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04/06/2012 10:50 am EST
A record corn crop for 2012 will not only impact corn prices, says Andy Waldock, but the excess acreage now diverted away from soybeans will stir up prices in that market as well.
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Last week’s USDA prospective planting report made the production demands on US farmers quite clear. The world said, “We need more!” This was most evident in the corn market. The major adjustment in the report was the disappearance of 514 million bushels of corn from the ending stocks.
This has to be attributed to either a smaller ending 2011 crop or increased exports. The missing corn was not used as feed because the warmest winter in years allowed herds to graze far more than usual. The resulting inventories leave US corn supply near 15-year lows.
There is also considerable trade chatter that the USDA may not have revised their ending stocks low enough, with some traders believing the true revision should be in the neighborhood of 900 million bushels.
The result of these numbers was instantly higher prices, especially for corn already in the bins. Our statistical model showed that corn should sell off in the days heading into the report and rally afterwards. The corn market sold off about 6.5% heading into the report and has rallied more than 10% since its release.
There are several main factors in this market going forward. First of all, the planting intentions for corn are 95.9 million acres. This would be the largest planted acreage since 1937 and would lead to a record crop if all goes well.
Second, as always, weather is a major concern. The warm spring will get the crops in early, but any weather shocks down the road lead us right back to extremely tight supplies.
Finally, the risk of economic shock due to a Spanish or Italian implosion is very real. This would hurt Eurozone trade with China, and China is the primary US source for corn and soybeans.
The soybean and corn markets are competing for acreage, and that competition is scored by market prices. Farmers are trying to manage the coming year’s budget and must analyze their operations accordingly.
The expected trend line yield for corn is approximately 160 bushels per acre and 43 bushels per acre for soybeans. The break-even cash prices for these crops are expected to be around $4.60 and $11.50, respectively. The current market prices of $6.50 and $14.25 give corn a significantly higher expected rate of return and explain the large increase in expected acreage for the 2012 crop.
The price disparity will continue to grow until soybeans can trade high enough to justify more acreage. Unless some acres are shifted from corn to soybeans, we could see a huge swing in the corn-to-soybean spread due to the projected record 2012 corn crop.
Soybeans typically bottom out at about 1.7 times the price of corn at the beginning of April and then rally through the end of July before selling off again into harvest. Given the large imbalance between the two crops, the current spread of beans at twice the price of corn could easily surpass 2010’s high of 3.34 and could very well test the all-time high of 3.6 set in 1988.
By Andy Waldock of Commodity & Derivative Advisors
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