Prepare for price volatility: analyst

Poor U.S. moisture reserves | Crops will survive ‘rain shower to rain shower’ and roller-coaster markets will fray nerves, he warns

The market expects corn yields to bounce back this summer but Frayne Olson isn’t convinced, considering the extreme dryness in the western corn belt.

“Given today’s prices, what do you have to assume about the size of crop to get those price levels? You have to have a very large corn crop … to get those prices,” said Olson, a crop economics and risk management expert with North Dakota State University.

“The moral of the story is there is a lot of pressure being put on production next year…. If there is any hiccup at all in U.S. corn production, if there is a threat of more drought … if we have some hot weather during pollination, what do you think is going to happen to prices?”

During a presentation at Ag Days last week, Olson presented stats and prices to support his argument that the 2013 U.S. corn crop may be underpriced.

New crop corn futures in Chicago were trading at $5.90 per bushel as of Jan. 21, which is 23 percent less than old crop futures of $7.27 per bu. In comparison, November soybean contracts were trading around $13 per bu., 10 percent less than old crop soybean prices of $14.30 per bu.

Olson said current prices for the new crop would indicate that the market is predicting a plentiful corn crop in 2013.

“The expectation is we need to have a lot of acres and a lot of yield,” he said.

“The current assumption is that corn is going to buy some acres from soybeans and buy some more acres from wheat.”

The market is also expecting yields to return to normal levels following a disastrous 2012. On Jan. 11, the U.S. Department of Agriculture reported an average U.S. 2012 corn yield of 123.4 bu. per acre, which is 36 bu. under trend line yields.

“That’s about a 23 percent cutback (from trend line),” said Olson.

However, is it reasonable to expect an average corn yield of 160 bu. per acre in 2013 given the extreme drought conditions in the central United States?

Like many of the presenters at Ag Days, Canfax market analyst Brian Perillat showed a screen shot from the U.S. Drought Monitor website.

The drought map depicts extreme or exceptional drought conditions in Nebraska, Kansas, South Dakota, southeastern Minnesota, northwestern Iowa, eastern Colorado, Oklahoma and Texas.

Don Keeney, a meteorologist with the Cropcast weather service, told Reuters last week that the western corn belt needs 300 to 450 milli-metres of precipitation to remedy the dryness in the region.

The likelihood of that happening is slim, so the western corn belt will probably remain bone dry going into planting season.

As well, the USDA estimates Dec. 1 corn stocks at eight billion bu., down 17 percent from December 2011.

Perillat said that means corn will not be abundant by December 2013, even if it rains and U.S. farmers manage to grow a decent crop.

“Corn stocks are going to be tight, no matter what,” he said.

Olson said one reason stocks will remain tight is that livestock operators aren’t cutting back on corn use, or at least not as much as expected.

The U.S. consumed 12.5 billion bu. of corn in the 2011-12 crop year and produced only 10.7 billion bu. this year.

“Somebody’s got to quit using 1.8 billion bu. of corn because we just don’t have it. We can’t meet last year’s needs,” Olson said.

“Who is going to use less?”

Olson has determined that the ethanol industry will consume 10 percent less corn this crop year, based on his analysis of USDA figures, and corn exports may decline by 38 percent.

Feed use figures are tough to nail down, but Olson estimated it has dropped only two percent.

“Have high prices rationed uses in the livestock sector, yet? We’ve seen a little bit of cutback but nothing significant. Two percent is not a big number,” he said.

“One of the reasons we’re seeing a rally in the corn market right now … is because feed usage of corn hasn’t been rationed enough.”

Olson said the dearth of soil moisture reserves will cause extreme volatility in prices this spring and summer in the entire grain sector.

“We don’t have the soil moisture reserves to carry us through. We’re going to be living rain shower to rain shower,” he said in an interview following his presentation.

“We’re going to see tremendous volatility in the grain markets. We’re going to have days where we’ll take a dollar off wheat so fast it will make your head spin…. It will take nerves of steel to market (crop) this year.”

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