Thoughts on the Dec 2019 Corn / Dec 2020 Corn Spread
We received a question from a subscriber on this topic and thought maybe some may find it interesting.
The Dec 2019/Dec 2020 corn spread is right where it should be. The spread has rallied 60 cents since mid-May, while the flat price has rallied 90 cents. One could apply a 0.60-0.70 delta to the spread compared to the flat price.
We think:
There will be about 10 million Prevent Plant corn acres.
Yield is likely to come in below trend. A 170 yield would be optimistic in our opinion.
Export demand is suffering.
Ethanol usage should remain stable.
Ending stocks estimates seem to coming in near 1.2 to 1.6 billion bushels.
Dec 2019/Dec 2020 should stay at an inverse with this scenario.
If yield or acres come down further look to the spread in 2011/12 for comparison:
Yield dropped from 158 to 147 throughout the summer, taking ending stocks down to 989 million bushels.
The spread went from +20 cents to +$1.00 from early July to September.
In 2012-13 (drought year):
The USDA’s ending stocks estimate dropped to 650 million bushels in August from 1.183 billion in July.
Yield dropped down to 123 bushels per acre in August report from 146 in July and 166 in June.
The spread went from even money in early July to +$1.75 in mid-August.
In our opinion if the trade starts talking about ending stocks at 1.0 billion bushels the spread has a lot more room to run, and the participation of algos could increase the speed and intensity of a move.