The supply and demand picture for corn could become very precarious.
While U.S. supplies of old-crop corn have tightened—and are the tightest since 1995-96—a big U.S. crop this fall could mean corn supplies are back at comfortable levels.
USDA’s latest World Agricultural Supply and Demand Estimates
, released Feb. 9, held no surprises for the corn market. The most important number was the old-crop carryout of 801 million bushels, a 45-million-bushel drop from last month. A carryout of 1 billion bushels is considered adequate.
USDA left planted acres at 91.9 million, harvested acres at 84 million, and the average yield at 147.2 bushels per acre for the 2011-12 crop. Production was also unchanged at 12.358 billion bushels. Corn exports were increased slightly to 1.7 billion bushels from 1.65 billion bushels in January due to an expected decrease in South American corn exports. As a result, USDA increased the average price range for the 2011-12 marketing year by 10 cents to $5.80 to $6.60/bushel.
Al Kluis, president of Kluis Commodities in Wayzata, Minn., expects corn prices to be volatile this spring. On one hand, he says, U.S. growers could potentially plant as many as 95 million acres of corn acres this year. At the same time, though, the western Corn Belt, particularly Minnesota, northwest Iowa, and the Dakotas, remains extremely dry.
Kluis, who was the commentator on an MGEX press call following the release of the report, notes that dry conditions will favor corn planting, but a persistent drought could cut into yields. With favorable weather this growing season, Kluis says the 2012-13 corn carryout could hit 2 billion bushels.
Corn prices will continue to be sensitive to U.S. fundamentals—acreage, yield, and weather. "The market will wait to turn bearish," says Mike Krueger, president of the Money Farm, near Fargo, N.D. "Six months from now, corn prices could be cheaper." For that to happen, though, weather would need to be favorable across most of the Corn Belt, corn acreage would need to exceed last year’s, and yields would need to return to trend-line gains. "If yields struggle, corn futures will be back above $7/bushel," Krueger says. "Corn is on a knife edge."
Also working against corn is the expiration of the Volumetric Ethanol Excise Tax Credit (VEETC). "Ethanol margins are in the red," says Rich Feltes, vice president of research for R.J. O’Brien and Associates, Chicago. Now that ethanol producers will not be producing over the mandate, Feltes says a new demand source will be needed if the U.S. average corn yield returns to trend yield increases of 1.75 bushels per acre per year.
For the past five or six years, he says, corn demand from the ethanol sector rose by about 300 million to 400 million bushels per year. "Now we’ll see increases closer to 50 million to 100 million bushels per year as we approach the blend wall," he adds.
Chinese demand will also be a wildcard, says Feltes. "Domestic prices have stayed firm in China," he notes. "Expanding demand is a factor of the dairy and poultry sectors, and the government is trying to hold down the use of corn."