$3 Corn? Talk of Sell-Off is Growing Louder


by Darin Newsom, DTN Senior Analyst

This time of year, market forecasts become more popular. Without them there is little to talk about through the month of February and much of March. Sure, there is always South American production to debate, particularly this year as a hot and dry winter has reportedly whittled 7 million metric tons to 9 mmt off of corn production in Argentina (world’s second largest exporter) and possibly 3 mmt to 6 mmt off Brazil’s total soybean production.

But markets need fresh news every day and without it, eyes turn back to the never-ending morass of European economic headlines. Yes, the U.S. Dollar Index helps set direction when there are no changes to fundamental news. But, even the constant back-and-forth of the greenback grows tiresome as spring slowly approaches.

So analysts like myself use whatever methods they have to, to conjure up possible price scenarios to bide time until the brakes come off of the grain markets with the release of the March 31 Quarterly Stocks and Prospective Plantings reports. And as our participation this week on a Market Outlook panel at the Wisconsin Corn/Soybean Expo showed, corn remains the hot topic.

The talk of a sharp sell-off in the corn market in 2012 is growing louder. Many point to all the early chatter of acreage climbing to the 94 million to 97 million acre range (a large range, with 2011 plantings still estimated at 91.9 ma). Taking the mid-point of that range at 95.5 ma, and multiplying it times the average difference between planted acres and harvested acres of 9{962fe9be9a8a5c386944bfa41f48d98b010325707b70b1fa6182bcabd27c5d7f}, harvested acres could be estimated at 86.9 ma. Talk of trendline yield near 160 bpa seems to be popular, so let’s throw that into the mix as well. Multiply it out and expected production would be 13.9 billion bushels. Add in projected beginning stocks of 846 million bushels and total supplies are a record 14.8 bb.

All of those numbers are impressive and could certainly be construed as bearish, leading to the opinion that new-crop corn could reach the low $4.00s if not the upper $3.00s by the end of 2012. But let’s adjust the calculations a bit given the other headlines being discussed this winter.

The January round of USDA numbers had 2011-2012 U.S. ending stocks at 846 mb (becoming 2012-2013 beginning stocks). Argentina, on average, exports 70{962fe9be9a8a5c386944bfa41f48d98b010325707b70b1fa6182bcabd27c5d7f} of its production. If Argentine production is reduced to 19 mmt (the January WASDE report estimate was 26 mmt but some private estimates have fallen to 19 mmt to 20 mmt), then exports from the second leading country could decline by 5.3 mmt (210 mb). Let’s say the U.S. gets only two-thirds of that business, domestic demand would increase by 140 mb, decreasing ending stocks by a like amount to 706 mb, thus lowering 2012-2013 beginning stocks.

OK so now new-crop supplies have been trimmed slightly, but what about demand? The last two years have seen domestic demand decrease — should we be concerned about an ongoing trend? No, and here’s why. The last two years have also seen U.S. corn yields fall well short of trendline, leading to smaller-than-projected total production. With fewer supplies on hand, the U.S. has seen price ration demand (to a certain degree). With the binds of lower supplies removed domestic demand could be freed to grow once again in 2012-2012.

The 20 crop years from 1990 through 2009 saw domestic demand grow about 280 mb per year. Throwing out the weather-reduced markets of 2010 and 2011, this would project to total domestic demand in 2012-2013 of roughly 13.9 bb. If this comes to pass, domestic ending stocks would increase by only 16 mb AND U.S. ending stocks-to-use would FALL to 5.2{962fe9be9a8a5c386944bfa41f48d98b010325707b70b1fa6182bcabd27c5d7f}, again challenging the all-time low of 5{962fe9be9a8a5c386944bfa41f48d98b010325707b70b1fa6182bcabd27c5d7f} posted at the end of the 1995-1996 marketing year.

Is such demand growth — roughly 1.25 bb year to year — realistic? Probably not. There has been a great deal of talk regarding the small cattle herd size in 2012, meaning feed demand isn’t likely to increase a great deal. Gasoline demand in January was reportedly less than that seen a year ago due to increased sales of more efficient cars, implying ethanol demand could stabilize rather than grow this year if this trend were to continue. Process of elimination would indicate that the bulk of the demand increase would then fall on the shoulders of exports, and an increase of that size may be made more difficult by the possibility of a strengthening U.S. dollar.

Do I think corn is going into the upper $3 range? No, most likely not. I also don’t think the market (old or new crop) will be able to take out the 2011 highs unless the bearish technical signal from June 2011 is erased. It seems most likely that corn will hit a tipping point in late May or early June where the focus shifts from the old-crop situation to new-crop, and if weather is ideal and demand fails to increase substantially, the market could fall back to the $4.50 to $4.70 range.


© Copyright 2012 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.

Posted with DTN Permission by Haylie Shipp


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