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Corn Price Swings to Continue?

January 24, 2012
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By Phyllis Picklesimer, University of Illinois

 
Since early October, corn prices have bounced in a wide trading range. March 2012 futures have traded between about $5.75 and $6.75 while December 2012 futures have been between about $5.35 and $6.20, said University of Illinois agricultural economist Darrel Good.
 
"The wide price fluctuations have reflected numerous changes in indications of underlying supply and demand for corn. Those changing factors included USDA production and stocks reports, South American weather, the rate of exports and export sales, the rate of ethanol production, and expectations about the potential size of the 2012 U.S. crop," he said.
 
Prices have also likely been influenced by the volatility in the financial, currency, and metals markets, he said.
 
"Currently March 2012 futures are near the middle of the four-month trading range while December 2012 futures are in the low end of the recent range," he added.
 
Prices for the 2011 crop are currently being supported by a fairly rapid rate of consumption and ongoing uncertainty about the size of the upcoming South American harvest. Basis levels have been generally strong since harvest and are currently at record levels for this time of year in some markets, he said.
 
"Although Dec. 1, 2011, stocks of U.S. corn were larger than expected, they were at a five-year low. Year-ending stocks are projected to be a relatively small 6.7% of consumption," he noted.
 
Ethanol production in the first two weeks of January was nearly 5% larger than during the same two weeks last year. The low price of ethanol relative to gasoline suggests that blending economics will remain favorable even without the blender's tax credit, he said.
 
"Ethanol export prospects also remain favorable due to reduced competition from Brazilian ethanol. With seven months remaining in the marketing year, there is potential for price relationships to change, but it appears that corn use for production of ethanol and co-products is well on the way to reaching the USDA projection of 5 billion bushels for the year," he said.
 
Earlier in the month, the USDA increased the projection of marketing-year U.S. corn exports by 50 million bushels, to a total of 1.65 billion bushels. The increase was partially in response to reduced production and export forecasts for Argentina, he said.
 
"Recent weather in Argentina has been less stressful than in December and early January, but total precipitation since November has been well below average in most areas and less than in 2008-09 in some areas. Further reductions in the forecast size of that crop would not be surprising," he said.
 
The pace of exports and export sales of U.S. corn also supported the larger projection of marketing-year exports. As of Jan. 12, 62% of the projected marketing year exports had been sold, slightly ahead of the pace of a year ago, he noted.
 
"China has been a steady buyer of U.S. corn since September with commitments totaling 136 million bushels as of Jan. 12. New sales to China averaged 6 million bushels per week for the past 19 weeks. There were only two weeks when no new sales to China were recorded," he said.
 
Even with implied feed and residual use of corn at a very low level, year-ending stocks of U.S. corn could be slightly smaller than the current projection of 846 million bushels. March 2013 futures are about 50 cents lower than March 2012 futures, and the spread widened about 20 cents over the last week, Good said.
 
"The market is anticipating a larger U.S. corn crop in 2012 and some build-up of inventories by the end of the 2012-13 marketing year. The larger crop expectation stems from an anticipated increase in acreage, motivated by high prices, and higher yields after two consecutive years of below-trend yields," he said.
 
Current expectations for planted acreage of corn appear to center on about 94 million bushels, two million more than planted in 2011. With favorable planting season weather, such an increase could be easily accommodated without a reduction in total acreage of other spring-planted crops, he said.
 
Total cropland acreage could increase substantially in 2012 as a result of maturing CRP contracts in September 2011 and a sharp reduction in prevented plantings from those of 2011. Planted acreage of 94 million bushels would point to acreage harvested for grain near 87 million bushels, 3 million more than harvested in 2011, he said.
 
"An average yield near 160 bushels then would result in a crop of 13.92 billion bushels. Corn consumption would have to increase by 1.28 billion bushels (10%) next year to prevent an increase in the size of year-ending stocks," he noted.
 
Unless expectations for a larger crop are altered by spring weather or by acreage estimates, prices for the 2012 crop will remain below the prices for the 2011 crop. Prices for the 2011 crop are expected to remain within the range established over the past four months, at least for a few more weeks, Good said.
 
The corn market was surprised by the USDA's final 2011 corn production estimate and the estimate of Dec. 1, 2011 corn stocks. The March 2012 futures price declined by 52 cents per bushel in the two sessions following the release of the reports, said Darrel Good, a University of Illinois agricultural economist.
 
