If you’re expecting to read about the prospects for a sudden recovery in corn prices, you might ought to turn the page – it’s not likely to happen.
In fact, corn futures prices could have a “2” in front of them at some point in the 2014-15 marketing year, should the United States continue to move toward harvesting a bumper crop, says grain analyst Richard Brock, speaking at Decisions 2014 summer seminar, held recently in Destin, Fla.
An informal survey of producers attending the seminar supported the perception that a huge bounty of corn is growing on the U.S. countryside. Most described their crops as excellent, many said they were headed toward 200-bushel-plus yields. Terms like outstanding and “the best I’ve ever seen,” were not uncommon.
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Brock says he’s heard it everywhere he’s spoken this year. It seems every farmer is having a great corn year. And that’s one reason why he wouldn’t be surprised to see average U.S. yields of around 180 bushels per acre. Currently, USDA pegs U.S. corn yield at 165 bushels per acre, an increase of 6.5 bushels over last year’s crop. “We have a high probability we’re going to have a huge crop this year,” said Brock, whose official estimate of yield is 169 bushels.
Weather could impact further development of the crop and its removal from the field. On the other hand, much of the corn is out of danger from most of the stresses a typical season might deliver and is in excellent shape. According to crop condition reports, U.S. corn in the good to excellent category is above 76 percent, the highest since 2004.
Unfortunately, the market is also fully aware of the promise of this season’s crop, which is why Brock believes what he has characterized for the last two years as the biggest bear market in the history of the corn market is just getting started.
“The last two bear markets in corn declined by 68 percent and 62 percent. If the present market declines by 62 percent, it takes nearby futures to $3.21. If it declines by 68 percent, it takes them to $2.70. We’re getting there quickly. I think the futures market will bottom between $2.70 and $3.21 by the end of August.”
Fundamentals suggest lower prices
Fundamentals also suggest lower prices, according to Brock. When ending stocks were 821 million bushels in 2012-13, the stocks-to-use ratio was 7.4 percent and the farm price was around $7 per bushel. Last year, ending stocks rose to 1.246 billion bushels, the stocks-to-use ratio to 9.2 percent and average corn prices ranged from $4.35 to $4.55 per bushel. Brock’s projection for this season, based on a conservative yield expectation of 169 bushels per acre, is that ending stocks will rise to 1.9 billion bushels, with a stocks-to-use ratio of 14. 2 percent and average farm price of $3.25 to $4.45.
Brock bases the possibility of a 180-bushel or higher corn yield on the expectation that genetic improvements in hybrids typically provide a 7-bushel yield increase annually. In the last three years, however, those increases have not been seen due to poor environmental conditions. So will yields need to increase by 21 bushels to realign with trend yield?
Brock adds that plugging in the possibility of a 180-bushel U.S. yield to the balance sheet could take carryover from 1.9 billion to 3 billion bushels. “Then you get back to a situation like things were in the 1980s, when cash corn just goes flat. I personally think that’s where we’re headed. I just don’t know where that bottom is going to be yet. This a classic collapsing market.”
A recent 60-cent down move in corn futures might have alerted quite a few corn producers to the possibility that the last six years of the corn market have been an abnormality. History bears that out. Brock pointed out that with the exception of 1996, on average, from 1980 to 2007, “farmers lost money producing corn. We survived on government payments. The last six years, we’ve made a fortune producing corn without government programs. And we could very well be back in a loan deficiency payment program in 12 months.”
Nothing much is happening on the corn use side, noted Brock. “Ethanol production is pegged at 5 billion bushels, compared to 5.075 billion in 2013-14. Nothing is going to change that number much right now unless there is a sharp increase in exports. We’re at the mandated level domestically. Ethanol is a mature industry. It was a bullish factor for a long time.”
Corn exports for 2014-15 could be down 150 million bushels to 200 million bushels from last year.
Brock noted that soybeans are facing bearish fundamentals too. USDA pegs soybean carryover at 415 million bushels, compared to Brock’s 516 million bushels. USDA’s estimate portends a farm price of $9.50 to $11.50, while Brock’s suggests a farm price of $8.50 to $9.75 per bushel.
World production of soybeans is climbing higher too, on strong prices and demand, Brock notes. In Brazil, production has risen from 75.3 million metric tons in 2010 to 91 million metric tons this year, the United States, from 90 million metric tons in 2010 to 103 million tons expected this year and Argentina, from 49 million metric tons to 54 million metric tons. The world has gone from 263 million metric tons of production in 2010 to 304 million metric tons expected in 2014-15.