Corn end-users in the US can breathe a sigh of relief; producers behind on marketing their 2012 production can only fret and hope that some opportunity - any opportunity - will come along to allow them to price their crop at higher price levels than today; while US corn importers can lick their chops at the good fortune of being able to source corn at inevitably lower prices. As we move into the latter of part of May 2012 this semi-collective mindset might reflect the reality of the moment. However, it does so only with a casual disregard to history
When USDA’s World Agricultural Outlook Board presented their "first pass" S&D balance sheet on US corn for the 2012/13 marketing year on Thursday May 10, 2012 the projections were qualified with the standard "disclaimer". "Note…projections reflect economic analysis, normal weather, trends, and judgment…these projections are highly tentative. (Author’s emphasis) It all sounds more than a tad iffy. And it must be so since the presumptions required in developing the forecasts are necessarily expansive and heavily dependent on agronomic and economic factors that reside in the area of the unknown.
One fact that is known about the corn market is that it has been consistently presented with bearishly construed supply & demand fundamentals for some time now. That reality has kept prices under more pressure than what the trade had generally expected. The extent in which the corn market retains its price defensive posture going forward hinges on those two key elements of USDA’s prudent disclaimer – weather and economics. What’s "normal" weather-wise can only be affirmed after the fact. And if there is, or ever was for that matter, any kind of normality experienced in the area of the economy/economics, it has more often than not been decisively proven in hindsight to be an illusion.
There should be some comfort to be taken in the certainty of uncertainty. All markets invariably exist not only with uncertainty, but because of it. For domestic corn producers and end-users in the U.S., as well as the foreign end-user, some broad price influential contours are already in place for the 2012/13 crop marketing year:
1.) US corn production will increase dramatically
2.) Increased US corn supply will exceed demand
3.) Ending stock levels of US corn will therefore be comfortably large on August 31, 2013
That is the general trade consensus. It is understood that we have a full growing season ahead and with it the real nitty-gritty of the yield making process. The fact of the matter at the moment is that the rapid planting/emergence pace of 2012 has infused the market with a sense of very good crop potential. The fly in the ointment, coming right on the heels of this historically strong planting pace is weather concerns popping up – both in the US and overseas. That accounts for some weather premium being put back into price during the past week. Coupled with spring /summer US temperature correlations – warmth begets warmth – the market will take a reasonable pause in trying to press values lower near-term.
This leads to a noteworthy point: the market has placed an inordinately high confidence level on an early seeded crop and hefty final yields. However, there is more than adequate evidence to suggest that the linkage is a variable tendency and not a certainty. Temperature and precipitation are the ultimate determinants of yield. Nevertheless, USDA’s posting of a record 166 BPA national yield in its May WASDE report was based in no small part on the rapid planting pace. It must be kept in mind that USDA has periodically adjusted its yield models. Revisions have incorporated changes in the number of years used in linear trend; planting progress is an factor of the equation which was reintroduced into the model in 2008 and remains so today.
The current USDA yield model that was implemented in 2008 also substantially reduced the number of years in which linear trend was used. Between 2008 and 2012, the number of years used has varied from 18 to 21. For the May 2012 yield USDA used, "Projected corn yield based on the simple linear trend of the national average yield for 1990-2010 adjusted for 2012 planting progress." Hence, the origination of the projected record 166 BPA yield for 2012. If USDA were to use a longer time-frame in linear yield calculations and omit the planting progress factor, yield would be closer to 160 BPA. That would represent a very substantial 1,070 billion bushel reduction in production, given projected harvested acres. That’s 57% of the projected 2012/13 Ending Stock level of 1,881 billion bushels.
This is not, at least not close to being, a year in which every bushel of corn counts. And that brings us to a salient point that seems to have gotten lost in the big acre and record yield corn production schema of 2012 – harvested acres. USDA pegs harvested acres for grain at 89.1 million acres "based on historical abandonment and derived demand for silage". With planted acreage of 95,864 million acres (based on the March Planting Intentions report) that projects percent harvested acreage for grain at 93%. Average harvested acreage for grain between 1990-2011 is 91%. Omitted from this calculation is 1993 "The 100 Year Flood" when harvested acreage fell to 86% (which coincidentally is on par with percent harvested acreage in the drought years of 1983 and 1988). Bottom-line is that 2% bump higher in harvested acreage from a longer-term historical average equates to 300 million bushels in additional production or 16% of the projected 2012/13 Ending Stocks of 1,881 billion bushels.
Utilizing adjustments in longer-term historical yield and harvested acreage cuts net corn production 1,371 billion bushels. Understood is that if such a reduction were experienced it would not get dropped right into 2012/13 corn end stock levels. If it were, the market would be looking at a 510 million bushel figure. And that simply would never occur as it would be well below pipeline supply and the market would ensure it didn’t – via an excruciating demand rationing process.
So, a fact based supply side scenario suggests:
1.) It would be premature for corn end-users to breathe a sigh of relief
2.) Producers that are behind on marketing their 2012 production are more than likely to be provided with a better pricing opportunity than what is present today
3.) US corn importers fortune cookie tag might not read lower prices await you.