By Todd Hultman
In the case of corn, USDA’s ending corn stocks estimate of 1.70 bb is 11.5% of annual use. It is a lot more bullish than the 3.32 bb estimated last June, but not close to the tight scenario we’re talking about for soybeans. USDA may adjust its corn ending stocks estimate modestly lower in their World Agricultural Supply and Demand Estimates (WASDE) report on Jan. 12, but for now, the history of cash corn prices at an 11.5% ending stocks-to-use ratio points to a target of $4.20 per bushel, which is far below the $4.94 per bushel that March corn settled at on Jan. 7.
The 10-year average of spot soybean to spot corn prices is 2.5:1. Over the past 20 years, the ratio has ranged from roughly 2:1 to 3:1. The current ratio of 2.74:1 ($13.55 1/4 for March soybeans/$4.94 for March corn) is remarkably normal, given the much tighter fundamental supply concern in soybeans.
The dilemma here is that if soybeans continue to trade higher on tight supplies, as their price history suggests they will, it seems likely that corn will keep trading higher as well.
At what point do corn traders get nervous about prices above $5 without adequate fundamental support?
Markets are often more emotional than scientific, especially when prices are as high as they are starting to get. The fates of corn and soybean prices are largely in the hands of China and the weather — two forces that are difficult to guess.
If soybean prices continue to trade up to $15 or higher, it is difficult to imagine corn won’t go along for at least part of the ride, with or without the proper fundamental support. But we shouldn’t fool ourselves into thinking there is no downside risk in this situation, especially where corn prices are concerned.
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