Corn potential stunning but crop late

Record U.S. production expected | Analyst expects price could dip below $3 per bushel

U.S. corn crop forecasts keep getting bigger, and that means prices for corn and other crops will likely fall, says an analyst.

The market consensus is that the average corn yield will be much bigger than the 165.3 bushels per acre forecast by the U.S. Department of Agriculture.

In a Reuters poll of 20 analysts the range of forecasts was 166 to 176 bushels per acre with an average of 170.5. The average yield in 2013 was 158.8. The next U.S. Department of Agriculture forecast is set for Aug. 12.

Arlan Suderman, senior market analyst at Water Street Advisory, is also forecasting a bin-busting crop. He uses a yield model based on USDA crop ratings.

“It right now puts the corn crop at 170.3 bu. per acre,” he said.

A crop that plentiful would shatter the previous record of 164.7 bu. set in 2009.

As of July 27 corn was rated 75 percent good-to-excellent, down one percentage point from the week before. Despite the drop, corn ratings have not been better for that week since 2004.

Using the rating from July 20 of 76 percent and assuming it would continue to the end of the growing season, it would produce a crop of 172.8 bu. per acre.

Suderman thinks that’s where the number will be when the combines stop rolling. Toby Goodroad, vice-president of Agri-Trend USA, is skeptical about the forecasts calling for more than 170 bu. per acre.

“Everywhere I travel, I’d say the yield potential is extraordinary, there is no doubt about that,” he said.

“The issue is that it’s behind.”

He believes the crop is two to four weeks delayed, which is significant.

“Most of the farmers are pretty optimistic about the crop sitting out there, but they realize they need some heat and they’re going to have to avoid some frosts,” said Good-road.

It makes him wonder if there will be serious quality problems with the crop.

Suderman is bearish about short-term price prospects, but he thinks they will eventually rebound because of expectations for a strong sales program.

He thinks there will be “a surprising amount of demand” because of depressed prices and reduced global competition.

The huge U.S. corn crop and lacklustre pricing will deter planting in competing countries.

Corn prices in Mato Grosso, Brazil, are $2.20 per bu. A government subsidy sets a floor price of $2.60 but it is still a money-losing venture, considering the cost of production is $3 to $3.50 per bu.

Argentina is defaulting on bonds and there is talk about devaluing the peso and increasing interest rates.

The conflict in Ukraine and Russia is driving up interest rates in the Black Sea region.

Farmers in those key exporting countries rely heavily on bank loans to seed a crop, and Suderman anticipates decreased acreage in Argentina, Russia and Ukraine because corn is far more costly to plant than competing crops.

Reduced competition from South America and the Black Sea region should boost U.S. corn exports, helping mop up the burdensome supply. Suderman is forecasting two billion bu. of U.S. ending stocks, which is well below other estimates he has seen of three billion bu.

Strong demand will eventually prop up corn prices, but he expects them to initially tumble as the world comes to grips with the massive U.S. corn crop sitting in the fields.

“We’ve probably got quite a bit of downside price risk here,” said Suderman.

“I would look for futures prices to probably dip below $3 (per bu.), maybe down to $2.85.”

He said there are other reasons for his slumping price forecast in addition to expectations for a huge crop.

“Funds love to trade trends, especially down trends and they will trade a down trend as long as they can until they are absolutely proven wrong,” said Suderman.

Speculative hedge funds still hold a slight net long position in the corn market.

He expects that to turn into a short position soon, which will put further pressure on prices.

As well, elevator managers across the U.S. Midwest say many farmers are holding more than 100,000 bu. of old crop corn that will need to move to make room for new crop.

“We could have a collapse of both futures and basis at the same time,” said Suderman.

“Farmers who are normally 50 percent sold on their new crop are only like 15 percent this year.”

He believes prices will rebound by 75 cents per bu. during the winter to a level similar to today’s values be-cause of strong exports.

Goodroad thinks price prospects could be much better than that if the crop doesn’t get the August heat it needs to advance or if there is an early frost. Corn markets could quickly turn bullish if yields turn out to be disappointing.

“I would see the prices climb dramatically,” he said.

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