Market Outlook: Crunch Time for Corn Margins

July 30, 2013 10:09 PM
Market Outlook: Crunch Time for  Corn Margins

Producers in the driver’s seat in upcoming years will be those who keep production costs low with high liquidity and working capital levels.

Coming off several years of strong profits, crop farmers should be in a good position, says Sterling Liddell, Rabo AgriFinance senior vice president, food and agribusiness research. Farmers who maintain a financial cushion in upcoming years will be positioned to take advantage of opportunities, such as purchasing farmland, he says.

Right now, it’s hard to make a bullish case for corn, says Johan Ford, senior analyst with Ceres Hedge, Chicago. An average USDA yield estimate of 156 bu. per acre coupled with current acreage numbers would produce a crop near 14 billion bushels. "There are big numbers hanging over the market," Ford says.

Liddell also has concerns for the future of corn prices.

First is the potential for slower demand growth. There is a conflict between the mandate and the industry’s legally allowable usage. "In 2013, the 10% blend wall will fall to about 12.5 billion gallons, more than 1 billion less than the 13.8 billion gallon mandate," he says. "As a result, corn-based ethanol is expected to level off near current levels of 12.9 billion gallons."

Additionally, Liddell expects U.S. corn exports to remain under pressure because of global expansion.  "During the past 18 years, demand for corn has grown at just 2 million tons per year," he says. If demand returns to trend consumption in 2013 and exports return to pre-drought levels, the U.S. should export 1.3 billion bushels.

If the growth rate of world corn exports reverts to the long-term trend of 4 million tons per year, about 1.7 billion bushels would be from the U.S. "Consequently, unless there is a contraction in global production, annual U.S. exports will struggle to regain 2009 levels of 1.9 billion bushels," Liddell says.

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