Market bulls have been firmly in charge since last week’s Prospective Plantings report, but corn still has significant downside risk of $3.80 per bushel or lower. After adding in the basis, that would be nearly a $1-per-bushel correction from the December 2014 futures price of $5.05 on April 10.
While few producers have booked any 2014 corn to date, risk exposure is huge, says Brian Basting, commodity research analyst with Advance Trading.
One major factor that could drive prices sharply lower by harvest: a correction in the much-discussed corn acres reported last week by USDA. The 91.7 million acre corn number came in about 1 million acres lower than traders expected, sparking a 30- to 35-cent rally.
"I think the corn acreage is underreported," Basting says. "Our conservative estimate is that corn acres could be 1 million higher."
"I still think there are 2 million or more acres combined for corn and soybeans that will be planted and not identified in the March 31 report," says Steve Johnson, farm management specialist with Iowa State University Extension. Those acres could show up on USDA’s June 30 Acreage report, but more likely with the monthly crop production numbers in September or October once the National Agricultural Statistics Service reconciles to Farm Service Agency-certified acreage data, he notes.
Another puzzle: the low acreage total for nearly 20 principal crops. The 2014 total for these crops—using USDA’s Prospective Plantings report—and enrollment in the CRP is 352.7 million acres, about 10 million less than 2013’s total of 362.6 million, according to an analysis by economists Darrel Good and Scott Irwin at the University of Illinois. June’s Acreage report could reveal larger plantings even if some acreage is prevented from being planted this year, they note. "A conservative estimate would be an increase in the range of 2 million to 4 million acres."
Using USDA survey data, total acreage for almost 20 principal crops and CRP for 2014 will be 352.7 million acres, about 10 million fewer than in 2013. Source: Darrel Good and Scott Irwin, University of Illinois.
So why is USDA’s 2014 acreage numbers so low?
"The most likely factor is sampling error," Good and Irwin say. USDA acknowledges that sampling errors for major crops are generally between 1% and 3%. Using 2%, that’s 6 million to 6.5 million acres, with a 95% confidence interval.
The combination of more corn acres and good weather could push harvest prices decidedly lower. Bob Wisner, biofuels economist at Iowa State University, projects average farm cash prices for 2014/15 of $4.15 per bushel, using yields of 164 bu./acre, slightly above USDA’s $3.90 per bushel released in February at the Ag Outlook Forum. And Wisner’s average harvest cash prices in central Iowa are $3.80 per bushel. That makes today’s $5-per-bushel new crop futures price look attractive.
However Wisner cautions that the sharp decline in South American corn production and uncertainty in the Ukraine would create the potential for significant upside potential in corn prices in case of serious U.S. weather problems this year.
While weather will have a lot to do with what gets planted and market behavior over the next 35 days, the potential for $3.80-per-bushel corn at harvest suggests that producers use recent price rallies to protect against downside risk, says Dave Fogel, vice president with Advance Trading. The cost of doing so with December put options has dropped considerably, he notes, from more than 50-cent option premiums in January to 25 to 30 cents today.