Despite the seemingly supportive USDA report this week, corn prices have so far not reacted in much of a bullish manner. In fact, Wednesday’s settlement price for Dec-13 corn is within $.02 of the closing price the day before the USDA report on Monday Aug. 12th.
So why are prices so far not showing much reaction? First of all, let’s examine production. Although the latest USDA estimate was below expectations, it is still a record crop. In fact, it is just over 650 mil. bu. larger than the record crop in 2009.
Next, let’s take a look at US ending stocks. While below expectations, they are still up just over 1.10 billion bu. from last year and are the highest in eight years.
Finally, let’s factor in global supplies. World endings stocks for the 2013/14 marketing year are forecast to swell to 150 million metric tons, up 27 mmt. from last year and the highest level in 13 years.
With this report out of the way and now fully digested by the market, we must address the following two questions. Will this year’s crop ultimately be bigger or smaller than the latest USDA estimate? What can we expect in terms of price movement heading into this year’s harvest?
In answering the first question, look at historical USDA production data. In the past 20 years in the August report, the USDA raised corn production eight times, while lowering it 12 times. In those 12 years, that production was cut in August (like this year), the final production figure was down from the September estimate five times, up six times, while unchanged one year. That said, historically it argues that production could go either way.
At this point, I’m still prepared to argue that final corn production will increase from the Aug-2013 USDA estimate. On a national basis, crop conditions remain above their historical average, this despite conditions in Iowa (largest producing state) has the 2nd lowest corn ratings in the past decade. My crop condition model is forecasting an average yield of 157.7 bushels per acre, just above the current USDA estimate of 154.4 bpa.
Even if you drop harvested acres to 88 million due to preventative planting, you’d still produce a crop of 13.880 bil. bu., 117 million bushels above the USDA. Many still argue production will likely exceed 14 billion bushels, if we can avoid an early frost this fall.
Where can we expect prices to go as we head into this year’s harvest? History strongly suggests prices are still headed lower. The average pullback from the summer high in December corn dating back to 1980 is 24.5%. From this year’s high that would suggest a fall low just above $4.30. The average selloff just the past five years is 32%, suggesting a low near $3.90. Given what we know at the moment, I would expect this year’s harvest low to fall somewhere between the $3.90 - $4.30 level.
Helping keep prices depressed will be the continued competition that US corn finds in global trade. Just five years ago, US corn accounted for 63% of the global trade. Given last year’s drought reduced crop, US corn exports accounted for only 19% of the global trade.
Most of this export demand has shifted to South American origin. This past marketing year, combined exports from Brazil and Argentina accounted for 47% of the global trade. Only five years ago it was just under 23%. A record large crop in South America will likely depress US corn exports well into the 2013/14 marketing year.