Corn supplies get even tighter

06/13/2011 12:31 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Just when you think the crop forecasts for the upcoming harvest year can’t get any worse, they do.

On June 9, the U.S. Department of Agriculture’s regular crop report lowered the outlook for this year’s corn harvest. End of the year inventories are likely to remain at levels near 15-year lows. Not surprisingly, the report sent corn futures to an all-time high of $7.90 a bushel on June 9 at the Chicago Board of Trade. In early trading this morning corn had pulled back about 1.4%.

The problem, as it has been during all of planting season this year, is wet weather that has delayed putting seeds in the ground. Planting delays don’t guarantee harvest disasters but crops that miss the optimum-planting window tend to produce lower yields per acre. More than one-third of Midwest fields, for example, were planted after the mid-May target for optimal growth due to excessive rain.

That wouldn’t be a big deal if existing inventories weren’t so low. Corn buyers and consumers—and that includes everybody from McDonald’s (MCD) to Tyson Foods (TSN) to you and me—have been hoping for a harvest big enough to rebuild end-of-year supplies. (McDonald’s raised its menu prices by 1% in May in response to higher commodity prices. The USDA report isn’t good news for inflation or consumer wallets.) That’s looking less and less likely. The June 9 forecast put this year’s U.S. harvest at 13.2 billion bushels. That would still be an all-time record but the forecast represents a 2% drop from the May report.

The problem is that even a record crop of that size won’t be enough to meet soaring demand and rebuild inventories. The USDA cut its forecast for end of the year inventories to 695 million bushels from the 900 million bushels projected in May. The 695 million bushel number is still above the record low for inventories set in 1996.

The forecasts for other crops were mixed with the USDA projecting tighter supplies of wheat but growing supplies of soybeans.

The shares of companies that supply agricultural commodities and equipment climbed on a forecast that promised a big crop and higher prices. Equipment-maker Deere (DE), for example, was up 2.6% on the news on June 9. Fertilizer producer Potash of Saskatchewan (POT) was up 4%.

Tight corn supplies aren’t limited to the United States. The USDA cut it forecast for the 2011-2012 world corn stockpile to a five-year low of 111.9 million metric tons. With inventories down and demand rising inventories are projected to fall to just 14.5% of estimated annual consumption. That’s the smallest margin for error in global corn supplies since 1974.

The only good news on crop supplies came in soybeans. Brazil is projected to produce a record crop this year.

 

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