Prices may follow slump in corn demand

Higher ending stocks | Some analysts predict an abundant corn crop while others say soil moisture is still lacking

Corn prices for 2013-14 are on their way down to levels growers haven’t witnessed since 2010, says an agricultural commodity research and marketing firm.

The ball will get rolling when old crop stocks come in way higher than the U.S. Department of Agriculture is forecasting, and it will gain momentum with a massive 2013 corn crop, said Allendale Inc.

December futures could fall as low as $4.42 per bushel by summer, down from slightly less than $6 Feb. 4.

“Sharp revisions in old crop demand are coming,” said Allendale’s chief strategist, Richard Nelson.

The firm forecasts 873 million bu. of corn ending stocks for the 2012-13 crop, up 45 percent from the USDA’s January estimate of 602 million bu.

Nelson expects the ending stocks number to start ratcheting up with the USDA’s Feb. 8 world agricultural supply and demand estimates report. He anticipates the February number will be 652 million bu.

The USDA can’t ignore slumping corn demand. The department is forecasting a 10 percent decline in ethanol demand, but it has been down 11.4 percent year-to-date and the situation appears to be getting worse. Last week’s consumption was 18 percent below the same period a year ago.

It’s a function of declining gasoline demand and sky-high corn prices. Allendale expects ethanol, which is the biggest user of corn, will buy 4.45 billion bu. of the crop, down from the USDA’s estimate of 4.5 billion bu.

Exports are also over-stated, Allendale believes. The pace of exports this year is half what it was last year, yet the USDA projects full year exports will be down only one-quarter below 2011-12 levels.

Allendale also believes the USDA’s livestock feed use number is too high. It expects the number to drop to 4.3 billion bu., down from the USDA estimate of 4.45 billion bu.

The upshot of all the adjustments in corn use will be a big increase in ending stocks compared to the USDA’s Jan. 11 bare bones estimate.

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“That will give us a moderately lower price by itself,” said Nelson.

“(But) the real problem is actually more in new crop rather than this old crop revision.”

Allendale expects a 3.3 billion bu. increase in corn supply in 2013-14.

“That will be a huge problem and the majority of our bearish issues coming down the road,” said Nelson.

The company forecasts 97.6 million acres of corn in 2013, up slightly from 97.2 million in 2012. The big difference is a return to trend-line yields.

Nelson said some may find the yield estimate surprising, given the expanding drought in the U.S. Midwest. However, few people realize subsoil moisture has no correlation with corn yields, he added.

Yields are determined by growing season temperature and precipitation, and history has shown that yields have typically rebounded after hot and dry years.

The best example is 1989, the year folowing the drought of 1988-89. Moisture maps showed significant dryness through 1989.

“However, yields in that year actually broke trend. They did not just meet trend, they actually broke trend by three percent,” said Nelson.

Allendale is forecasting yields this year of 157 bu. an acre, up from 123 last year.

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Other analysts don’t share that view.

Frayne Olson, a crop economics and risk management expert with North Dakota State University, believes markets are incorrectly predicting abundant corn yields in 2013.

“We don’t have the soil moisture reserves to carry us through,” he said.

“We’re going to be living rain shower to rain shower.”

Nelson disagrees and is convinced yields will rebound, driving the December 2013 corn futures price down to $4.42 at some point during the summer.

That will have a ripple effect on many other crops.

Wheat has been artificially supported by corn to the tune of about $2 per bu., despite abundant supplies of the crop.

“Once we lose this artificial support from corn, wheat should have some sharply lower prices in front of it as well,” he said.

He expects a moderate decline in oilseed prices during the usual summer lows followed by a strong comeback.

“Oilseeds, unlike corn and wheat, have a very strong demand picture that’s not going to change,” said Nelson.

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His advice to corn growers is to sell all old crop before spring planting and lock in a portion of next year’s crop at today’s futures prices, preferably using a tool that allows a gain on the upside if markets move higher.