Beefing up corn stocks
Is the market already planning on big corn and soybean crops this year?
The March 2013 corn futures contract is trading between 80 and 85 cents lower than the March 2012 contract, a sign that "there is general agreement on the likely direction of production and stocks in the year ahead," says University of Illinois ag economist Darrel Good. But, that's a long way off, and the first sign whether or not that supply situation reaches fruition will come later this month.
"While there is general agreement on the likely direction of production and stocks in the year ahead, there is considerable uncertainty about magnitudes. That uncertainty starts with the likely level of stocks at the end of the current marketing year," Good says. "Some light will be shed on that issue, as well as the potential size of the 2012 crop, when the USDA releases the quarterly Grain Stocks and the annual Prospective Plantings reports on March 30."
But, some major variables in play make this crystal ball an awfully cloudy one, namely ethanol and feed usage. Right now, ethanol production is trending almost 4% higher than it was a year ago and corn consumption for feed and residual use is at its lowest level in 23 years. If either of those numbers moves much, it could change the supply picture quite a bit.
"The ongoing strong basis and recent inversion in futures prices implies some combination of slow movement of corn to the market, relatively small supplies, and a higher rate of consumption than forecast," Good says. "That higher rate of consumption would have to be in the feed sector since use in other categories is transparent. The current price structure underscores the importance of the March 1 stocks estimate and the amount of supply rationing, if any, needed during the remainder of the marketing year."
And, most importantly when it comes to estimating where U.S. corn stocks will be sitting a year from now is yield. Thus far, Good says USDA expectations are hovering around the 94 million acre mark, 2 million higher than last year. Even if that's a safe bet, the guessing game will be far from over.
"The big unknown is the 2012 average corn yield," Good says. "The USDA has started with a projection of 164 bushels, well above the trend calculation for the year."