Bearish Report Might Have Silver Lining

November 2, 2011 08:51 AM

Crash in corn prices could bring back demand

It was more than a dip. The corn market crashed in early August to the magnitude of $2 per bushel. The $1 drop in the days following USDA’s highly bearish Sept. 30 Grain Stocks report sucked the wind out of the corn sector even more. Yet, according to some analysts, the price debacle could end up being good news for crop producers.

"Livestock producers, ethanol users and international buyers looked at corn prices at the end of August and concluded that if prices were going to be $7.70 per bushel, corn wasn’t worth it," says Frayne Olson, an ag economist at North Dakota State University.

"It’s hard for farmers to hear it, but the $2 per bushel drop will give end users a chance to book attractive prices, and in the long term [six to 24 months in the future] may actually be good for prices by increasing demand. Farmers have to step back and take a longer-term view," Olson says. Corn is in the spot-light because that’s where the big surprise was and because it so influences other commodities, he adds.

Because prices appear to be at harvest lows, most analysts advise producers to sit tight on marketing for now. There is little reason to sell corn below $6. Furthermore, stocks are still tight and prices for 2011/12 are likely to set a new record.

One point is certain: Last summer’s high crop prices choked off demand, most notably for feed. In response, USDA added 200 million bushels of corn stocks that shocked the trade and spooked commodity funds into fleeing their positions.

Bearish Report Might have Silver LiningPendulum Swings. "If you look at corn futures, the pendulum swung too high at the end of August, as positive news tends to feed on positive news, and swung too low at the release of the Grain Stocks report, as negative news feeds on negative news," Olson says.

The Grain Stocks report showed Sept. 1 supplies at 1.13 billion bushels, exceeding the 900 million bushels anticipated by the trade and far above the 675 million bushels forecast at the beginning of the growing season.

"High prices ration demand better than we thought," Olson continues. His bias, however, is that USDA will add back some usage in future reports.

In early October, corn futures were suggesting a $5.80 average farm price for 2012. "I think that’s too low," says Chad Hart, an ag economist at Iowa State University. "I think 2011/12 corn prices will average $6, and soybeans, $12."

The report suggests that the 2010 corn crop was larger than expected and demand took quite a tumble, says Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri.

"Still, I don’t look for a price collapse; corn will average $6," Westhoff says. "Stocks are very tight, and this is just one report. In the past two years, Grain Stock report surprises have become the norm. We’re going to learn a lot more about corn supply and demand in the months ahead."

One huge demand question is how the livestock industry responds to these lower prices, Hart says. "Feed demand fell off the table the past three months," he adds. In particular, poultry and cattle numbers crashed. "Pork held its own."

Rebound in Feed Demand. Based on early October grain prices, "we could see some turnaround. The first place to look will be poultry," Hart says. Iowa hog producers can now lock in feed prices at break-even or above for six to seven months, and three to four months for cattle producers. (A Rabo AgriFinance forecast calls for 2012 U.S. livestock numbers to tumble, however, which will hurt corn demand. See page 69.)

One question many have asked is how feed demand evaporated so quickly when it was higher than in previous years. "The big story in the Grain Stocks report is wheat," says Corinne Alexander, an ag economist at Purdue University. "When wheat and corn are roughly the same price, you see more wheat feeding."

Furthermore, one reason why corn used for ethanol is not increasing is that some ethanol plants are using 5% wheat, she adds.

Export Direction. "Exports will be the real wild card," Hart says. Pro-ducers should watch the next few USDA Foreign Agricultural Service export reports for direction, he adds.

One potentially positive development could be increased bookings from developing countries such as China, Vietnam and India, which can take advantage of lower prices. China has tight domestic grain stocks and might turn more to exports to feed its 460 million hogs.

On the flip side, many experts are forecasting a slowdown in the U.S. and abroad, Hart says.

"The global economy is in a dangerous new phase," according to a World Economic Outlook report released by the International Monetary Fund in late September. "Global activity has weakened and become more uneven, confidence has fallen sharply recently and downside risks are growing."

More Carry in the Market. One thing that the crash in prices has done is to put more carry in the market, making storage more attractive than it was just a few weeks ago.

Because of the short harvest in the eastern Corn Belt, marketing strategies could differ between eastern and western Corn Belt producers, Alexander says. Basis is likely to be far tighter in the eastern Corn Belt.

Another reason to go back to marketing in a more traditional way for the next six months is that stock levels are still tight enough that Brazil and Argentina’s production could have a major impact on prices.

"If they have a rough time, corn and soybean prices could return to the higher levels experienced this past summer," Hart says.

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