Having peaked at just over the $7.80 level, following the USDA March 31 Stocks and Acreage report, July-11 corn prices experienced a month long correction, with prices bottoming out near the $6.60 level.  Since then, prices have rebounded back toward the $7.60 level, as heavy rains have prevented US corn farmers from planting the crop in a timely manner.  Now, as the calendar turns over to June, corn prices are at a crucial juncture, with many unanswered questions.  Over the next few months, some of these questions will be answered, while others will not.  Let us examine some of these unknown factors and see if history can help provide some answers.

Of the immediate concern is the planting pace for this year's crop and its impact on final acres.  Recall in March 2011, the USDA had forecast that US farmers would plant 92.2 mil. acres of corn this year, the second most in over 60 years.  As of May 29, only 86% of these intended acres have been planted, therefore leaving roughly 13 million acres left to plant.  While this was well behind last year's pace and the 5-year average, it was very similar to the pace in 2009.  In 2009, corn acres actually increased 1.5 million from the March 31 intentions.   We would have to go back to 1995 and 1996 to find years where planting progress was significantly slower than this year.  In 1995, plantings were at 71%, while in 1996 plantings were at 78%.  In 1995, final corn acres slipped nearly 4.1 million from the March intentions, while in 1996 corn acres were down only 700,000.  By some estimates, corn acres will drop by 5 million from the March intentions.  I do not share this view.  Two states stand out as being the furthest behind, Ohio with 3 mil. acres and Indiana with 2.4 mil.  History has shown that Ohio farmers, on more than one occasion, have been able to plant 60% of their corn crop in one week.  In Indiana, the largest weekly jump has been 50%, back in 2001.  Now I am not suggesting that these states combined will reach the 9.6 million acres, as forecast by the USDA in March, but with clear weather this week, I don't believe the combined acreage losses will exceed 1 to 1.5 million acres in these two states.  While other states lag their historical averages and flooded areas around Midwest rivers surely lost acres as well, some states are likely to exceed their March estimates, as weather allowed for rapid progress this spring.  Right now, my best guess is that farmers will have planted somewhere between 90 – 91 mil. acres of corn this spring.  The next USDA acreage update will be on June 30, however this update will also be subject to future revisions.  

The next major factor will be the weather this summer and its impact on final yield.  Planting progress has historically not been a good indicator of final yield, as evidenced by the past two years.  In 2009, when plantings were historically slow, corn yields were a record high at 164.7 bu. per acre.  In 2010, when plantings were historically fast, corn yields were off over 7% from 2009.  The first weekly crop condition report showed overall conditions were the third lowest of the past decade.  With plenty of sub-soil moisture and generally warm, dry conditions this week, I suspect conditions will improve over the course of the next few weeks.  My best guess is the USDA will leave their corn yield at 158.7 in the June production report, while future revisions will be determined by weather and crop conditions.  Personally, I would be leaning toward slightly higher. 

On the demand side of the equation, the corn export forecast has been revised down to 1.9 bil. bu. for the 2010/11 MY, while the new crop 2011/12 was lowered 200 million bu. to 1.8 bil., this to reflect the impact of the higher prices and the competition from the strong South American harvests.  Prices will continue to be very sensitive to future export demand, particularly to China.  In April, the USDA raised the amount of corn used in the production of ethanol to 5.0 billion bu., up 50 million from March 2011.  Since then, the weekly pace of production has not been high enough to support this forecast.  I suspect that with the higher corn prices, the resulting deteriorating margins and lower demand, as consumers react to the $4 per gallon gas price, corn demand will struggle to reach this 5 billion bu. forecast.  Feed demand will also be a key determinant on corn values.  The most recent USDA estimate lowered the 2010/11 usage by 50 million bu., and the 2011/12 estimate by 100 million bu.  Although cattle feeder margins are historically weak, the May cattle on feed report did show a high level of cattle placed onto commercial feedlots.  This was largely due to drought conditions in the southern plains and its impact on pasture land.  Other factors such as the value of the US Dollar, the global economy and the flow of speculative money, either in or out of commodities, will all have an impact on prices.

Bottom line, given the historically tight corn supplies, prices are likely to remain quite volatile.  I suspect the 2010/11 ending stocks are likely to remain above 700 million bu.  The new crop 2011/12 ending stocks at 900 million bu. can change significantly.  If farmers are able to make significant process in planting corn this week and acreage losses are less than 1 million, combined with yields challenging the 2009 record, ending stocks are likely to build to well over 1 billion bu.  If this were to occur, December-11 corn prices would very likely trade under the $6.00 level sometime in the late summer, possibly challenging the March 11 lows near $5.50.  If acreage losses are more than a few million acres, while yields slip back to the 2010 levels, prices would have to rally to a level to ration at least 500 – 600 mil. bu. off the current USDA usage estimates.  It is anyone's guess how high prices would have to soar to in order to accomplish this.  

 

Chart provided by APEX     

For December-11 corn, my best guess would be to at least the July 11 highs, currently near $7.90.  Very likely however, the market would overshoot that mark and with $8.00 - $8.50 a more likely target range.  From there, the market would be extremely sensitive to the weekly usage numbers looking for evidence of demand rationing.  Without it, prices will continue to seek out higher levels until we get to a level that assures we do not run out.    

If you would like more information about the agricultural marketplace, please contact Mark at 1.800.933.3996 or send an email to mark.soderberg@archerfinancials.com.

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