Thursday, September 22, 2011
Are You Watching The Current Dynamics In The Corn Market?
Today begins a two-part look at the ability of the Cornbelt to supply the corn and soybean needs of the market place. Diminished yields due to the weather and increased demands have placed a burden on farmers to deliver the crop. While prices have responded, the higher prices have both rationed demand and destroyed some of the demand, and now prices are weaker as a result. Today we begin with a look at the corn crop and the dynamics that are currently impacting the supply and the demand.
The September Crop Report estimated corn production at less than August, and most observers of the market believe the October report will project a smaller crop. Although most of the Cornbelt sustained weather-related yield losses during 2011, this was not the first year for a sub-par performance, says Kansas State marketing specialist Dan O’Brien. His latest newsletter says, “Expectations of U.S. trend line yields of 165 bu/ac or more since 2009 have not been met in either 2010 or 2011, and will effectively lead to lower trend line corn yield projections for 2012.” While the yield projection declined, there is still some question about just how many acres will really be harvested, given the flooded fields along some of the nation’s major rivers. And he says without yield and acreage in 2011, there will be more pressure on next year’s crop, “The inability to meet U.S. trend line yields of 165 bu/ac or more since 2009 have caused a dramatic tightening of U.S. corn ending stocks and % ending stocks-to-use in MY 2010/11 and again in MY 2011/12. Either a return to trend line U.S. corn yields, a large increase in U.S. corn acreage, or a sizable reduction in U.S. corn usage will be needed to rebuild U.S. corn stocks in MY 2012/13 and later years.”
O’Brien believes there will be continued market volatility for the next 12 months, until the market is satisfied that stocks are growing, “The combination of tight beginning stocks (following a short corn crop the previous year) and less than anticipated production has led to the current tight, at risk supply situation for U.S. corn in MY 2011/12. For next year, i.e., MY 2012/13, prospects for extremely tight beginning stocks will place all that much more anxiety in corn markets over any real or perceived threat to 2012 U.S. corn production. Because of what are likely to be minimal new crop beginning stocks for U.S. corn in MY 2012/13, grain markets are likely to remain extremely volatile through at least the early summer of 2012.”
USDA has dropped its estimate of the use of old crop corn down to 12.760 bil. bu. due to price rationing. That comes from 100 mil. bu. declines in the projected use of corn by the export and ethanol industries, and a 200 mi. bu. decline in corn for livestock feed. O’Brien says the latter is part of a downtrend, “This reduction in U.S. livestock feed usage of corn continues the year-to-year downward trend from the record high of 6.135 bb in MY 2004/05. The increased availability of distillers grains from ethanol production for domestic livestock feeding has to some degree offset this reduction in direct U.S. corn livestock feed use.”
The Kansas State economist says the reduction in use, is a function of high prices rationing the demand to the point buyers are looking for alternatives to corn, “In these preliminary USDA projections of how short supplies and high prices will affect the usage of U.S. corn in MY 2011/12, they are accounting for a number of factors. These include:
a) The inflexibility of demand and price responsiveness of U.S. gasoline demand,
b) livestock/meat prices and feeding profitability,
c) Strength of consumer demand for processed corn products, and
d) The value of the U.S. dollar relative to the currencies of countries involved in World coarse grain export / import trade.
Although these early projections are subject to change, they are consistent with the broader idea that higher corn prices will ration usage to such a degree so as to ensure that adequate supplies of corn will exist in the summer of 2012 (the end of MY 2011/12) to avoid a complete shut down of industries that rely on corn inputs.”
The demand for corn, says O’Brien will reach a point that the psychologically important point will be reached of a 5% stocks to use ratio, “It is possible that % ending stocks to use levels of 5.0% or less may occur in MY 2011/12 for a number of plausible reasons. If there is either a) projected 2011 U.S. corn production is reduced further due to early freeze, more extensive production losses exist than has yet been accounted for, etc., or b) greater usage of corn in any of the major categories than is currently projected later in the marketing year, then there is a reasonable possibility of new record low U.S. corn % ending stocks-to-use occurring (i.e., below 5.0%) in MY 2011/12.” He says if corn use falls below the 5.3% stocks to use ratio, then it will be reflected in cash bids, pace of exports, and ethanol use, with verification in the quarterly grain stocks reports.
Throughout the early part of the year, when short corn stocks would be apparent and prices climbed, the USDA advocated wheat to replace corn in livestock rations, a move that provided price support for wheat. O’Brien says that action is apparently occurring, “Tight corn supplies and high corn prices have provided carryover support for wheat prices. By responding to high corn prices, the wheat market appears to be acknowledging the possibility that large amounts of wheat feeding could occur in from fall 2011 through summer 2012 to make up for shortfalls in the 2011 U.S. corn crop and historically tight MY 2011/12 corn ending stocks. As market arbitrage forces go, as corn prices have moved higher, wheat prices have followed them at levels approximating breakeven feeding opportunities.”
Globally, O’Brien says ending stocks of coarse grains have been declining, and are currently just over 13%. He says a good US crop in 2012 will be needed to restock US supplies as well as reduce the downtrend in world corn stocks.
Summary:
US corn production failed to reach trend line levels for the second successive year, and that has resulted in high prices to reduce the demand, as buyers have begun to seek alternatives. Wheat has made up some of the shortfall. Global supplies have also declined and a good US crop in 2012 is needed to restock domestic and foreign supplies.
Posted by Stu Ellis on 09/22 at 08:29 PM | Permalink