Revisiting Corn Spreads: Narrower Than Before

We are in a different situation than a month ago for the corn market. With USDA cutting 5 million acres from planted area, ending stocks for the coming crop year have been whacked 675 million bushels by USDA from June to July.

That sheds a different light on spread values for the corn market. Corn spreads have narrowed versus a few weeks ago, and FBN’s model update points to narrower spreads than previously projected. 

Big stocks usually signal wider futures spreads  

This is because the market tries to entice participants to store grain and take it off the market in the near term. But corn spreads have narrowed considerably the past month and specifically since June 30. For the December and March contracts, current spread values are trading nearly in line with the average after being wide relative to historical averages.

Previously, FBN was expecting the CZ/CH spread to widen to about 15 cents as the December contract neared first notice day. That was under the assumption that 2020/21 corn ending stocks would come in around 3.3 billion bushels. Now, the spread is forecast to come in closer to 13 cents near first notice day.

A similar pattern is expected for the December-July spread. Previously, a spread value around 35 cents was expected, but now that forecast has been trimmed to 30 cents.

cz-ch-spread-seasonal-ending-stocks-071820cz-ch-spread-seasonal-dec-july-071820We expect spreads to widen versus where the current values are today as we approach harvest. Generally, there is a consistent widening in spreads as harvest approaches. Again, our models point to widening of both the December/March and the December/July spreads in the coming months versus the current values.

FBN's take on what it means for the farmer

Given the current value of spreads and what FBN expects to happen in the coming few months, this is an opportunity. In the current environment, FBN views spreads as widening, likely meaning more downside risk for December corn futures relative to other 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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