Initially, the trade reaction to USDA’s June 11 WASDE balance sheet for corn was price friendly. Traders were surprised USDA cut the planted acreage estimate by 3 million from March Prospective Plantings this soon; not even waiting to see the June 30 official ACREAGE report. Traders were also startled USDA trimmed the average yield forecast as much as they did, a whopping 10 BPA from the “trend” yield.
Futures jumped higher on report release, matching previous highs, but then stalled. Why? Because traders were quick to note that even though dropping projected ending stocks for 2019-20 by 810 million bushels; a whopping one third from last month. USDA raised its forecast for 2019 corn by only 50 cents a bushel, to $3.80; just 20 cents higher than projected for the 2018-19 crop as shown below:
FIGURE 1: USDA’S AVG FARM PRICE FCSTS FOR CORN IN JUNE WASDE
As of today, the rally has resumed, taking out prior highs. How high next? I plugged USDA’s June balance sheet for 2019-20 into my WASDE Wizard forecasting model and it shot out significantly higher price impact for such a dramatic drop in ending stocks in Figure 2:
FIGURE 2: WIZARD MODEL CORN PRICE FCST PER PAST WASDE HISTORY
These prices were more in keeping with years of similar ending stocks. In May of 2014, for example, ending stocks were projected at a 47-day supply and an average farm price forecast of $4.20. In 2013-14, forecast ending stocks were a 45-day supply with an average farm price forecast of $4.40.
Model algorithms reveal the only way USDA was able to project just a 50-cent gain in price with such a big drop in stocks was to factor in price sensitivity only about half what WASDE history shows. When I use historical price sensitivity to changes in ending stocks in days’ supply, it generates a farm price 76 cents per bushel higher than last year and 56 cents per bu. higher than what USDA forecast for 2019 corn.
Bottom line: USDA’s June WASDE price forecast should be seen as quite conservative because it’s betting that history won’t repeat itself in terms of price sensitivity to changes in the supply and ending stocks outlook. Now that the rally in corn has resumed, charts suggest a $4.75 -$4.85 objective for Dec. futures.
Dan Manternach, President
Perfect Fit Presentations, LLC
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