Todd's Take

By Todd Hultman
DTN Analyst

As I write this in Omaha, we are bracing for a February blizzard, but having experienced a sunny 40 degrees at last week’s Sioux Falls Farm Show, there is a feeling that spring is not far away. With that come thoughts of a new growing season.

Back in December, USDA gave us their first glimpse of 2016 when they released their long-term projections and the outlook was largely neutral for corn. However, like all estimates this early in the year, these are just starting points, and we will need plenty of erasers before the year is done. Before we talk about acres, yields, and all the other variables that are headed our way, I like to begin with an estimate of grain prices in relation to their production costs.

If you read this column a year ago, you might recall me saying that December corn futures have a tendency to trade between USDA’s estimated cost of production* and a 50% premium to cost in years that lacked unusual events, like drought. For 2015, the anticipated range was $2.98 to $4.47 a bushel before we knew anything about plantings or weather.

As it turned out, December corn reached the high end of the range on July 10 amid concerns of too much rain falling from Missouri to Ohio, but did not stay there long. The eventual low of $3.56 on Nov. 10 came with many in the Western Corn Belt reaching their best yields ever.

As disappointing as post-harvest prices were to many producers, I find it interesting that December corn did not trade closer to the anticipated low of $2.98. Brazil had a successful 3.35 billion bushel crop earlier in 2015 and their shrinking currency gave Brazil’s corn exports a 55% boost to 1.28 billion bushels. Much of the credit for corn’s stubborn support should go to the stabilizing influence of U.S. ethanol production, which was up 4% in 2015 — a temporary beneficiary of cheap gasoline prices.

The anticipated range for Dec 2016 corn is roughly the same as a year ago, at $2.96 to $4.44. With the Dec 2016 contract showing $3.92 as of Monday’s close, prices are in the upper half of the expected range, but are not high enough yet to offer a profitable return for many who are renting ground. Outside markets have not been friendly to corn prices early in 2016, but it is encouraging for demand that commercials are still net-long. For that reason, I still think December corn has a good chance to trade above $4.00 by the end of March.

The rest of the story, as Paul Harvey would say, is up to weather. So far, DTN Ag Meteorologist Bryce Anderson leans toward normal precipitation for the Midwest this summer, but also expects above normal temperatures, giving us an early corn yield estimate of 165 bushels an acre.** If it proves out, Bryce’s early scenario would point to a modest reduction of U.S. ending corn stocks in 2016-17 and help offset some of the concern from corn’s bearish outside market influences.

Is $5 corn possible in 2016? Yes, but history also cautions us that a scenario above $4.44 is not likely without extra help to get there — drought being the obvious suspect. In the meantime, the year is still young and there is much that we do not know. Stay tuned to DTN as we bring you the surprises of 2016.

* For valuation purposes, the production cost used here ignores land expense. Land expense is an important factor but is set aside because it varies widely for each particular farm.

** "Midsummer Crop Weather Projection" by DTN Ag Meteorologist Bryce Anderson, Jan. 22, 2016 at: https://www.mydtn.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ/BAS)