In light of the new growing year we wanted to give a broad outlook of where we feel prices are going and why. Corn is coming off of all-time highs and we feel the strong prices of old crop have been a deterrent for many producers when it comes to pricing new crop. The complacency of "holding out" for better prices is certainly not what we recommend for a year like this. We have reason to believe corn could fall below $4.00 before the end of 2013. Here’s why...
Total corn usage of US supplies was down sharply this year (6.6%) obviously due to the drought which brought us to record high prices and heavily rationed demand. The question now is "how quickly will that demand return?"
We looked at data going back to 1960 to see how quickly demand recovered. There have been 12 times where total usage dropped by more than 5% below the trendline. Only twice the usage bounced back the following year.
The slowed demand caused the price to drop on average by 15.7%. The table on the left shows the correlation between usage and price for the following years for those 12 occurrences including the ethanol era. This analysis gives us a reason to believe that 2013 will follow the same pattern.
The current trendline usage is 12.221 billion bushels. Trendline yield is currently 157.6 bpa and surveyed corn acres are 97.28 million which gives us total US production of 14.028 billion bushels. Last year’s carryover will add 800 million bushels creating a total surplus of 2.627 billion bushels.
There are many who do not believe corn usage will be that low. With bullish circumstances, the usage could potentially get to 13.100 billion (see table below). Even using higher demand estimates we still end up with a total carryover of 1.743 billion which would warrant sub $4.00 corn in our opinion. Last time we saw similar ratios was in 2009 when corn averaged $3.62 for the year. To get back to a record demand, just look at how substantial the increases would have to be. Corn for ethanol would have to jump almost 10%, feed usage 11%, and exports would have to more than double.
The big hurdle for ethanol demand is still the blending wall. The maximum amount of ethanol we can blend is approximately 13.4 billion gallons in 2013. At today’s bushel to ethanol conversion ratio of 2.8 gallons, that suggests a total corn usage of 4.786 billion bushels. There are certain political issues that could change this number. With the mandate currently at 13.8 billion gallons obviously that is more than the industry needs which is why ethanol RIN prices are skyrocketing. The debate over the mandate and ethanol blending levels is just heating up. The petroleum industry is lobbying to reduce the mandate claiming the added costs of RIN prices are translating to higher prices at the pump. The Renewable Fuels Standard lobbyists argue that the blending wall is artificial and higher levels of ethanol should be blended. This debate over the blend wall is going to come to a head soon and any changes will be worked into our forecast but for now we are staying with a rather conservatively high estimate of 4.950 billion bushels for ethanol.
If we get a price break we think the demand will return to its 10 year average of 1.842 billion bushels, our current estimate is pegged at 1.8 billion. The northern hemisphere has had great winter weather and world wheat feeding is expected to remain high. Also South America is expected to have an additional 5 million metric tons of corn compared to what they had last year.
Feed is estimated to represent 37.4% of total demand in 2013. While export and ethanol demand can rebound relatively quickly, feed demand is going to be slower to rebound. The massive drawdown of cattle inventory will take a long time to rebuild. The average gestation period is 283 days. The March report showed total cattle on feed down 7% from 2012 and placements down 14%. We still put in a conservatively high demand estimate of 4.900 billion bushels even though we think it will be a stretch to reach.
Now that we have reflected on demand let’s move to production. There are some that would argue that it is impossible to reach trendline yield this year with the memory of last growing season. The long term trendline suggests that it is unlikely to see yet another yield shortage in 2013 (see chart below). In 2012 we had a 21% reduction in yield below trend. There have only been two other years since 1960 that we have seen over 20% decline below trendline – 1983 and 1988. In the following years the national average ended up above trendline yield.
In fact, we need to see a yield reduction of 5% or more to meaningfully alter demand and carryout. Let’s take a look at how unlikely it is to get such reduction. Since 1960 we have had 12 years where yield has dropped below 5% of trendline including last year.
With the current supply and demand outlook we see the potential for sub $4.00 December corn prices before the end of 2013.
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