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Corn Joins Bear Market as Drought-Driven Rally Ends

April 3, 2013
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April 3 (Bloomberg) -- Nine months after a U.S. drought sparked a surge in global crop prices, corn has joined soybeans and wheat in a bear-market slump as demand slows and farmers prepare to boost output in 2013.

Corn futures in Chicago plunged 13 percent since the U.S. Department of Agriculture said March 28 that inventories were bigger than analysts forecast and that farmers will plant the most acres this year since 1936. Corn, soybeans and wheat, the biggest U.S. crops along with hay, have tumbled into bear markets with drops of more than 20 percent from 2012 highs.

Exports of corn from the U.S., the world’s largest grower, are at a 41-year low, while high grain costs last year forced beef producers including Cargill Inc. to close plants and ethanol makers such as Valero Energy Corp. to shutter distilleries. South American farmers are adding to supply with record harvests, and global food prices tracked by the United Nations dropped for five straight months through February.

"Corn is the basis for where we start in looking at cost of production for food," said John Nalivka, a former USDA economist and the president of Sterling Marketing Inc., an agricultural economic research and advisory company in Vale, Oregon. "Right now, whether it be supply driven or demand driven, our food prices are not going to be as high as it appeared they were going to be nine months ago."

The Standard & Poor’s Agriculture Index of eight commodities has declined 21 percent from a peak on July 20, including a 28 percent slump in wheat, which entered a bear market in early January. Soybeans, down 22 percent from a closing high in September, first reached a bear market in November. Coffee and sugar also are in bear markets.

Inventory Surprise

While the USDA forecast in February that domestic corn production would surge this year by 35 percent to a record 14.53 billion bushels, prices on the Chicago Board of Trade reached a seven-week high on March 27 because of concern that inventories would get too low before the harvest in September.

On March 28, the USDA estimated March 1 corn inventories at 5.399 billion bushels, 8.1 percent more than the 4.995 billion analysts predicted in a Bloomberg survey and a sign that demand had slowed. The government also said U.S. farmers will sow 97.282 million acres.

That day, prices fell by the 40-cent exchange limit. The next session, they plunged 7.6 percent, the biggest drop for a most-active contract since 1988. The two-session slide of 13 percent was the biggest since before 1960, erasing $4.8 billion in value based on the March 1 inventories.

‘Game-Changing’

"The larger corn supply was a game-changing event and shifted market psychology from fears of shortages to worries about excesses," said Roy Huckabay, an executive vice president for the Linn Group in Chicago. "The markets are pricing in bigger supplies."

Corn futures fell 0.6 percent today to $6.3675 a bushel as of 11:51 a.m. on the CBOT, while soybeans declined 1.2 percent to $13.775 a bushel. Wheat climbed 2 percent to $6.845 a bushel.

Last year’s rallies "have crushed demand, and it will be much slower to respond to increased supplies and lower prices," said Joel Karlin, the commodity sales coordinator for Western Milling LLC in Goshen, California. The inventory report "was a huge shocker and signals an end to high grain prices," he said.

The USDA report last week implied that cattle, hog, poultry and dairy herds probably cut corn-feed use by 30 percent in the quarter ended Feb. 28, Karlin said. Livestock consume two of every five bushels of corn grown in the U.S.

Feed Use

"The biggest bearish factor is the market overestimated the feed demand," Christopher Narayanan, the New York-based head of agricultural commodity research at Societe Generale SA, said in an April 1 interview on Bloomberg Television. "The ending inventories came in higher than what the market was expecting, and it just sent the market into a tailspin."

Growers in Brazil and Argentina are harvesting 27 percent more soybeans in 2013, while corn output gains 5.3 percent, both records, USDA data show. Brazil may top the U.S. as the world’s leading soybean exporter this year, and Argentina is the second- largest seller of corn, according to the department.

"The story in corn is good prices in the last few years have induced farmers to plant a lot more," said John Stephenson, a senior vice president and portfolio manager who helps manage about C$2.7 billion ($2.7 billion) at First Asset Investment Management Inc. in Toronto.

