2021 Outlook: Is the Stage Set for $5 Corn in the New Year?
December 7, 2020
Four-dollar corn is the new reality in corn for 2020. While the March contract seems to struggle to push past $4.40, the price switch is demand driven. For Dan Basse, president of AgResource Company, the sudden shift in the corn market is unrivaled.
“If I look back in my 40 years of being in this business, this happened so quickly in terms of loss of U.S. crop and world crop loss and the arrival of a big buyer, that it's almost unprecedented,” he told Chip Flory on “AgriTalk.” “I've been saying that I've never seen anything like this, and when you get the combination of the lower supplies and the higher demand, it's a rare combination.”
Basse thinks the rare combination of more demand and lower than expected supply could continue to fuel the market.
“USDA has China plugged in for 13.5 million metric tons,” Basse says. “We know that Chinese demand, at least as I count, is already up to 20, potentially could be 25, or 30 [million metric tons]. If you do that, we could have U.S. exports of 3 billion bushels, which seems outlandish, but it just speaks to where we are today, and that we really need to have big crops in South America and North America for at least two or three growing seasons.”
Can China’s Buying Continue?
With possibly more room for USDA’s China export projections to grow, Basse says the newfound demand stems from one major need: feed. He says data revealing Chinese feed compounding usage showed record large amounts in September and October, with another record likely to be confirmed for November.
“Our thesis is when you look back, and I think USDA data proves this, that the Chinese hog production number fell 11.3%, but their feed usage last year was only down 3.7%,” Basse says. “Because there's no longer the backyard hogs, and we're not seeing the table scraps feeding, they're getting more corn and soy meal pushed into these factory, biosecure farms that are just ramping up production to levels we never expected. So, to me, it's a big structural change in terms of what's happening with China's pork industry.”
Basse says as hog production ramps up in China, and the Chinese resort to more refined production practices, the need for corn will continue to grow. Chinese hog production is now taking place in multilevel buildings, but Basse says it’s a learning curve for employees now implementing these new production practices.
“If they get to these Westernized diets, somewhere between two to two and a half years out, their ability to produce pork will kind of ramp up to levels that will stabilize,” he says. “We see runway here for an ag bull market that's maybe 18 to 24 months, and it’s a demand market. We all talked about a demand driver, we finally found one."
Sights on South America
As demand is a driver, supply might also help fuel the market. Basse says weather concerns are causing his firm to reduce their South American production projections.
“Right now, we see support in the corn market like it's $4.05, and if you give me a problem in Argentina or with the Safrinha crop in Brazil, we can be talking corn prices, making it up to $4.80 to $5 sometime late winter, early spring,” he says.
“AgriTalk” host Chip Flory says considering prices farmers in Brazil are seeing, there’s a major incentive for farmers to push planting dates and get the second-crop corn in the ground this growing season. Basse agrees, but says that will ultimately be determined by Mother Nature.
“I think they will [try to plant], the question is, will Mother Nature cooperate,” Basse says. “When you look at weather history from Brazil, that May time frame, you typically either get a couple rains in the first two weeks of May or you don't. If they miss that rain, and that crop gets planted sometime after let's say the 10th or 15th of March, it's going to be in trouble. So, that's why the market will be very sensitive, particularly as we're planning our own crop here in the United States. “
Acreage Battle and Price Potential in 2021
Basse knows ethanol has been a demand wild card in 2020. However, he’s optimistic normalcy will return, and driving demand will be restored in the second quarter of 2021.
“Besides that, I'm not seeing a big demand driver,” Basse says. “I think feed usage in this country will be relatively stable. It's really the export side of the equation that will kick into gear here and give the corn market some bullishness and really mean that we need to buy another 1 or 2 million acres of seedings next year.”
Basse says those acres will compete with soybeans, a crop he thinks will also demand 90 or 91 million acres planted next year.
“There's going to be this bidding campaign going across the Midwest to get corn and bean acres,” Basse says.
The competition for acres could help drive crop prices, which is why when Flory asked Basse if the likelihood for $3.50 or $4.50 corn was greater in the next six months, Basse didn’t hesitate to answer.
“We're easily at $4.50,” he says. “We think March corn could make it up to $4.50, and we don't think it drops much below $4. If you have a weather problem, then we can make it up at even higher prices, but I just don't know today whether Argentina or Brazil will have that.”