A thin supply-side cushion for 2012
Feb 28, 2012
From The Editor
Feb. 24, 2011
Hello Pro Farmer Members!
For only having four market days in it, this week was jam-packed with all kinds of market-moving happenings. Unfortunately, it seems like USDA's annual Outlook Forum overshadowed many of these happenings. We try to bring some perspective to those factors in this week's newsletter.
Some of the most interesting comments in the letter this week (in my opinion) came from Sr. Market Analyst Brian Grete in his fundamental corn comments on Analysis page 2. Here are his comments:
USDA confirmed what traders expected with its initial 2012-13 projections last week — potential for a record crop and a sharp rise in carryover. While the projections weren’t a surprise, they still weighed on futures, with new-crop contracts leading the decline. But the widening of bull spreads even as prices slip is a bullish indicator. The tight old-crop supply situation isn’t going to be "cured" until next fall at the earliest — even if the U.S. grows a record corn crop. And end-users know that. The drop in prices now will encourage end-users to ramp up purchases of corn, which in turn will further tighten old-crop supplies this summer. The result is an increased likelihood of greater price volatility, especially if there’s a weather scare, as the market tries to balance tight old-crop supplies against the potential for a record crop.
"...especially if there's a weather scare..."
There's a good reason to include that comment. Old-crop carryover is, very simply, the supply-side cushion for any problems with the new-crop production. The 2009-10 marketing year started with a cushion of 1.7 billion bu. and 2010 production problems helped support the market. The 2010-11 marketing year started with 1.128 billion bu. and the market made a new all-time high in the summer of 2011 as hot temps during pollination and kernel fill cut into yields.
Right now, the 2012-13 marketing year is expected to start with an 800-million-bu. cushion. That's next to "nothing." It takes at least that much corn to keep corn flowing through the pipeline. I'm not predicting an assault on resistance at $8 for old-crop futures this summer, but the thin cushion on 2012-13 supplies will certainly make the market vulnerable to another rally if any production problems arise.
That's it for this week...