Supply Surplus Caps Corn Prices, but ChAI Forecasts Upward Movement in 2024

In recent weeks, CME Corn prices have predominantly been trading within a range of $4.60 and $5 per bushel and during this time the market has reached its lowest price in almost three years. This marks an unusually tranquil time in a market that had been highly volatile since late 2020, with surging prices driven by factors such as resurgent Chinese demand in May 2021 and Russia’s invasion of Ukraine in 2022. In this week’s article, we will delve into some of the factors contributing to the current pricing level for corn and explore expectations for the future.

Surplus Supply Pressures Prices

One of the primary drivers behind the recent decline in corn prices is the anticipation of a bumper corn crop in the United States for the 2023-24 year. According to the United States Department of Agriculture (USDA), corn production for this period is forecasted to be the second-highest on record. This surge in production, when combined with weaker export demand, has created a surplus in supply, ultimately pressuring prices lower.

Export demand for U.S. corn has been weakened as China, a significant importer, has increasingly turned to Brazil as its primary source of corn. This shift mirrors the transition witnessed in the international soybean trade, with China favoring South American grains over the United States in recent years. Notably, Brazil also achieved a record harvest, contributing to the global corn market's shift from a prolonged period of tight supplies to the brink of surplus.

CME Corn Stocks, shown in ChAI Insight

It is easy to forget the extent of last year’s concerns of a global food supply crisis, driven by disruptions of supplies in the Black Sea region. Looking at CME Corn Stocks, shown above in ChAI Insight, the current levels are lower for the third week of October than in each of the past four years, which shows the extent to which supplies were depleted during the period of high prices last year. However, the combination of the promising U.S. crop and the current high-interest rate environment, which makes long-term grain storage more costly for farmers, has the market factoring in plenty of supply in the short term. This is bolstered by the progress on harvesting the crop, with the USDA's recent report indicating that 59% of the U.S. corn crop had been harvested, ahead of the 54% average for this time of the year.

Market Expects Higher Future Prices

While current corn prices are near the recent three-year lows, the futures curve suggests prices will climb again. The market is in contango with the July 2024 contract currently priced just below $5.10, which while not a significant increase, indicates market expectations of a potential pricing rebound. One narrative that has captured the attention of speculative market participants is the risk associated with El Nino. This concern may be linked to the recent reduction in the net-short position of non-commercial traders in the corn futures market.

Another factor to consider is the potential for rice export bans, being considered by several leading producers, which could have a significant ripple effect on corn and other key food commodities. Furthermore, the market could see upwards movement based on future revisions in U.S. crop production and yield estimates. At the recent U.S. Department of Agriculture’s biannual data users’ meeting, it was raised that U.S. corn yield has landed below USDA’s trend yield for five consecutive years now, as reported by Reuters, raising concerns that corn may be currently undervalued based on unrealistic yield projections. Correcting these projections in the future could lead to speculative-driven price increases.

In the short term, ChAI’s price forecast for front-month corn futures sees prices remaining relatively subdued in the final quarter of the year. However, looking further ahead, the current forecast has corn prices approaching the $6 mark by the end of Q2 2024. The aforementioned lower CME stocks, futures curve shape and the recent narrowing of the net-short position of speculators are all supportive of this bullish outlook. ChAI’s bespoke technical models which track price signals, trends and seasonality effects all also indicate that the current price level for corn may not be here for the long term.