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$7.20 ceiling for 2012 corn, analyst
Entering 2012, the foundation of fundamentals we have seen since 2008 continues.
The planting and growing seasons will begin with very low ending stocks inventories of corn and beans. Expect a spring planting rally. Corn and bean prices will rise to steal acres from spring wheat, oats, hay and alfalfa to ensure enough acres are planted so supplies will not shrink to dangerous levels if an untimely drought materializes.
Also continuing will be mandates for producing corn-based ethanol and soyoil for bio-fuels. And, the demand from emerging market food needs, particularly for the Chinese population, is not going away. Finally, let’s not forget the billion-dollar index and trend-following funds that dominate monthly trade.
I believe funds will have the biggest price impact in 2012; they create profits to take profits. Since 2008, there has been a change in the roster of grain traders. Years ago, yearly price action was controlled by large individual traders and $5- to $10-million dollar day-trading agricultural trading funds. Commercial interests – exporters and processing companies – control seasonal trends, and they are still out there. They publish reports talking of more acres to be planted, and how, with good weather, ending stocks inventories will soar. This suits their needs as end users and processors – they can only profit from lower cash prices. Note that their reports conveniently leave out future world demand indicators, and demand is the real market driver, not supply. For instance, in three of the last four years we have seen record acres planted, while futures pricing has also soared to record or near-record levels.
Today, it’s the index and trend-following funds that are benefitting from a 2007 law allowing them to trade commodities, once considered too risky. Their pattern is make profits then take profits. Index funds have hedge fund account status with no trading limits on long-held positions. They can only buy long the market, leaving selling only as a profit-taking result.
This makes for easy trading decisions. Funds buy the beginning of each month into the uncertainty of each USDA monthly grain report, released between the ninth and eleventh of the month, then take the profit before the month ends.
In eight out of 12 months in 2009, futures prices rallied to the high before the second week of the month and established lows in the last half.
Ten out of 12 months in 2010 had the same pattern and in 2011, this occurred in nine of the first 11 months. Now you know who they are and their intentions.
President Obama’s mandates to continue ethanol expansion are locked in for his term. In 2011, about five billion bushels of the U.S. corn crop went to ethanol production, and a similar level will be put into ethanol in 2012. The ethanol industry will be stronger as almost all government controls are lifted. The government is ending subsidies because they are no longer needed to encourage ethanol production increases. Private interests will build the ethanol plants at their own expense.
U.S. laws require all refiners to produce an additional 15 billion gallons for the next 28 months, up measurably from 2011 production. This will continue to be a driving force. We have seen in 2011 what appears to be an effort to overproduce to build stored inventory. One reason was a late-year rush to produce in order to receive the per-gallon government subsidies. Another was to ensure there was enough low-priced inventory to disperse when grain prices post strong seasonal gains. This is where the smart hedge and marketing skills prevail.
Another positive is the surge in ethanol exports. Brazil is buying record amounts as they have a tight supply based on soaring costs of production. About half the cars in Brazil are flex fuel vehicles using either gasoline or ethanol; gas is sold containing 25% ethanol. Brazil’s auto sales have doubled since 2004 with seven consecutive years of expansion. They simply can't produce enough ethanol affordably to meet needs.
Another key demand fundamental for U.S. grains is that world food needs are outstripping production for the fifth consecutive year. Japan has recovered from the devastating earthquake that sidelined them from being a regular U.S. grain buyer when their shipping and receiving ports were destroyed. Now, Japan’s livestock populations are built back up again and ports are at full capacity. I anticipate a measurable increase in demand for corn and soy meal for feed in the first half of 2012.
China remains the world leader as an importer, as their government mandates a more protein-rich diet. They are increasing hog and chicken populations for meat protein. China’s government also mandates ethanol increases to address their world-leadership energy consumption issue.
China's vast corn and soybean appetite is fueled by the second consecutive year that 40 million people again will move from poverty class to middle class. Moving from farms to cities, these people produce less grain. China has 22% of the world’s population and only 7% of the world's plantable land.
But apparently the U.S. government has suggested that there should be a limit to how much of our grain inventory should go to China. Early last spring, President Obama and China’s Premier met before the annual trade agreement meetings. Two weeks after meeting, a record U.S. sale of four million metric tons of soybeans to China for the next marketing year was announced. A deviation from the four prior years, the meeting concluded with smaller overall export announcements, but all were within the current marketing year. Apparently China was told to find secondary markets so it would not deplete U.S. reserves too quickly. Soon after, China announced agreements with Argentina for corn, and Brazil for beans.