Weather Risk

Even after this year’s decline, corn prices are averaging $7.0775 in 2013, higher than last year’s record average of $6.89, and the U.S. harvest is still at least five months away.

Many Midwest farmers won’t sow fields until May and the harvest isn’t until September or October, leaving ample time for unusual weather to delay planting or damage crops. Last year’s drought was the worst in the U.S. since the 1930s, reducing corn and soybean output for a third straight year. With the dry spell lingering in the Great Plains, 34 percent of the winter-wheat crop was in good to excellent condition as of March 31, compared with 58 percent a year earlier, the USDA said on April 1.

While corn may slip below $6 if U.S. output returns to normal, any weather threat to Midwest crops would spur a rebound to $6.75 to $7, according to Jeffrey Sica, who helps oversee more than $1 billion as president of SICA Wealth in Morristown, New Jersey.

"Memories are still very fresh in our minds about corn prices moving up because of the drought," Sica said. "The minute there is any indication of any drought, it’s going to send the price of corn back up."

Improving Conditions

Soil conditions are improving in the Midwest after winter snowstorms and rain, data from the U.S. Drought Monitor show. About 35 percent of the country had severe to exceptional drought conditions on March 26, compared with 42 percent on Jan. 1. The dry spell will ease further through June 1 in the western Midwest, Great Plains and parts of the Southeast, according to forecasts from the U.S. Climate Prediction Center.

"Drought areas will continue to shrink the next month with more rain that may cause some minor planting delays," Drew Lerner, the president of World Weather Inc. said yesterday. "The western third of the Midwest and parts of the Plains will not see soil moisture fully recharge before temperatures warm in June and July and soil evaporation increases. But we will not see a repeat of extreme dryness and prolonged period of searing heat like last year."

Farm Income

A slump in corn may threaten farm income, which is projected to reach a record $128.2 billion this year, according to the USDA. Farmers were protected against losses last year by crop-insurance payouts that reached an all-time high of $16.1 billion.

"The fact that prices are going to start to decline means you have this one really bright spot in the economy starting to look shakier," said Johanna Nesseth Tuttle, a director for global food security at the Center for Strategic and International Studies in Washington. "It means that you could potentially have farmers with a little bit less robust outlook than they’ve had. Farmers have had some really great years."

The USDA said in February that food inflation would ease later in 2013 as larger crop inventories reduce cost pressures. The effects of the 2012 drought will decline this year as grain harvests replenish supplies and agribusinesses worry less about shortages, USDA economist Richard Volpe said at a USDA conference in Arlington, Virginia, on Feb. 21.

Consumer Prices

Consumers may pay as much as 4 percent more for food this year, compared to a 2.6 percent increase in 2012, according to the latest USDA food-inflation forecast on March 25. That’s above the five-year average of 2.9 percent inflation.

"I don’t see any cause for alarm in terms of huge increases at the grocery store," U.S. Agriculture Secretary Tom Vilsack said yesterday in an interview in Washington.

The recent drop in corn prices will take pressure off food companies and livestock producers, said Chad Hart, an economist who specializes in agriculture at Iowa State University in Ames. Food inflation should moderate and be closer to 2.5 percent to 3 percent by the end of the year and early 2014, Hart said.

The "real relief" from food inflation because of lower corn prices will come in 2014, after a normal crop is actually produced, said Bill Lapp, the president of Advanced Economic Solutions in Omaha, Nebraska.

Moderation in food prices won’t come right away because corn, while down from record highs, is still elevated, Lapp said. Futures closed 16 percent above the five-year average yesterday. "Significant lags" in production cycles mean it can take a while for lower corn costs to move through the system, he said.

"In 2014, you can begin to become optimistic on food costs if weather cooperates," Lapp said.

 

--With assistance from Alan Bjerga in Washington. Editors: Steve Stroth, Millie Munshi

 

To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

 


 

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