U.S. farmers are responding to high corn prices in a big way this spring — saying in a USDA survey that they intend to plant a little over 90 million acres to the crop.
Joe Victor, a market analyst with Allendale, Inc., says the shift to corn began with a major rally shortly after harvest in 2006. The bull market lasted well into the winter, but futures prices were taking somewhat of a beating at the time of this writing in late March.
“We hope that farmers took advantage of those high prices through either their hedging and options program, or at least through forward contracts.”
Victor, speaking at a Minneapolis Grain Exchange teleconference shortly after the release of USDA's March 30 prospective plantings report, said forecasted corn acres of 90.5 million acres and a 152-bushel average yield would produce a crop of 12.537 billion bushels. “By the time you bring in your beginning stocks, higher ethanol use, lower feed demand and exports, strangely enough, we're looking at ending stocks of 771 million bushels (which is about the same as last year).”
This portends a season average farm price for corn of $3.30, “but if we do increase yields to the low 170-bushels per acre, (production rises and) the season average farm price drops down to about $2.50.”
The increase in corn acreage comes largely at the expense of soybeans, which Victor says could test $9 a bushel. “When you look at the acres for beans at 67.4 million intended acres and a yield estimate of 41.9 bushels per acre, we get a production of 2.774 billion bushels and a total supply of about 3.34 billion bushels. Total demand is about 2.965 billion bushels. The good news for the soybean enthusiast is ending stock projections are 379 million bushels versus a 2006 projection of 565 million bushels, so we are trimming back bean stocks. This should support a season average farm price of $7.50.”
Victor says new crop soybeans “could push into the $8.50 to $9 mark just before pod fill starts. The only caution I would add is any delay in getting this monster corn crop in the ground could ultimately be bearish to soybeans if farmers replace delayed corn plantings with soybeans.”
Victor says the huge shift toward corn in the southern growing region was not that much of a surprise. “When you start floating cash corn prices in front of southern farmers the likes of which they had never seen before, that's where we found the acres. We're seeing fewer cotton acres. Needless to say, as we see new crop corn prices being trimmed a little bit, cotton prices are ready to stage a fairly decent rally.”
The focus in the corn market will now move toward planting weather, “for at least the next six to seven weeks,” Victor said. “Our research suggests that when we try to plant this big of a corn crop, it's going to take longer and we're going to need a planting window at least two weeks longer.
While Victor estimates that the chances of a big weather problem are slim, “with the hypersensitivity of the market, weather is going to create a great deal of volatility for corn in 2007, probably even more so than we saw in 2006. A year ago, we were looking at 1.8 billion bushels of ending stocks for corn. Now we're down to 771 million bushels. So there is no room for error.
“The market is also going to pick up on the fact that with the big crop, planting progress will lag behind the five-year average. By no stretch of the imagination do we feel that this corn market has topped. We see the biggest correction coming in the late June, early July. With proper pollination, the market could break, but the one thing that will not let this market go is when you cheapen up the price of cash corn, the ethanol sector will jump all over it to improve their profit margins.”
Victor anticipates a weakening basis for corn “when we get into the mid- to late April time frame, when the market starts looking for the 22-million ton Argentina corn crop. Also, Brazil's projected 50-million ton corn crop is 8 million tons greater than last year.
“But when we get into that pollination time frame, that's when we feel the basis is going to start to strengthen. The market is going to want to make sure it is securing corn through attractive basis levels. The good thing about the ethanol industry is that it has created a great deal of competition. We feel that the southern basis is going to have a fairly firm year.”