Argentina then increased corn acres to meet the Chinese demand, and Chinese purchases of corn and beans from the U.S. declined. Probably it was for the good; the poor growing season that befell the U.S. shrank production and we would have run out of grain by October 2011. What this tells me is that our government will do what's necessary to keep hyper price rationing from occurring. This will help feeders, ethanol producers and processors from seeing any horrendous price spikes. But it doesn't stop funds, unconcerned about cash delivery of grains, from pushing futures and manipulating rallies; they’ve created a year where cash versus futures spreads will have record swings, futures over cash.
We enter 2012 with very low ending stocks of beans and significantly lower corn stocks, setting up a more bullish year of supply and demand fundamentals than were present at the start of 2011.
If South American weather is beneficial for corn and soybean plant development in key growth months of January and February, I’ll expect a seasonal price decline from late January into mid-February. I anticipate that the February low for corn and beans will hold through to late fall.
The buying opportunity should surface in a late spring/early summer rally.
On the chance that weather conditions ruin South American crops in January and February, a corresponding price rally from late January to early February is possible, and then a correction will follow from late February into early March (buying opportunity there.)
Last Four Years
The last four years have been among the largest corn and bean crops in history, yet exploding world demand leaves dangerously low corn and bean stocks – we’re one moderately dry summer growing season from running out!
Corn and beans will battle this spring to ensure one does not lose two or three million acres to the other. There's little room to steal acres from hay, barley, alfalfa, oats or other feed crops as they were robbed from their acres last year.
Talk of land being released from the conservation reserve program is unlikely to make a difference. This land is generally the worst land the grower has. And if you pull the land out early from the initial agreement, you have to pay back the government money you received.
U.S. economic prosperity from 2000 to 2007 saw the tax-rich government buy away 34 million acres for special use areas, like rural parks and fish and wildlife areas. This is why the last three years have lead farmers to try and get land from other crops. It's the only way to find more acres for your preferred crop. This sets up spring of 2012 for a ferocious price battle to determine which crops gain acres or lose acres.
Look for beans to be the rally leader and corn following as pre-planting estimates will favor planting more corn acres and less beans. I think it will be cheaper to plant an acre of corn than beans. The cost of land rented for planting is at a record cash price level, making corn the front runner to turn a profit on that land.
Spread traders will aggressively buy November new crop beans and sell December new crop corn at spring planting, with bean traders buying long November short July soybean spreads. Spreaders will enter at the pre-spring planting lows.
China depleted its meager grain reserves this last season due to the prior poor growing season, but an increase in corn production this year looks to have them rebuild reserves and they should use new imports from the U.S. to meet immediate needs.
Timing for China entering to buy U.S. corn is April, because South American supplies will be exhausted by March. China spent $3 billion last year to build storage facilities for one purpose: to store grain so they don't fall short again from weather problems like they had in 2010.
As for wheat, its strength may come from short covering. Worldwide, wheat ending stock inventories are huge. But late spring looks to find a seasonal high along with a corn and bean rally on several issues. The U.S., which is the world's largest producer/exporter of wheat, saw its winter wheat crop go dormant with 20-year low quality ratings due to the fierce drought in major producing states Texas, Oklahoma and Kansas. This crop will be challenged to find nearly perfect weather when dormancy breaks in March and during the key yield and quality development time April and May.
The Ukraine, which is the fourth largest world producer of wheat, went dormant in such horrible conditions that they have begun to stop exports and begun crop rationing after the driest fall planting season in 50 years.
Trend-following funds enter 2012 with a near-record short position in wheat. With spring weather uncertainties and corn and bean prices surging to steal away spring wheat acres that go to seed in May, we can assume that by March, the funds will begin to cover risk by short covering. This could lead to tens of thousands of buy orders (when no one wants to sell!)
I foresee a measurable rally for grains in the spring planting and early growing season. Underlying fundamentals of a lower supply and stronger world demand suggest higher overall prices than in 2011. However, possible government intervention to maintain a minimal ending stocks inventory and to try to mitigate rampant food inflation could mean that our yearly high is not going to be as high as 2011.
I think corn futures will stay above $5.65 and below $7.20. Beans look to hold a low of $10.50 and high of $14.00. Wheat should remain above $5.40 and beneath resistance at $8.25. To exceed our high projections we would need something to enter that's not there – a growing season weather catastrophe.
Written by Tim Hannagan PFGBest.com senior grain analyst.