Brace for a Bigger Crop

February 5, 2012 10:20 PM

More acres, bigger yields and declining prices appear likely for 2012

There is always room for surprises, but most experts advise farmers not to get too confident when it comes to corn price outlook based on numerous factors.

"I think there’s a real chance that there will be a ‘3’ as the first number on the wall at the elevator come October," says Ohio State University economist Matt Roberts.

That price is $3.90, which, coupled with 2012–13 ending stocks of 1.5 billion bushels, would bring the season-average price to $4.50.

Depending on the weather, says Colorado State University ag economist Stephen Koontz, corn prices might drop to $4 or jump to $8 this year.

"We’re sitting in a corn market where what happens with this crop makes the price," he adds.
Rich Feltes, an analyst at R.J. O’Brien, expects price pressure from rising corn stocks, increased acreage and a return to trend yields.

"South American weather is the driving factor now," Feltes says.

"But sooner or later, that will be discounted and we will have to face the reality of substantially larger U.S. feed grain supplies—at least that is what the momentum is suggesting."

Feltes has figured that corn yields historically reach trend or higher in two out of three years. "You can go to Vegas and make a fortune on those odds," he says.

p20 Brace for a bigger crop chartA Lot of Corn. The odds for a third year of below-trend corn yields are very low, predicts Dennis Smith of Archer Financial Services. He thinks that given prospects for soft feed demand, flat ethanol volume and sluggish exports, corn prices might be on a downhill slope for months.

"If I’m correct and we fall into place with acreage and decent weather, in spring or early summer you could see corn prices challenge $5 or maybe below $5," Smith says. "So we are looking at strategies to try to get price floor protection close to current levels."

Echoing Smith’s observations, Roberts says average corn yields lagged trend yields in back-to-back years for the first time since 1980 and the odds don’t favor a third year. A 2012–13 scenario of 94 million planted acres, 86.48 million harvested acres and a trend yield of 161.3 bu. per acre will result in a 13.9 billion bushel harvest.

"That’s a lot of corn," Roberts says. "Now, what to do with it?"

Flat Demand. In response to high feed prices, the domestic livestock industry shrank. Ethanol production—after demanding 2 million additional acres of corn each year during the past decade—will flatten due to the end of the blenders’ tax credit, and import tariffs are tightening margins enough to stop further expansion, Roberts says.

"I think the feeding side is what gives," Koontz says. "We’ll be short cattle and dairy numbers, and we have to see how hog profits go."

Ethanol demand will depend on crude oil prices. "If oil is over $100, which is likely, there will be decent demand for that ethanol product.

If you bring oil to $75, it softens a little bit," Koontz adds.

Smith of Archer Financial notes that poultry numbers are down, and he expects cattle numbers to decline soon. Hog numbers likely will stay even to slightly higher than 2011.

"With two of the three down, you have to look for corn demand to be down," Smith says.

Chinese Sway. "The world has plenty of feed wheat," he adds. Chinese buyers are regularly coming to the U.S. corn market, but "if not for them, exports would be sluggish."

Feltes says China might be a wild card in the corn outlook, but he minimizes prospects for the country to re-enter the global corn market as a major buyer driving prices higher. Some analysts talk of that possibility as they cite declining corn stock and increasing corn prices in China. However, Feltes says Chinese officials are well aware of the potential inflationary impact their purchases can have on global grain and food markets.

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