STEVE KELL: Watch feed, ethanol sales and exports you will know where corn price is going

As we move into harvest our attention shifts from how big these crops might turn out to be, to where are we going to find the demand to drag prices up? I am struck by how optimistic the USDA’s estimates are in terms of how fast the economy might recover from the pandemic shake up and how robust it thinks that recovery might be. It has been clear since mid-summer that the 2020 North American corn crop will come in at close to 15-billion bushels. What has been really interesting is that the government’s corn demand estimates come astonishingly close to gobbling all of that up. Are these estimates reliable? We should want to know.
One of the first things that marketing professionals do when they receive information about commodity markets is to evaluate the data to see if it makes sense. The simplest way to do this is to compare the new figures to other respected sources of information and see if the figures add up.
For example, in recent months the USDA has suggested that in the 2020-2021 crop year roughly 5.1 billion bushels of corn will be used to manufacture ethanol (up 6% from this past year). With the 2020 corn crop expected to come in considerably bigger than the 2019 harvest, it’s great to see a strong recovery in bio-fuel demand for corn.
From mid-2015 right through to the winter of 2020, U.S. weekly ethanol production came in at slightly over one-million barrels per week. It plunged sharply in the throws of the pandemic shutdown to a low of only 537,000 barrels during the week ending April 24 and then bounced quickly back up to 900,000 barrels per week in June and has remained in that range ever since. The bottom line is that corn ethanol production has run very consistently at about 90 % of its historic production volume.
The quickest way to verify whether or not the USDA’s estimates of feed demand for corn make sense is to use one of the USDA’s own reports on livestock slaughter numbers. If the number of hogs, poultry, and cattle going to slaughter is 2 % or 3 % higher than last year, it’s rational to assume that the amount of feed needed might also be up by 2 % or 3 %. Unfortunately that metric doesn’t work in 2020 because with all of the COVID-19 related shutdowns and slowdowns in meat processing plants, slaughter numbers were interrupted. So it’s hard to draw a comparison and we may in fact have increased feed demand because livestock is being held in inventory longer.
The bottom line is that the USDA is currently forecasting a 4 % increase in feed demand for corn in the 2020 crop year (5.825 billion bushels in 2020/2021 up from 5.6 billion bushels of feed in 2019/2020). That 4 % increase might sound big but it’s actually in lockstep with the 4 % increase we saw back between 2018 and 2019. So it’s the extension of a trendline and likely believable.
Export demand for 2020 crop corn looks really impressive and there has been enough buying activity in the new crop markets to confirm that the demand is real. Recent Chinese purchases of American corn have made a lot of headlines and it’s really encouraging news because a quarter of the world’s population lives in China. They are the key market for all commodities. Since China is buying in big volumes (potentially big enough to replenish depleted reserve stocks), it’s great news for corn producers.
Even though the challenges of geography make it difficult for exporters in the Great Lakes to ship to China and some political tensions still exist between our two countries, as long as China is purchasing corn from someone, it helps Canadian producers. World corn supply is like a bucket of water. Regardless of which side of the pail you take water out of, the total amount in the bucket goes down.
Even if we don’t see Great Lakes corn moving across the Pacific Ocean, those sales to China will still tighten supplies everywhere.
By the time that we get to the winter of 2021, the market’s attention will have shifted to planting intentions for the 2021 crop. Between now and then, the market and price behaviour is going to be driven by the three key pillars of corn demand: ethanol, feed, and exports. If the USDA is right, we’re actually in pretty good shape but watching weekly progress on ethanol production, export sales, and livestock numbers will tell us if demand is staying on track.
A failure in any of these categories will be a precursor to the corn market dropping off. We might not know exactly where this market is headed, but we certainly know where to watch.