Earlier this summer, the US corn crop was facing dry conditions that drew comparisons to the severe drought of 2012. In the last few weeks, however, corn prices have reached lows last seen in late 2020. What are the key reasons behind this decline in prices?
Over the past three years, corn has been one of many commodities to experience a period of high prices and significant volatility. Indeed, since January 2021 prices have exclusively traded above the peak of the period 2014-2020. However, in the past couple of months this situation has changed. The September 2023 contract traded steadily above the $6 per bushel mark in the opening 2 months of the year, and while it declined during Q2 the price spiked back above $6 as recently as late June. The recent decline has been stark, with prices closing at $4.69 per bushel on 16th August. This drop comes despite the WASDE report of August 11th suggesting that supply may be lower in the upcoming crop season. This week’s blog post will look at the report, what it indicates for corn markets and why prices have continued to decline in spite of waning supply.
August WASDE Report
The World Agricultural Supply and Demand Estimates report is published monthly by the USDA and provides estimates for the supply and demand for major crops and livestock commodities. From looking at the latest report’s figures for corn, the price slide is perhaps surprising. Corn production for 2023/24 is “15.1 billion bushels, down 209 million from the July projection and if realized, would be the second highest on record behind 2016/17.” While a strong overall crop may occur then, the scale of reduction in the total production estimate since July could be interpreted as bullish for prices.
Outside of the US, the report also noted that “foreign corn production is down, with cuts to the EU, China, and Russia partially offset by increases for Ukraine and Canada”. While production may be higher in Ukraine, it follows a year of conflict in the nation which impacted last year’s crop and furthermore there are no guarantees the entire crop could be exported given the collapse of the Black Sea grain deal. With prices falling alongside the supply forecasts, it is clear that other factors need to be considered to explain the recent drop.
Weather Turns More Favourable
A major driver behind corn prices rising earlier in the summer was drought conditions which threatened the crop across the US Corn Belt. Dry weather throughout June led many analysts to draw comparisons to the 2012 crop, which was one of the most severe droughts experienced in the US for decades and led to corn prices spiking globally. The final corn production figures in 2012 dropped by over 25% compared to initial USDA estimates for the year, showing the brutal effect dry weather can take on the crop.
In late July and early August, however, rains have arrived which have eased market concerns about a repeat of 2012. Crops have been recovering across the major growing regions and, while there will be lasting impacts from the earlier drought, the overall picture is looking much healthier. Indeed, Karen Braun noted for Reuters that “both corn and soybean crop conditions worked their way above the year-ago readings after having been down as much as 17 and 14 percentage points” respectively which are amongst “the biggest-ever condition comebacks” for the crops. With crop health bouncing back so significantly since earlier in the summer, the bearish sentiment has been reflected in trading positions. As shown in the graph below, Non-Commercial positions on CBOT corn futures recently turned net-short.
Non-Commercial Position on CME Corn, shown in ChAI Insight
While decreasing supply has not had the price impact one might expect, demand has also been falling and this has contributed to lower prices. The August WASDE report has forecast a 95 million bushel cut to corn demand in 2023/24, with cuts to total exports as well as within specific use categories, such as feed or glucose manufacturing. These estimates come at a time when concerns are building about Chinese demand, traditionally the largest importer. Recent economic data from China has suggested the economy is not growing as expected, and faltering demand from the nation would weaken prices for corn and other commodities.
Another area where corn demand has declined in recent years is ethanol production. As the graph above shows, while monthly ethanol demand followed an upward trend between 2010 and 2020, it has struggled to regain the same level of use in the post-pandemic era. This break in the upward can be clearly seen in the graph below, which take data from the Renewable Fuels Association. As demand for electric cars continues to grow, the reduced demand for gasoline will dent ethanol production which is driven by biofuel demand. The outlook for ethanol demand may yet pick up depending on the future biofuel blend mandates, as was discussed in a paper published by the USDA earlier this year, however at present there has been a weakening demand for corn. Given that ethanol-based demand for corn has constituted “roughly 40 percent of U.S. corn production” over the last decade according to the paper, the lack of continued growth in this sector is a change to which corn supply may not yet have adapted.