Guess What ... The Corn Market Is No Longer Trading the Weather
By Dennis Smith, Archer Financial Services

After reaching my first upside target of $4.10 (see article published on July 1), December corn futures pulled back 34 cents off the high. A sharp advance in prices this week gives the appearance that the downward correction has likely run its course. In fact, the close on Wednesday at 390 ¾ indicates the start of the next "wave" upward, signaling a move to my next target of $4.50.

Much of the grain trade continues to be "totally confused" by the recent upward move. The confusion is bellied in the fact that weather in the Midwest, for the developing corn crop, has been great. While some areas have experience too much rain, generally, the weather pattern has been conducive to good reproduction (pollination) and warm/humid weather moving forward should allow for the crop to finish in excellent shape. The good weather, however, can't be categorized as perfect weather. The crop was planted early, but many acres were lost to flooding during June. Also, many fields will have no production in the "low spots" making yield results somewhat mixed. The weather pattern in July, during the pollination period, was good and it appears the weather pattern during August will also be good for the finish of the crop. Harvest could be underway by mid September. The good corn will be "real good," but the lost acres and variability in yield due to lost production in the low spots will likely keep the total crop from being absolutely huge.

A recent survey of grain analysts (21) predict the national average corn yield at 163.8 bushels per acre compared to their estimate at the start of the growing season of 163.2. The range of estimates was 160.8 to 167.6. During June, when it was raining, there was much talk about a national average yield approaching 170, which would be substantially off the charts compared to trend line yields. This talk seems to have simmered with much of the corn yellow from too much moisture. Last year's yield was 164.7. Recall that last year's crop was planted late, but experienced very cool and moist weather during the development. A very late, wet harvest season, however, damaged the quality of last year's crop.

A final note on production must be focused on the planted acreage. The USDA, in their June 30th acreage report, surprised the trade with a reduction in corn acreage by 1.0 million acres from their March estimate. In addition, due to lost acres in low lying river bottom areas, I'm expecting an additional reduction in harvested acreage by perhaps 300,000 to 500,000 acres.

The bottom line is we'll soon harvest a record large corn crop for the second consecutive year. However, as implied in the title of this article, it's my opinion the market is no longer focused on weather, yield, acreage and total crop size. The market is focused on the demand side of the ledger. Corn demand appears to be surging with the rapidly growing sectors of ethanol production and exports exceeding expectations. In fact, it appears the demand for corn is changing so rapidly that additional acreage will need to be devoted to corn production next year. The bottom line is we must produce another record large crop next year and likely the year after that.

Four years ago, for the 2007/08 crop, corn demand was pegged at 12.7 billion bushels. The recession hit the following year and demand for the 2008/09 crop was pegged at 12.0 billion. However, over the last year, demand has begun increasing rapidly with demand for last year's crop, the 2009/10 crop, now estimated at 13.3 billion bushels.  Demand for this crop, the crop currently about to be harvested (2010-11), is projected at 13.36 billion. On top of this, it's very likely this demand projection does not include any substantial purchases by the Chinese. Recent reports indicate that China may have to import as much as 300 million bushels over next year.  If you tack this new demand onto current projections we're looking at possible demand for the new crop corn as high as 13.6 billion bushels.

Thus, two record large crops will very likely experience demand which exceeds production. This can easily be seen in the ending stock projections.  Three crops ago (2008/09), ending stocks were 1.673 billion bushels. Last year's crop, the 2009/10 crop, ending stocks are estimated at 1.478 and ending stocks for this year's crop, 2010/11, are currently projected at 1.373. It's pretty obvious that corn producers are going to need to reap another record large crop one year from now. The other possibility is to slow demand for corn through higher prices. It's very likely a combination of the two forces will be necessary to prevent ending stocks from being depleted to minimum pipeline levels.

What Does It All Mean Regarding Corn Prices?

It's my opinion that corn prices will move higher in a two-fold attempt to slow demand and to assure that producers will expand acreage devoted to corn production next year. The weekly corn chart shows that we've basically been in a range from $3.25 to $4.25 over the last year and a half. At these usage rates, I believe it's very unlikely we'll see corn prices in the near future back down toward the low end of the range. In fact, I believe it's highly likely that corn prices, in the short term (meaning before harvest) will test the $4.25 resistance level. If this resistance is taken out, we'll then test the major resistance at $4.50. I would not expect $4.50 to be penetrated until after harvest. I'm holding bullish positions in the corn market in both options and futures for my customers. The livestock producer, especially the hog and poultry producer appear to be very vulnerable to rapidly rising corn prices.

If you're not satisfied with your current brokerage relationship give me a call or send me an email to dennis.smith@archerfinancials.com or 1.877.377.7905.

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