At 9.642 billion bushels, Dec. 1 corn stocks were 425 million bushels smaller than those of a year ago and the smallest in five years, but they were about 240 million bushels larger than the average of the reported trade guesses, he said.
 
"Those guesses were in an extremely wide range of 500 million bushels. Three of the 15 analyst guesses reported by Dow Jones were 9.55 billion bushels or larger, so not everyone was surprised by the USDA estimate," Good said.
 
Part of the surprise in the magnitude of Dec. 1 stocks came as a result of the average expectation of a smaller 2011 crop estimate. With the absence of any supporting evidence, it is not clear why, on average, analysts expected a 30-million-bushel reduction in the estimated size of the crop, he added.
 
"The USDA estimate was a very modest 48 million bushels (0.4%) larger than the November 2011 forecast. The 78-million-bushel difference between expected and actual production accounts for about one-third of the surprise in the stocks estimate. The remainder of the surprise is the result of incorrect expectations about the level of feed and residual use of corn during the first quarter of the 2011-12 marketing year," Good said.
 
The market anticipated a high level of use to be revealed, perhaps partly to correct what was perceived as an underestimate of feed and residual use in the previous quarter. The surprisingly large estimate of Sept. 1, 2011, stocks implied a very low level of feed and residual use during the final quarter of the 2010-11 marketing year and for the entire marketing year, he said.
 
"Some believed that the low, and incorrect, estimate of feed and residual use last year had resulted in an unrealistically low forecast of use for the current year. It was thought that the Dec. 1 stocks estimate would 'correct' the past errors and show a high level of use during the September-December quarter, resulting in a larger projection of use for the year. That did not happen," he said.
 
Instead, implied use during the quarter was consistent with the USDA forecast of 4.6 billion bushels so the forecast was not changed. Calculated feed and residual use of 1.838 billion bushels during the quarter represents 40% of the projected total for the year, he said.
 
"The percentage of total use during the first quarter last year was an unusually large 43.2%. In the previous 4 years, use during the first quarter averaged 39.3% of the marketing year total, in a range of 38.2 to 40.7%," Good said.
 
According to Good, the seasonal pattern and the total implied feed and residual use of corn during the 2010-11 marketing year is still troublesome. Explanations for the low level of use center on the potential for overestimating the amount of corn used to produce ethanol, increased feeding of distiller's grains, and/or an underestimation of the size of the 2010 crop.
 
"None of those explanations, however, addresses the inconsistent seasonal pattern of implied use. In addition, the implied sharp decline in feed and residual use of corn, all grains, and all feeds (including an estimate of distiller's grain) per animal unit during the last half of the marketing year is without explanation," he added.
 
With year-ending stocks of U.S. corn still expected to be a relatively low 6.7% of projected use, a lot of price uncertainty remains, he said.
 
"The immediate focus may be on the size of the South American corn crop and the implications for U.S. corn exports. The USDA lowered the projected size of the Argentine crop from 1.14 to 1.02 billion bushels in last week's report. Recent and upcoming precipitation will help stabilize that crop, but the extent of damage may exceed that reflected in the current forecast," he noted.
 
The forecast of the Brazilian crop was unchanged at 2.4 billion bushels. The USDA now expects U.S. corn exports to reach 1.65 billion bushels during the current marketing year, he said.
 
"Nineteen weeks into the year, export inspections have averaged 32.7 million bushels per week (adjusted for Census export estimates through November). Inspections need to average 30.9 million per week from now through August in order for the total to reach the projection," he said.
 
A further reduction in the size of the South American crop, as occurred in the drought of 2008-09, could boost U.S. exports above the current projection, particularly if China continues the current pattern of small weekly purchases, he noted.
 
"Beyond the South American crop, corn prices will be influenced by 2012 U.S production prospects. In general, analysts are anticipating more acres, higher yields, and a much larger crop than in 2011," Good said.
 
According to Good, such a large crop has not yet been priced into the market. Potential crop size will be gradually reflected from spring through harvest, beginning with the USDA's February baseline projections and including the March 30 Prospective Plantings report.
 
"Oh, and don't forget the March Grain Stocks report to be released on the same day," he said.
 

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