Corn Futures: A Wild Ride and Uncertain Future

Last week was a wild ride for corn futures. The December’23 corn futures contract reached its highest level since October 2022, $6.29/bu, then collapsed back to $5.84/bu, which happens to be the 200-day moving average. We believe that the volatility in the corn market was driven early in the week by a bullish crop progress report from the USDA that showed declining US corn conditions scores across the country generated by concerns about soil moisture in key corn producing states. The subsequent fall back to earth seemed to arise from poor US export sales and increasing probability of timely moisture.

Headed into the end of June, the corn trade has gone through a profound change. We believe that concerns about a developing El Nino drought which helped the December’23 contract appreciate by $+1.39/bu was necessary and ultimately helped the trade recalibrate and restructure. A large part of this move reduced and removed managed money shorts, caused producers to re-own futures hedges while forcing the commercial end users to build coverage. After last week, we feel more comfortable with the current price levels of the new crop corn and believe that the risks for the producer and the commercial end users have become more apparent. At the current price levels, we can make a case for both a bullish and a bearish fundamentally driven scenario.

On the bullish side, the dryness across the ECB and WCB is material, and we expect that it will negatively impact corn yields. We believe that the USDA has a reason to abandon their weather adjusted 1841.5bpa estimated yield and lower the national MY 23/24 yield objective in the July WASDE. Because the corn yield is not survey based, estimating a final yield in July is a particularly arduous assignment. Since 2000, the USDA adjusted the corn yield from the June to the July WASDE report four times. The last time was in 2012 when the USDA reduced the July yield by -20 bpa. Because the starting point of the crop in 2023 is drier than 2012, the vegetative health indices are showing more vulnerable corn crop and we are estimating a 168 bpa, +/- 7 bushels per acre. This creates a range of 175 bpa to 163 bpa. With most of the crop in the key northern growing states heading into the early reproductive phase, we use various vegetative health index data to generate yield assumptions. The challenge is that this vegetative crop data presents large error terms and is not very reliable for predicting final yields.

On the bearish side, the thesis is that timely moisture and lower temperatures in the more vulnerable producing states will aid crop development and will result in minimal production losses. At the current price level, we see a case where the December’23 corn future contract can increase by $.50/bu or decline by $.50/bu. To protect against weather and production risks, we advise producers to examine owning put spreads and downstream commercial users remain in call spreads.

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Contact Scott Strand

Direct 612-486-4624 | scott.strand@hilltopsecurities.com

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