Three consecutive years of smaller U.S. corn harvests are driving inventories of the world’s most-consumed grain to a 39-year low and spurring Goldman Sachs Group Inc. to predict that prices will rise near record highs.
Global stockpiles will drop 11 percent to 117.61 million metric tons by Oct. 1, or 13.6 percent of what will be used for food, ethanol and livestock feed, the lowest ratio since 1974, the U.S. Department of Agriculture said in a report.
Prices surged 44 percent since mid-June as U.S. farmers endured their worst drought in 56 years, and heat waves and dry weather seared crops from Australia to Europe. While futures fell 14 percent since reaching a record $8.49 a bushel on Aug. 10, tightening supply before next year’s harvest will drive prices to an average of $8.25 in the next six months, 13 percent higher than Monday, Goldman said in a Dec. 5 report.
“It will take more than one year of good weather and high yields to dig the world out of this supply hole,” said Peter Meyer, a senior director of agriculture commodities at PIRA Energy Group in New York. “While corn prices may not spike, they will remain well supported until the extreme moisture deficits in the U.S. are rectified.”
Grain Rally
Corn rose 13 percent to $7.30 on the Chicago Board of Trade this year as the Standard & Poor’s GSCI Agriculture Index of eight commodities gained 8.5 percent. The MSCI All-Country World Index of equities advanced 12 percent, and a Bank of America Corp. index shows Treasurys returned 2.6 percent.
Production in the U.S., which accounted for 32 percent of world supply this year, fell 13 percent to 272.4 million tons, the smallest harvest since 2006, the USDA said Nov. 9. That’s 18 percent less than the record 332.5 million tons in 2009 after dry weather in 2010 and heat waves last year.
Global consumption will exceed supply for the second time in three years, even as a faltering economy erodes demand by 2.5 percent to 853.8 million tons in the season ending Oct. 1, according to the USDA. While that would be the first drop since 1995, the decline in production will be even steeper, retreating 4.6 percent to 839.7 million tons, the agency said.
Prices will reach $7.85 in six months because inventories are “precariously low,” Hussein Allidina, the head of commodity research at Morgan Stanley in New York, wrote in a Dec. 5 report.
‘Corn Overvalued’
Futures are headed for a record annual average this year, and that should spur farmers to sow more crops. Informa Economics Ltd., a Memphis, Tennessee-based research company, predicted Nov. 2 that global production will jump 14 percent to a record 950.7 million tons next year.
If the weather returns to normal, futures for December 2013, after the U.S. harvest, may be as much 37 percent overvalued, Chris Gadd, an analyst at Macquarie Group Ltd. in London, said in a report Dec. 6. Gadd predicted the contract may drop as low as $4, from $6.3675 Monday.
“We are just one crop away from a substantial increase in supplies,” Douglas Carper, the principal of Omaha, Nebraska- based DEC Capital Inc., a commodity trading adviser and consultant to hedge funds. “If we have a widespread moisture event over the heart of the Corn Belt between now and April, there would be an epiphany that would sweep over folks.”
Dry Weather
More than 56 percent of the nine-state Midwest region where most of the crop is grown had moderate to exceptional drought by Dec. 4, compared with 15 percent a year earlier, according to the U.S. Drought Monitor. That reduced the level of the Mississippi River, delaying barges carrying grain to Gulf of Mexico ports and export markets.
Hedge funds and other speculators boosted their net-long positions, or bets on higher prices, for three weeks and are the most bullish on corn since Oct. 23, U.S. Commodity Futures Trading Commission data show.
Global inventories may not get the expected boost in February from Argentina and Brazil, the biggest exporters after the U.S. Flooding led farmers in Argentina to plant 10 percent fewer acres than expected, which means output may total 22.5 million tons, below the USDA’s estimate of 28 million, said Michael Cordonnier, the publisher of the Soybean & Corn Advisor in Hinsdale, Illinois. In Brazil, dry weather may cut output to 70 million tons from 73 million a year ago, he said.
Demand Outlook
Demand for corn to feed livestock and make ethanol may not be slowing as much as the USDA expects. Hog farmers kept buying corn even as prices topped $8 because they were hedging some of their costs, Larry Pope, the chief executive officer of Smithfield Foods Inc., the largest pork producer, said on a Dec. 6 conference call with analysts. Hog herds expanded about 4 percent in the three months ended Oct. 28, he said.
U.S. red-meat production jumped 7.2 percent to 4.579 billion pounds in October, and pork output gained 8.7 percent to 2.21 billion pounds, the highest ever for the month, government data show. Supplies of young chickens rose 7.5 percent and turkey 9.9 percent, the USDA said in a Nov. 26 report.
Domestic corn inventories before the 2013 harvest may fall to 546 million bushels, below last month’s USDA forecast of 647 million bushels, said Dan Cekander, the director of grain-market analysis at Newedge USA LLC in Chicago. The increase in feed demand during the three months ended Dec. 1 probably won’t appear in USDA data until the Jan. 11 report, he said.
Fuel Use
Ethanol distillers, who used 41 percent of the U.S. crop last year, boosted production by 4 percent in the week ended Nov. 30, the biggest gain in 14 months and the highest output since the end of June, Energy Department data show.
A reliance on crops to make fuel and expanding economic growth will keep grain inventories tight and contribute to a “new norm” of high food prices over the next two decades, the World Bank said in a Nov. 27 report. Risks to supply are increasing at a time when 12 percent of the world population remains chronically undernourished, the bank said.
World food prices, while down 11 percent from a record in February 2011, were the highest ever on average during the past two years and more than doubled in the past decade, according to the United Nations’ Food & Agriculture Organization in Rome.
“People and animals continue to eat,” said Sal Gilbertie, who helps manage $69 million of assets as president and chief investment officer of Teucrium Trading LLC in Santa Fe, New Mexico. “Everything in grocery stores is made from corn.”
While Europe’s confidence-inspired rally is floating all global boats
in some magical unicorn-inspired way, the reality is that on the ground in the US, things have never looked worse.
The NFIB Small Business Outlook for general business conditions had
its own ‘cliff’ this month and plunged to -35% – its worst level on
record – as the creators-of-jobs seem a little less than inspired.
Aside from this unbelievably ugly bottom-up situation, top-down is
starting to be worrisome also. In a rather shockingly accurate analog, this year’s macro surprise positivity has tracked last year’s almost perfectly
(which means the macro data and analyst expectations have interacted in
an almost identical manner for six months). The concerning aspect is
that this marked the topping process in last year’s macro data as
expectations of continued recovery were dashed in a sea of reality (both
coinciding with large ‘surprise’ beats of NFP). We suspect, given the
NFIB data, that jobs will not be quite so plentiful (unadjusted for BLS purposes) the next time we get a glimpse.
