Last week, USDA put another reminder out in its monthly Supply and Demand report that corn carryout for 2020 is going to be burdensome. With 97 million acres planted and near-normal yields, ending stocks balloon from just over 2 billion bushels for 2019 to a projected 3.3 billion for 2020.
Big stocks usually signal wider futures spreads as the market tries to entice participants to store grain and take it off the market in the near term.
But corn spreads have actually narrowed since early May. Some of that can be attributed to a very modest rally in flat prices, although the supply outlook has only gotten stronger with early season crop conditions holding strong.
The two key drivers for spreads are carryout numbers and interest rates, with stocks having a much more important impact on spreads. Based on current carryout projections for 2020 and historical patterns on spreads, stocks and interest rates, here’s where we think spreads will go as we get closer to harvest.
We expect new-crop corn spreads to continue to widen out as we get closer to harvest. Historically, there is a fairly consistent trend for spreads to widen (see gray lines in charts above) as harvest draws near. This year we expect a similar trend. Furthermore, we expect much stronger spread readings than the market is currently trading. The December-March (CZ/CH) spread is currently at 11 cents, which should be around 15 cents assuming a 3.3 billion bushel carryout, based on our model. For December-July (CZ/CN), it is expected to eclipse 35 cents with current values only at 22 cents.
Here we expect spread values to be closer to long-run values. A few months ago, we did call out the negative spread environment in new-crop soybeans, and today spreads are closer to normal. But here again, we think there is still some potential for upside, especially in the November-January (SX/SF) to widen to 10 cents versus at 3 cents today.
Choosing hedges based on strength/weaknesses in spreads can be a useful way to enhance your marketing. In the current environment where FBN views spreads as widening, this likely means more downside risk for December corn/November beans versus more deferred contracts. With futures and options type hedging, this presents an opportunity to hedge in those contracts with more downside risk and potentially roll to the deferred contracts around harvest when spreads would widen.
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