by djibouti_69
I first want to say I am by no means an expert in commodities, debt, energy, or politics and would welcome any and all counterpoints so please comment with any that you have. Also there is a TLDR at the bottom for all of you degenerates out there.
Below is my case against the price of corn first starting with the supply side then looking at the demand side.
Supply Side
- Up 8% from last year based on the latest estimate from the USDA https://release.nass.usda.gov/reports/pspl0320.pdf
- About 7% is in the ground now, new reports come out every Monday here https://usda.library.cornell.edu/concern/publications/8336h188j
- Soybean value and corn v. Soybean rotation
- If you aren’t going to plant corn then your other option is to plant soybeans and corn is still projected to be more profitable than soybeans. The only potential upside for soybeans was China buying a significant amount of them under the new trade deal but they are actually buying less from the US because they are getting them cheaper from Brazil https://www.scmp.com/economy/china-economy/article/3081459/coronavirus-us-farm-sales-china-hit-bumper-soybean-crop
- Its hard to switch last minute because many farmers rotate corn v. Soybeans. If you grow the same crop in consecutive years then you pay a yield penalty due to chemical imbalances in the soil. Whereas if you switch soybeans and corn year after year then you maximize the amount you will grow. So a lot of farmers planning to plant corn would probably pay a yield penalty if they switched to soybeans
- From what I can tell farmers seem relatively hard headed and will plant corn due to FOMO and/or they are set in their ways https://www.reuters.com/article/us-usda-crops-plantings/us-farmers-plan-huge-corn-crop-despite-price-drop-ethanol-collapse-idUSKBN21I391
- If anything I think farmers will plant more corn than expected
Demand Side
http://www.worldofcorn.com/#corn-usage-by-segment
- animal feed (40%)
- Breakdown by animal category http://www.worldofcorn.com/#corn-feed-by-species
- Slaughterhouses/processing plants closed due to COVID. Means that in the short term there are slightly more animals to feed but doesn’t really move the needle. https://www.spglobal.com/platts/en/market-insights/latest-news/agriculture/042320-closure-of-us-meat-plants-raises-more-concerns-over-long-term-corn-feed-demand
- Another thing to consider is that although animal counts may be elevated short term, feed structure could change to higher fiber diets (less corn) in an effort to make animals grow slower offsetting the potential effect of having more animals to feed https://www.marketwatch.com/story/meat-shortage-looms-as-coronavirus-shuts-packing-plants-leaving-farmers-with-tough-choices-2020-04-24
- If there continue to be plant shutdowns farmers will begin depopulating at higher rates. Industry operates on a just in time inventory system and plan which plants they will sell stock to far in advance. If that plant is closed at planned time of harvest they have to destroy product
- hogs https://www.startribune.com/minnesota-farmers-trying-to-find-markets-for-their-hogs-and-save-their-livelihoods/569927872/
- chickens https://www.cnn.com/2020/04/25/us/chickens-depopulated-delmarva-plants-delaware-maryland/index.html
- In general this demand segment will likely have little impact on corn price unless meat plants are shut down longer than expected
- Ethanol (30% – 40%)
- US ethanol plants http://www.worldofcorn.com/#us-ethanol-production-facilities
- obviously demand for ethanol is a lot weaker due to gasoline. Ethanol in storage is also at an all time high, meaning even if demand went up there is a massive stockpile that needs to be run through before it makes sense to ramp up production again https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPOOXE_SAE_NUS_MBBL&f=W
- The big one is the EPA may not require gasoline refineries at all https://thehill.com/policy/energy-environment/493402-epa-weighs-lifting-ethanol-requirements-for-oil-refiners
- Obviously this would destroy the demand for ethanol. The reason I think the chances of this happening are higher than people think is simple: Trump cares about the performance of the market above all. It doesn’t matter if this move is right or wrong all that matters to Trump is how to save the image he has tried to build of being the ‘stock market president’. Also it makes sense from a purely economic standpoint.
- Bankruptcies in U.S. shale would have a much larger impact on the economy than any bankruptcies experienced by corn or ethanol producers. Why? Leverage. U.S. shale is leveraged to the tits. Because of the higher leverage in energy vs. ethanol/agriculture, a dollar saved in oil is worth more than a dollar saved in ag. https://www.reuters.com/article/us-global-oil-usa-restructuring/bankruptcy-looms-over-u-s-energy-industry-from-oil-fields-to-pipelines-idUSKCN2250FQ
- Even bigger than that is the impact defaults in U.S. energy could have on debt markets and the overall market in general. Massive bad debt buildups have been the precursor to every major recession or depression https://moneyweek.com/501844/chart-of-the-week-us-corporate-debt-bubble-ready-to-burst
- There has never been a bigger debt bubble in this country than right now. Corporate debt is now over 50% of the US economy https://www.salon.com/2020/03/29/the-sad-state-of-us-and-global-economic-affairs_partner/
- Much of that debt is ‘junk’ below investment grade status that is was already considered high risk before oil had a double black swan event of demand destruction and supply increase. Energy accounts for 15% of the US junk bond market.
- If the massive bubble of corporate debt sees major defaults it will burst and we will enter a major global depression. By decreasing the number of defaults in US energy you decrease the odds of the worst case scenario becoming a reality.
- Oil is more important than ethanol and therefore corn when it comes to limiting overall economic downside.
Conclusion A lot of this shit is probably priced in. Everyone knows ethanol demand should be weak. There are also factors that I don’t discuss above: weather, exports, available storage capacity for ethanol and corn, potential timeline for slaughterhouse shutdowns, etc. However I think there are two major things that are not currently priced into corn, and that in general potential downside for this commodity is much larger than potential upside. I don’t think price accurately represents 1: the odds that farmers plant more corn than expected because outlook for the major alternative soybeans has only gotten worse. And 2: I think the chance of the EPA reducing or eliminating ethanol requirements is way higher than the market seems to and in fact I think it would actually make a lot of sense to do this in the short term from a purely economic standpoint. It’s cheaper to pay off farmers and ethanol plants than it would be to see mass defaults in U.S. oil. A massive failure in HY credit markets triggered by energy defaults could lead a U.S. debt crisis sending the entire global economy into a major depression. Even if the EPA keeps the ethanol requirement corn is still f*cked, it’s probably going to be largest harvest ever and really weak demand.
TLDR CORN $12p 11/20
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.