Coming into the marketing year of 2020/21, there are many questions surrounding the grain and oilseed markets. With 2019’s floods and tariffs still fresh in everyone’s minds, many traders were eager to flip the calendar to 2020. However, for well-positioned producers, late-2019 turned out to be an opportunistic time to unload existing stocks for a tidy profit.
However, the optimism of a brand-new marketing year quickly gave way to negative sentiment. The onset of the COVID-19 pandemic threatened commodity values from corn futures to crude oil. Subsequently, the ag markets were left with more questions than answers. Let’s take a look at three market drivers that may prove essential to 2020’s corn market dynamic.
Planting Season 2020
The release of the USDA’s Prospective Plantings report on March 31, 2020 suggested that a robust corn planting season was likely. Here are a few of the highlights from the report:
- U.S. corn planted acreage for 2020 is estimated to come in at 97.0 million acres. This figure is up 8 percent from 2019, an increase of 7.29 million acres.
- At 97.0 million acres, 2020 will be the most heavily planted year for corn since 2012.
When the USDA’s estimates became public, July CME corn futures came under intense selling pressure. For the April 1 session, prices fell by 2.10 percent, posting fresh yearly lows and extending March’s losses (-7.11 percent). Although the move in pricing came after the USDA’s release, it was representative of previous expectations going unrealized.
Bottom Line: On the surface, 2020 has the look of an aggressive year for corn plantings. If successful, this may bring an abundance of supply come harvest time.
EL Niño and La Niña
One of the key elements driving the USDA’s projections for a strong corn planting season is the lack of extreme weather predicted for spring and summer 2020. By comparison, 2019 was a record-breaking year for precipitation, resulting in delayed plantings and corn futures market volatility.
The weather outlook for 2020 is shaping up to be much more accommodative to producers. According to March’s U.S. National Weather Service (NWS) release, equatorial sea surface temperatures are likely to remain near to above average across the Pacific Ocean throughout the spring and summer months. Accordingly, the NWS is projecting a 65 percent chance of neutral atmospheric conditions in the Northern Hemisphere for spring 2020 and a 55 percent chance for summer 2020.
Bottom Line: NWS estimates suggest that 2020 is unlikely to be an El Niño or La Niña year. The lack of extreme moisture is a probable contributor to the expectedly strong planting season. Further, ideal growing conditions are conducive to a robust 178.5 bushels per acre yields for 2020. Industry estimates show corn production for 2020/21 to come in around 15.5 billion bushels. When added to an old crop carryover of 2.5 billion, year-end stocks may approach 18 billion. Given an aggregate projected demand of 14 billion bushels, a record 4 billion bushel carryout is a possibility.
Given strong plantings and tame weather through the growing season, a bumper crop and record carryout is possible for corn for the 2020/21 marketing year.
The Future of U.S.-China Trade
August 2019 was a transitional period for U.S. ag producers. An abnormally wet year hampered spring planting and brought extraordinary crop destruction. In addition to these concerns, a U.S.-China tit-for-tat tariff exchange upended business-as-usual for corn futures traders.
January 2020 brought optimism that the U.S. and China were closing in on a final trade deal. Following adoption of the “Phase One” agreement, China pledged large-scale purchases of U.S. agricultural products for 2020 ($35 billion) and 2021 ($40 billion). Significant portions of these purchases were to be corn, solving many of the demand-side questions prompted by the two-and-a-half-year trade war.
Unfortunately, the onset of the COVID-19 pandemic in Q1 2020 placed U.S.-China trade on the back burner. In a statement on March 28, President Donald Trump summed up the state of negotiations: “I must tell you this whole invisible enemy [COVID-19] has taken over the world … nobody cares about trade.”
Bottom Line: Although COVID-19 has derailed progress on the trade front, it’s possible that further resolutions will be made during the marketing year of 2020/21. Most analysts believe that a post-COVID-19 global recession is inevitable―and perhaps the easing of tariffs and trade restrictions will be used to fight the downturn. As of this writing, China has pledged to meet their Phase One commitments; if they do, demand will be poised for a return to the U.S. corn export markets.
Crude Oil, Gasoline, and Ethanol
Without doubt, the coronavirus outbreak is one of the largest economic game-changers in U.S. history. One sector particularly hard hit was energy. In late-April 2020, CME WTI crude oil futures plunged into negative territory for the first time since their inception.
When crude oil crashed in spring 2020, the pricing of gasoline and diesel followed suit. During the month of March, June RBOB gasoline futures fell by 55.15%. Accordingly, the national average gas price fell by more than $1.00 per gallon year-over-year.
Bottom Line: So, what does historically cheap oil and gasoline have to do with the price of corn? The answer is ethanol demand. About one-third of corn demand in the U.S. may be attributed to the refinement of ethanol. If gas prices were to remain abnormally low for an extended period of time, ethanol production would dry up. In turn, the demand for corn would take a huge hit, sending prices south.
Interested in Trading Corn Futures?
Prediction is far from an exact science. Accordingly, the picture for corn in 2020 has become increasingly murky due to the ramifications of COVID-19. Nonetheless, a strong planting and production season is expected to boost ending stocks to 18 billion bushels. COVID-19, energy prices, and the future of U.S./China trade are key factors in the 14 billion bushel demand estimate. All nuances aside, supplies look to far outweigh demand. The result may be a bearish 2020 for corn futures.
To learn more about corn futures, as well as the entire lineup of CME ag derivatives products, reach out to a certified broker at Daniels Trading. With decades of experience in the markets, the Daniels team has the expertise necessary to answer your questions regarding agricultural futures and options.
* Updated – May 20, 2020 at 12:15 PM CT
