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Higher Grain Yields, Stocks Surprise Markets

02:04AM Jan 13, 2012

By Jennifer Stewart, Purdue University

Increases in world grain stocks and estimated 2011 total corn yields surprised grain markets expecting decreases - especially in corn, Purdue Extension agricultural economist Chris Hurt said.
The U.S. Department of Agriculture released its January Crop Production and Stocks reports Thursday (Jan. 12). The bearish report caused corn futures prices to drop to the daily limit of 40 cents. This marks the sixth straight year that the government's January crop updates jolted markets, Hurt said.
"The biggest surprises were the corn production and stocks reports, both of which were higher than expected," Hurt said. "There was a lot of anticipation that both stocks and production would be down."
Estimated corn yields increased from 146.7 bushels per acre in the Nov. 1 report to 147.2 bushels per acre in Thursday's report. The increase of 0.5 bushels per acre represented a total increase in U.S. production of 48 million bushels.
U.S. soybean production largely followed the same trend. Final 2011 soybean yields increased 0.2 bushels per acre, resulting in 10 million more bushels of U.S. soybeans than were projected in the November report.
While the bearish soybean report sent soybean futures prices lower, Hurt said the increased production wasn't nearly as surprising as the corn numbers.
"January is the final estimate for the 2011 crop, and a three-bushel increase in overall yield is a pretty big increase at this point," Hurt said. "The good news is that there are more bushels to sell, but the bad news is that it will be at lower prices."
In addition to the higher-than-anticipated corn and soybean yields, a decrease in corn use for livestock feed also left ending U.S. grain stocks higher than expected. While that's not great news for grain producers, Hurt said the lower grain prices that result from higher inventories have benefits for livestock producers and consumers.
"The livestock sector is a major direct end user of corn and soybean meal, so the price decreases can benefit them," he said.
The average food price inflation for 2011 was about 3.6 percent. Hurt said that with bigger grain supplies and slower demand growth, food inflation could slow to about 2-2.5 percent in 2012.
Hurt said the grain markets are likely to keep a close eye on the weather and yields in South American countries where growing seasons are opposite what they are in the United States.
Hot and dry weather already has reduced yield potential in Argentina, so markets will be watching South American weather and ultimate crop yields in the coming weeks for signs of further stress.
As spring approaches, markets will shift their focus to U.S. weather. With fairly normal weather in the United States, corn growers could produce a record 14 billion bushels of corn - nearly 1 billion bushels higher than the previous record.
"This report suggests that with normal weather, we will see some grain price moderation over the next three years," Hurt said. "Demand for grains is still increasing, but it's increasing at a slower rate, so the supply has a chance to catch up. This is a condition where grain inventories may rise and prices moderate from the high prices received from the 2011 corn, soybean and wheat crops."


Complete Coverage of Jan. 12 Reports
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