By Mark Soderberg, Archer Financial Services
Six weeks ago I wrote a story titled “As Temperatures Heat Up – Will the Corn Crop Shrivel Up?” At that time Dec-12 corn prices were very near the $5.65 level, having just started to rebound off the $5.00 spring lows. I suggested that if the nation’s Corn Belt didn’t receive beneficial rains and relief from the searing heat very soon that prices would continue to soar as crop prospects would diminish. My fear was that if production prospects slipped towards the 13 billion bushel level, prices would have to surge toward the $6.50 - $7.00 level in order to ration demand and ensure supplies didn’t run out. Never did I envision that the record heat and drought conditions would not only persist, but worsen over such a vast area of the Midwest. Recently, the state climatologist in Iowa declared this year’s drought the worst since 1936. Both corn and soybean crop ratings are rapidly declining toward the all time lows recorded in 1988.
At the moment only 24% of the nation’s corn crop is rated good or excellent, while 48% of the crop is rated poor to very poor. Given the current crop conditions I sense the market has discounted an average yield for this year’s corn at 130 bu. per acre, well below the current USDA forecast of 146 bpa. In addition we’ll likely see the harvested acre’s be reduced as a larger percentage of this year’s crop is abandoned. At present as Dec-12 corn prices chop around the $8.00 level I sense the market has discounted this year’s corn crop at just under 11.2 bil. bu. If demand for the 2012 corn crop were left unchanged at 12.720 bil. bu., the resulting ending stocks would fall to negative 600 mil. bu. Obviously prices had to surge to levels high enough to reduce demand by at least 1 bil. bu. in order to maintain minimal supplies ahead of the 2013 harvest. At the moment it is unclear if the $8 level has accomplished this. What is also unclear is whether the crop can still manage to reach the 11.2 bil. bu. level. I’ve seen estimates as low as 10.5 bil. bu.
Chart provided by APEX
The good news is, we are already seeing evidence that the rationing process has begun. Ethanol production for the last four weeks has fallen below levels needed to reach the corn usage estimate of 5.050 bil. bu. My guess is it is over estimated by 30 – 50 mil. bu. Also export demand has completely collapsed as demand shifts to cheaper supplies from South America. Here too, I expect the USDA’s export forecast is 30 – 50 mil. bu. too high. The end result is likely to show an extra 60 to 100 mil. bu. of corn supplies left over from last year. Going forward however, I suspect we have not yet seen the highs in Dec-12 corn. I believe a correction will be limited to the $7.40 - $7.60 area before prices surge back above the current highs of $8.20 once harvest is under way and the true extent of damage to this year’s corn crop is more evident. How high will prices ultimately go? At 11 bil. bu. I suspect Dec-12 corn will peak between $8.50 - $9.00. If production were to slip to 10.5 bil. bu., prices will likely have to reach $9.50, possibly $10.00 per bu. There is already a growing list of livestock, hog, and poultry groups lobbying the EPA to reduce or eliminate the ethanol mandate for the balance of 2012 and all of 2013. Given the elections this coming November, I’m near certain action this drastic will not occur. However if the $10 price level is attained post election, I’d argue the odds of the mandate being lifted would grow dramatically.
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