Wet Weather Threatens US Corn Production

This report first appeared, with short and long term trade strategies, in the May 17th, 2019 issue of our Weekly Market Letter. Please subscribe or take a free trial today.

If the weather forecast verifies, the US and world balance sheets for corn should tighten considerably. As of May 12th, only 30% of US corn acreage was planted, compared with 59% last year at this time and a ten year average of 63%. Plantings increased 7% from the week before, which was slowest pace for the first week of May on record. Some of the top producing states showed some major problems, with Illinois just 11% planted and gaining only 1% on the week, South Dakota 4% planted, Ohio 4% planted and North Dakota 11%. Illinois, Indiana, Ohio, North Dakota, and South Dakota together account for 30.25 million acres in intended acreage, roughly 33% of the total corn area for the US. These states had barely scratched the surface by May 12th.

The latest 7-day precipitation forecast is very wet for the Midwest. Areas in Kansas, Missouri, Nebraska, Iowa, Minnesota, Wisconsin, North and South Dakota, and the northern half of Illinois could see 1 ½ to 5 inches of rain over the next week. The 6-10 and 8-14 day forecast models (through May 30th) are showing above normal precipitation as well. Normally, 93% of the crop is planted by May 31st, but this year we expect to be well short of that level.

The wet pattern looks to continue, with the Climate Prediction Center's 90 day outlook for June through August looking cool and wet for the Midwest. NOAA's National Center for Environmental Information said that the May 2018 through April 2019 time period for the Midwest was the wettest 12 month period in the 124 years of records. The US Drought Monitor pegged 91.16% of the US in no form of drought stage compared to 64% at the start of the year and 54% on this date last year.

Studies from agricultural universities indicate that the yield potential for corn declines if the crop is planted late. If we assume that the weather stays wet and 2.8 million acres are left unplanted (it could be a lot more) and we see a 170 bushel per acre yield, US ending stocks could drop to 1.524 billion bushels and the stocks/usage ratio to 10.4%, down from the current estimate of 2.485 billion and stocks/usage ratio at 16.9%. If so, ending stocks and stocks/usage would be the lowest they have been in six years.

We see the potential for even greater production loss. If yield falls to 167 bushels per acre, US ending stocks could drop to 1.276 billion bushels with a stocks/usage of 8.7%. The ratio has been under 8.7% only three times since the 1960/61 season, which is as far back as our records go.

There is certainly need for the market to build a weather premium for the growing season ahead. The Commitments of Traders reports show an excessive net short position being held by fund traders, which leaves the market vulnerable to aggressive short covering as resistance levels are taken out.