The last half of 2011 was dominated by economic concerns from the European Union, as well as declining export business here at home. The European economic situation was like an albatross around the neck of the corn market.
Just as the market would begin to stabilize, a new story of an ultimate economic collapse would hit the market and lead to a further exodus by the funds.
Just four months ago the Non-Commercial Funds held long positions of over 270,000 contracts. Last week’s Commitment of Traders report showed that those same funds are now long under 45,000 contracts.
In addition to the steady liquidation, buyers had little confidence to step up and support the corn market. Also, export demand was limited in the second half of the year. In July, the USDA expected US corn exports to be 1.9 billion bushels. However, competitive feed grain prices from the Black Sea region, in addition to a solid supply of Australian feed wheat limited US corn exports.
As a result, the USDA has subsequently reduced its export estimate to 1.6 billion bushels, which when combined with a reduction of 150 million bushels of corn used in ethanol from the summer estimate, led to a carryout estimate near 850 million bushels. Although, not an overly comfortable carryout estimate, it is not at a level that screams for sharply higher prices from where we are currently trading.
The last half of 2011 saw weakness, based on fund liquidation and weak demand concerns. The new year should see higher corn prices, based on a Southern Hemisphere weather market, a shrinking carryover estimate and seasonal strength. One factor in reducing the US export estimate from last summer was the growing optimism for the Brazilian and Argentine crops.
However, production estimates that were on the rise last fall have now begun to decline, based on lack of rain and increasing temperatures in Southern Brazil and Argentina. Argentina has received less than 50% of its normal rainfall. The critical stage in South American production is now upon us, with their season being comparable to July 1st in the US. At this point, large-scale production reductions have not occurred. However, the weather during the month of January will be critical to South American corn production.
The reduced U.S. corn export forecast will have to be revisited in January, or soon after, if the current pattern holds. The U.S. corn export pace is running 5% behind a year ago, while the USDA forecast is projecting a 13% decline.
Combining the current sales pace with declining competition from South America and the possibility increases that we may see the USDA export forecast raised in January’s report. It is suspected that the average yield estimate from the analysts leading up to the January report will not be much different from the USDA November estimate. However, some analysts share the idea that a 1-3 bushel per acre decline may be in the cards on January 12th. A combination of a production cut with an increase in usage may lead to a solid mid-January rally.
Finally, the seasonal trend in the corn market should lead to steady to higher prices in the first quarter of the year. Looking back at the last 5 years, the corn market has averaged a first quarter rally of 12%, while the first quarter declines have been 10%. In 2011, with the stocks to use ratio below 10%, as it is this year, corn values were able to rally 17% from its 2010 close. This would equate to a spring rally near $7.60 basis May futures. While a rally to this level would certainly be quite optimistic, a late winter/early spring rally in May corn to $6.80-$7.20 is expected.
The argument above is for stronger corn values to start the year. However, it is going to be very important to remain flexible in your marketing.
We will likely remain in a broader price pattern of rallying prices to slow demand and protect ending stocks. We also may witness breaks when demand slows, until we reach that level in which increased disappearance returns, all while keeping an eye on global weather forecasts and economic concerns. Producers should look to be diligent in designing a marketing plan to avoid emotionally marketing. It is my belief that any plan should include aggressive flexibility.
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