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While the soybean complex may be inundated with too much supply, the focus of attention for the corn market over the near term will be on longer term demand factors and of course on the outlook for planted acreage. In its baseline projections issued in late 2009 in preparation for the budget process, the USDA put corn planted area for the 2010/11 season at 88 million acres, up from 86.5 million this past season. This estimate will be updated in the USDA Outlook Forum for February 18-19 (released after this writing), but there is a general market opinion that corn planted area will increase by 2-4 million acres over that number, with some estimates even higher. Traders seemed to dismiss the preliminary baseline projections from the USDA, but we should point out that while there are more than 2 million acres coming out of the Conservation Reserve Program and winter wheat plantings were low, the baseline projections for the 8 major row crops are projected at just 247.1 million acres, down from 248.9 million last year and from 253.1 million acres in 2008. If the baseline numbers are close to correct, the trade may be overestimating total plantings for the coming season.
The enclosed table shows several “what-ifs” for the corn outlook for the 2010/11 season if we assume that producers will plant 4 million more acres this spring than they did last year. We have also assumed a slight increase in usage for the coming year due to the surge in ethanol production and reassuring reports from the EPA last month that helped to confirm that corn-based ethanol growth is likely to continue over the next several years. In November, the US used 362.4 million bushels of corn to produce ethanol. In order to reach the new USDA forecast of 4.3 billion bushels, the US needs to average 361.2 million bushels each month to reach the new projection. Given the recent trend, the USDA may be in a position to increase this forecast again in future reports.
If we assume a trend-line yield for the coming season at 161 bushels per acre, US ending stocks for the coming season are likely to decline to 1.702 billion bushels, compared to 1.719 billion this year and 1.673 billion last year. A record yield would drive ending stocks to just over 2 billion bushels. However, if we were to assume a yield that is the average of the previous five years (152.4) then ending stocks slip under 1 billion bushels, and the stocks/usage ratio would fall to just 7.4%, the second lowest in history. If we were to plug in the same yield as we had in 2005, ending stocks drop to 616 million bushels and the stocks/usage ratio to a record low. A yield level such as that would be only 8% below trend.
In its February Supply/Demand report, the USDA estimated world ending stocks for the 2009/10 season at 134.04 million tonnes, down from 145.88 million tonnes last year. This put the stocks/usage ratio at just 16.6%, the third lowest in 35 years.
There are plenty of factors which could keep grain markets under pressure over the near term, but our analysis suggests that corn prices are not likely to see a long, drawn out bearish trend. It also suggests that any sign of a weather issue that might reduce yield should be taken as a sign of a potential very tight situation ahead. Aggressive traders might assume a 388 to 351 trading range for May corn over the near term.
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