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Corn market functioning as needed?

11/25/2013 @ 6:57pm

Corn prices managed a small rally following the USDA's November 8 Crop Production report containing a corn production forecast that was not quite as large as feared. Since then, however, new lows have been established, and prices are currently only about 10 cents above the prereport level.

The recent corn market commentary has been dominated by two themes.  One is that the USDA's production estimate to be released in January will be larger than the November forecast. The second is that corn consumption for ethanol production will be negatively impacted if EPA's preliminary rule making for the Renewable Fuels Standards (RFS) for 2014 is actually implemented. Both of these expectations are questionable.

Any change in the January corn production estimate from the November forecast would be the result of a change in either (or both) the estimate of acreage harvested for grain or the U.S. average yield.  The November NASS planted acreage estimate was fully consistent with the USDA's Farm Service Agency (FSA) report of planted acreage.  Over the previous 10 years, the January U.S. average yield estimate was above the November yield forecast five times and below the forecast five times. Even in the five years when the November yield forecast exceeded the September forecast, as it did this year, the January estimate was below the November forecast twice. Considering the previous 30 years, the January yield estimate was above the November forecast 16 times and unchanged or lower 14 times.

Historically, the January corn production forecast was more heavily influenced by changes in acreage estimates than is currently the case since administrative data (primarily FSA-certified acreage data) were not fully incorporated in the NASS estimates until then. More recently, that data has been incorporated in the October production forecast (November this year). In the six years since 2003 in which the January production estimate exceeded the November forecast, the difference exceeded 80 million bushels only in 2009 (230 million bushels). In the four years when the January production forecast was smaller than the November forecast, the difference ranged from 93 to 210 million bushels. Recent history, then, suggests that there is a small probability the January production estimate this year will be large enough to substantially alter expectations of year-ending stocks. The price impact of the production estimate, however, will be comingled with the price response to the estimate of December 1, 2013, corn stocks to be released on the same day.

In preliminary rule-making for 2014 announced on November 15, the U.S. Environmental Protection Agency proposed to effectively reduce the mandate for renewable biofuels (primarily corn-based ethanol) in 2014 from the statutory requirement of 14.4 billion gallons to 13 billion gallons. Some have interpreted this to mean that, if implemented, the rules would result in less corn consumption for ethanol production during the current marketing year than would have otherwise occurred. That may or may not be the case. Without a change in the rules, blending of ethanol in the domestic motor fuel supply during the 2013-14 corn marketing year would still have been limited by the 10 percent blend wall and consumption of relatively small quantities of higher blends. Domestic consumption would have been well short of 14.4 billion gallons and maybe less than 13.3 billion gallons.

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