bernstein’s 36th Annual Strategic Decisions Conference.

“Certainly at Nutrien, we’re not as pessimistic as some.”

One big reason Nutrien is more optimistic about the corn price outlook is that it is forecasting 94 million acres of U.S. corn, which is well below the U.S. Department of Agriculture’s 97 million acre estimate.

There are also some positive developments on the demand side.

“We’ve seen some ethanol plants come back online and if the rumours for corn exports are true, we could see a much tighter supply-demand for corn than the market is certainly pricing in today,” said Magro.

He said $3 corn is possible but it is “certainly not a foregone conclusion” and is definitely not a sustainable price.

Magro thinks corn demand could surprise to the upside. There is strong feed demand due to COVID-related food supply chain disruptions.

“And if China steps into the grain markets to meet their Phase 1 commitments, we could see a significantly tighter supply-demand picture for corn,” he said.

Nelson agrees with Magro’s general premise.

“The market is way too set on the belief that new crop is all bearish and there’s nothing good. That’s true,” he said.

But he is not sure corn supplies will be a lot tighter than the market is forecasting.

Nelson said everybody is on board with the idea that corn acres will be smaller than the USDA estimate.

And it is true that feed demand will likely be strong for the final quarter of the 2019-20 crop year because “backed up animals” will be eating more feed in June, July and August.

But he worries about new crop demand because there is expected to be a huge drop in cattle placements, piglets are being euthanized and chicken flocks are contracting.

Nelson said there have been some encouraging rumours about Chinese corn demand. A report surfaced in April that the Chinese government planned to replenish its corn stocks with 20 million tonnes of U.S. corn.

That is well beyond what the trade had been anticipating. Allendale was forecasting four to eight million tonnes of demand emanating from the Phase 1 deal.

“It’s a great story but so far nothing of their current buying suggests that they’re ready to change,” he said.

China has purchased about two million tonnes of U.S. corn since the deal was signed in February.

Dim Sums, a web blog about China’s rural economy, said there are reports out of China that government reserves have been whittled down to 56 million tonnes from a peak of more than 200 million tonnes in 2015-16.

The USDA is forecasting Chinese corn stocks of 208 million tonnes in 2019-20 and 200 million tonnes in the upcoming crop year.

Nelson doesn’t know which estimate is accurate but it is true that China has sharply reduced its stocks over the past few years and that the country could be a catalyst for a corn rally if it started living up to its Phase 1 commitments.

Unfortunately, there are no signs that a change in China’s buying patterns is imminent.

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