Strong corn exports, profitable ethanol plants and increasing feed usage appear to be bullish fundamentals for corn. But don’t be fooled into thinking prices will head higher this fall, according to grain analyst Richard Brock, speaking at the 2014 Mid-South Farm and Gin Show.
Brock says the feed and residual number for corn in 2013-14, at 5.2 billion bushels, is a nearly one billion bushel increase over last year. But it’s misleading. “You may wonder how that can happen because were not adding livestock numbers, but we have quit feeding wheat and we’ve quit importing corn, so were just getting back to normal numbers,” after the short crop in 2012.
Brock says the United States will export about 1.5 billion to 1.6 billion bushels of corn in 2013-14. “Exports of corn have been exceptionally strong. In 2012-13, we exported only 731 million bushels.”
The cloud hanging over the market is the estimated big increase in corn carryover, Brock noted. “Last year we had 821 million bushels left over. This year, USDA says are going to have 1.5 billion bushels left over. We believe it’s going to be 1.7 billion bushels.
“You didn’t need a PhD in agricultural economics to figure it out. You just doubled the carryover of the supply of corn. You better be an aggressive seller of corn. There is only one direction that this corn is going to go.”
Things could be even more bearish for corn should high prices lead to an increase in planted acres this spring. Brock estimates that corn producers will plant about 94 million acres, which is a little higher than the average trade estimate.
Brock offered several scenarios for prices based on acres and yield.
“If we plant 92 million acres of corn and have a 160 national average corn yield, then our average price of corn on the farm will be about $4.60. If we plant 94 million acres of corn and have a yield of 160 bushels per acre, our average price is going to drop down to about $4.25.
“If we plant 96 million acres, which is not going to happen, it would take us under $4 a bushel. If we plant only 92 million acres and we have a horrible spring and summer and end up with 157 bushels per acre, we’re looking at $5-plus corn.”
Brock said the stocks-to-use ratio is a good measure of the relationship between price and cost of production.
“If the stocks-to-use ratio in corn is over 16 percent, the average farm price has always been less than the cost of production. If it’s between 8 percent and 16 percent, which is where we’re at this year, there’s a 70 percent chance that the average price is going to be below the cost of production.
“If the ratio is 8 percent or less, there is a 100 percent chance that the price will be above the cost of production. But the chance of that now is slim to none.”
Competition not going away
Brock said $7.50 corn, like $2 cotton, wasn’t good for U.S. corn producers. “What we’ve done is convinced other countries to raise corn again. All of a sudden, making corn over there is a lot more economical than growing wheat and sunflowers. Corn at $7.50 a bushel has caused us to develop some big competition that’s not going to go away anytime soon.”
As corn prices rose, the U.S. share of world corn exports slid from 63 percent in 2007-08, to 20 percent more recently. Meanwhile, Argentina’s share rose from 15 percent to 20 percent and Brazil’s, from 8 percent to 26 percent. Even the Former Soviet Union got into the act, going from 2 percent to 16 percent.
With last year’s big corn crop, the United States is starting to get some of that share back,” Brock said. But there’s a ways to go, with the U.S. share expected to be around 36 percent in 2013-14.
Perfect storm of demand destruction
Brock said the spike in corn prices from 2010-12 “was a perfect storm for a bull market. The ethanol industry was expanding and we had three disastrous corn crops back to back. Now the ethanol industry has matured and we’ve encouraged more corn production worldwide. That is a huge fundamental shift from where we were three or four years ago.
“History repeats itself. Once you hurt demand, it takes a long time to get it back. Corn at $7.50 is going to be one of the worst things that’s ever happened to us. This can take a long time to get back.”
Brock expects that ethanol plants will crush about 5 billion bushels of corn in 2013-14, because many have regained profitability on high gasoline prices and cheap corn. “We have 197 corn ethanol plants in operation in the United States right now. Two of them are expanding and 15 are idled and are not going to come back.”
Ethanol exports are expanding as well, primarily to Europe and Canada. “We also exporting a lot of dried distillers grains right now, with ethanol plants all fired up and running at full capacity. The biggest buyer is China. If you’re paying to export protein by the pound, you have a higher protein product in DDG’s versus corn, so you want DDG’s.”
Corn’s outlook could worsen should corn prices remain too high, too long as U.S. farmers get ready to plant. “A strong market will encourage more acres. But I think the more the corn price goes up in the next six weeks, the lower it’s going to go in July and August. It’s just basic economics.”
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