If Mother Nature doesn't provide enough water to grow the 2007 U.S. corn crop to its full potential, look out, this might light the “short fuse” on the corn market, said grain analyst Joe Victor, vice president, marketing, Allendale, Inc., speaking at the Minneapolis Grain Exchange's February crop report conference call.
Victor's firm is projecting a 10-million acre increase in corn acres in the United States this year, primarily to meet strong ethanol demand.
With planted corn acreage totaling 87 million acres and a trend yield of 149.8 bushels, the United States would produce a crop of 11.847 billion bushels in 2007, according to Allendale's estimates.
This suggests corn ending stocks in 2007-08 of only 346 million bushels, “which would give us an average farm price of $4.50,” Victor said. “The Congressional Budget Office, which estimates corn ending stocks of 870 million bushels, pegs 2007 corn plantings at 86 million acres, but higher production of around 154 bushels. The CBO has the average farm price at $3, USDA at $3.50.”
Allendale's low yield estimate stems from its concern that water may be hard to come by this year, Victor says, especially in the western Corn Belt.
“We have replenished some of the topsoil, but our subsoils have a ways to go. We have plenty of water east of the Mississippi. The problem is western Iowa and Nebraska. They'll need spring rains.”
In addition, weather observers say a weakening El Niño, which normally does not have a large impact on Midwestern agriculture, may do so this year, “due to recent sunspot activity,” Victor says. “Our private weather service is telling us that as we get into mid- to late summer, weather could move toward the dry side.”
Meanwhile, “the fuse for the corn markets this year is very short because of the persistent reminder that global stocks are so tight.” Victor noted that 2006-07 U.S. ending stocks for corn, at 752 million bushels, are the lowest stocks since 1995. World stocks at 87.95 million tons “are the lowest stocks we've seen since 1980.”
A correction in prices should occur for corn and soybeans, “when we start getting into the pollination period for corn and likewise in the soybean pod fill stage.”
The United States isn't alone in ramping up corn production to take advantage of good prices. Victor points out that South America has become more aggressive in the market and is looking at excellent crops in 2007.
In its February estimate of world supply and demand, USDA increased Argentina's corn production by 2 million metric tons, to 21 million metric tons. “We had heard that if Argentina went to 17 million to 18 million metric tons, that would be a big surprise.”
Because Brazil and Argentina will be in the market, “we anticipate that we will lose some sales. At the same time, if we start to see two to three weeks of dry weather in the United States, this market has the potential to explode.”
The corn market's one big concern is the price of crude oil, Victor said. “As crude oil goes, so goes the ethanol price, and so goes profit margins for corn. So we'll need at least 10 million to 10.6 million acres of corn and a decent growing season. But even then, we see dangerously low ending stocks.”
A long-term concern for corn production is the battle between fuel and feed for corn. “Is there is going to be enough for fuel, feed and exports?”
A bit of bearish news from Allendale is its observation that USDA's estimate of ethanol production is actually running too high. “We needed to produce 10.7 million barrels of ethanol in September. We fell short, and we fell short in October and November. The pace now is running 25 percent higher than year-ago levels. To meet the estimate, however, we need the pace to be 35 percent higher than year-ago levels. To change that, we rally crude oil prices and we drop corn prices.”
In the meantime, corn producers need to lock in some profit, Victor says. “Needless to say with these kinds of prices we have now, there is plenty of opportunity out there for some type of forward contracting or hedging using options.”
USDA raised projected soybean U.S. ending stocks by 20 million bushels in February, and reduced exports by the same amount. “Asian buyers have been gradually shifting away from U.S. purchasers to cheaper South American soybeans.”
Allendale also expects soybean acres to drop 6 million and wheat acres to climb 3.8 million acres. Allendale has U.S. soybean ending stocks at 461 million bushels, “which would be unprecedented. We have never see soybean stocks larger than corn stocks.”
Victor pointed out that the reason for the soybean rally in the United States “is not driven by a supply-demand scenario based on beans. The soybean market is doing its best to keep acreage and not lose too much acreage to corn.”