Analysis: US corn prices to face continued pressure as supply glut looms

New Delhi — The US Department of Agriculture expects corn acreage in the US in 2020-21 (September-August) to be the largest since 2012 at 96.99 million acres, which market experts believe if realized, could result in a glut by the time of harvest this year, and hit the already precarious corn prices in the country.

Many market participants expect the USDA to bring down the acreage numbers in the acreage estimates report to be released in June.

However, history suggest that though planted acreage under corn does vary from the planting intention sometimes, it does not not happen very often. Since 1997, the final corn planted acreage dropped over a million acres from March planting intentions only five times, according to a report by the University of Illinois.

CORN GLUT LIKELY

The USDA estimates the yield for US corn in 2020-21 to be at 178.50 bushels/acre.

Considering these numbers for yield and acreage, production of corn in the US may reach a record high in the upcoming marketing year.

"Under current planting intentions and consumption trends, a massive corn supply appears feasible during the 2020-21 marketing year," the University of Illinois' report by Todd Hubbs stated.

At 97 million acres, with the average planted/harvested ratio at 92%, and the trend line yield at 178.5 bu/acre, the USDA can come up with corn production estimates of 15.93 billion bushels for 2020-21 in its May World Agricultural Supply and Demand Estimates report, said Pete Meyer, head of grains and oilseed analytics at S&P Global Platts Analytics.

At close to 16 billion bushels, the production will be the highest ever, nearly 800 million bushels higher than the previous record in 2016, and over 2.2 billion bushels higher than last season's crop.

The market is most likely looking toward a glut situation in the US by harvest this year, said Meyer. This view was echoed by Terry Reilly, senior analyst at Futures International.

YEAR-END STOCKS TO RISE

In the 2020-21 marketing year, market participants see the year-end stocks as high as close to 4 billion bushels -- the largest in at least the last 20 years. According to the USDA's historical archives, the highest year-end stocks for corn was in 1986 at 4.9 billion bushels.

INTL FCStone's estimates for 2019-20 year-end stocks are at 2.3 billion bushels. When added to the 15.9-billion-bushel crop, supplies for 2020-21 come at 18.261 billion bushels, said the agency's chief economist Arlan Suderman.

"Feed usage drops back to 5.6 billion bushels as ethanol recovers back to 5.23 billion [bushels] and exports rise to 2.233 billion bushels. That leaves projected new crop-ending stocks at 3.8 billion bushels," Suderman added.

On the lower end, FCStone expects corn stocks to be at 2.855 billion bushels next year.

Platts Analytics estimates the ending stocks for 2020-21 to be at 3.56 billion bushels.

"Exports are the only thing that can save corn demand," Meyer from Platts Analytics said.

Corn exports from the US -- which remained slow through the marketing year 2019-20 -- were seen picking up pace recently on the back of factors like low prices, demand from Southeast Asian countries, and declining presence of competitors in the market.

"Lower prices look to see continued strength for US corn exports," a report by Hubbs said this week.

PRICES UNDER PRESSURE

The price of corn in the US is already at multi-year lows due to weak demand for ethanol as stay-at-home orders in the US to contain COVID-19 have restricted movement, curtailing demand for the grain-based fuel. In the US, roughly 40% of the corn produced goes into ethanol production.

The USDA has cut its 2019-20 estimates for corn used for ethanol by 375 million bushels in its latest WASDE report. However, many market participants anticipate a bigger drop, while Platts Analytics estimates a drop of nearly 600 million bushels.

Additional factors like low prices of gasoline, lower exports so far, and anticipation of increased production are also weighing on corn prices.

"If corn acreage stays at 97 million acres, cash corn prices under three dollars for large areas of the corn belt seem probable over an extended period," the University of Illinois' report stated.

The most active corn contract on the Chicago Board of Trade slumped to its lowest price since September 2016 at $3.20/bu on Wednesday.

"At 97 million acres, if realized, this would be devastating for US corn producers as prices basis the December futures contract could sink to $3 by October," said Reilly from Futures International.