2019 CORN BULL SPREAD


The corn market may see a setback over the near term, as crop conditions look ready to start out strong, but a long growing season lies ahead and a lot can go wrong.


Global stocks look very tight, the dry weather forecast for Brazil could lower production expectations even further, and China is already reporting drought conditions in some of its key producing areas.


With a potential bullish setup and an outlook for tightening stocks at the end of the 2018/19 season, we think a bull spreads in July 2019/ December 2019 Corn are worth considering. The studies below compare the highs and lows of the spreads with the stocks/usage ratios since 1971. In general, the July contract has a tendency to trade at a stiff premium to the December contract in the years when there is a low stocks/usage ratio.


For the 2017/18 season, the stocks/usage ratio was a hefty 14.78%. This coincided with July 2018/December 2018 spread reaching a minimum value of -18 ½ cents and a maximum of only +7 ¾ cents.


For 2018/19, the USDA sees the stocks/usage ratio falling to 11.5%. So far, the July 2019/December 2019 spread has seen a low of -1 cent and a maximum of +20 ¾ cents.


If we look at some possible changes to the supply/demand data ahead, Figure 1: Jul - Dec Corn Min Spreads vs. Ending Stocks/Usage


20 40 60 80


-220 -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 0


Crop Year Beginning Source: USDA and CRB


Spread is lowest value next calendar year corn. For Example: 2010/11 Crop Year -> 2011 Corn Spread Last 18 Months of Spread - Data as of 5/24/2018


perhaps we can get a better feeling for just how much of a premium that the July contract could trade to December. The supply/demand table below shows how having a trendline yield, a below-trend yield and a “poor” yield would affect the stocks/usage ratios. In this study we have adjusted the usage data to reflect stronger exports. (With South America corn production down 25 million tonnes from last year, the equivalent of 984 million bushels, exports could easily be revised higher by 200 to 300 million bushels.)


Under this scenario, a trendline yield of 174 bushels/ acre would leave ending stocks at 1.334 billion bushels and the stocks/usage ratio at 8.9%. This would be similar to the 2010/11 season when the July11/Dec11 spread hit a peak of +$1.33.


A yield of 171 bushels/acre would leave ending stocks at 1.092 billion bushels with a stocks/usage of 7.3%. This would be similar to the 2012/13 season when the July13/Dec13 spread hit a peak of +$1.68 ¼.


A yield of 166 bushels/acre would leave ending stocks at 668 million bushels with a stocks/usage of 4.6%. This would be similar to the 1995/96 season when the July96/Dec96 spread hit a peak of July +$1.59 ¼.


Jul - Dec Corn Min Spread vs. Ending Stocks / Usage


Based on these projections, we expect the July19/ Dec19 spread to see solid support at the +16 ½ to +14 cent zone, with +89 cents as an initial upside target. It would take a close back under +6 to sour our spread outlook.


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%


30 | ADMISI - The Ghost In The Machine | May/June 2018


Ending Stocks / Usage Ratio


Spread


1987 1982 1981 1979 1988 1992 1978 1984 1977 1971 2004 1976 1990 2000 1998 1980 1999 2005 1994 1989 2001 2016 1983 1997 2017 2008 1991 2009 2007 2015 2014 1974 1972 2006 2018 2002 1993 1975 1996 2003 2013 2010 1973 2011 2012 1995


54.90% 48.60% 36.37%


26.75% 26.59%


24.94% 24.44% 23.44% 23.13% 21.72%


19.83% 19.62% 19.60% 19.50% 19.22% 19.12% 18.06% 17.46%


16.66% 16.56% 16.26% 15.65% 15.04% 14.88% 14.78% 13.94% 13.90% 13.10% 12.75% 12.71% 12.59% 12.05% 11.80% 11.63% 11.53% 11.45% 11.15% 10.98% 10.05% 9.37% 9.16% 8.65% 8.21% 7.92% 7.41%


4.98%


-23.75 -15.50 -13.50


-21.00 5.75


-15.75 -14.50


4.25


-8.00 -3.25


-20.50 -10.00 -5.25


-19.75 -17.75


-21.25 -21.25


-27.00 -12.25 0.00


-18.75 -21.50


27.25 -14.25 -18.00


-25.50 -10.50


-21.75 -35.00 -15.00 -19.00 17.00 0.75 -21.25


-1.00 -3.25


1.50 3.75 1.25


-9.75


-15.50 -8.00


14.50 16.50


10.50 10.00


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