The April 10 Supply and Demand report contained some surprises, namely a lack of reduction in U.S. corn carryout compared to expectations, as well as supportive reductions in world carryout for corn, beans and wheat. Beyond that, the report was termed mostly neutral and really didn't provide the market with much fanfare. For now, that means the market will focus on planting progress and weather.
Haste makes waste comes to mind when people make decisions without a lot of information. Farmers are generally very diligent about gathering enough information to make good decisions. When researching something like buying a new corn planter, it takes a lot of time and effort to make sure that your decision is the right one.
Corn futures are poised to move higher as record tight inventory (in the U.S. and world) suggests rally potential for prices is high. Any disruption to this year’s supply, or even the perception of trouble growing this year’s crop, and prices could take off. However, the wheat market will act as a drag on corn prices. Unless there are weather-related problems elsewhere in the world with 2012 wheat crops, corn prices may likely have a limited upside potential despite tight inventory.
In this perspective, we will look at three different scenarios for the corn market this year.
We will look at what could drive prices significantly higher, and then the after affects if this were to occur. Second, we'll look at more of a sideways to neutral pattern, and third at a crash in prices. It's likely that, with tight carryout, one of these three scenarios will occur. It may even be more probable that two or all three could occur. Our goal is to draw an argument that you need to be prepared for wild price activity in the year ahead.
Expectations are that corn acres for 2012 will increase. These additional acres are considered marginal, and some have argued that they will act as a drag on yield trend. We’ll suggest this just doesn’t matter.
Let’s do some math. We’ll start with the additional acres:
The bulk of the additional acres are in the western and northwestern regions of the Midwest. Some of the acres are from areas abandoned due to wet conditions last year. These acres are not, and never were, expected to yield near levels of Illinois, Iowa or other key parts of the Midwest.
After peaking in February of last year, the wheat market has been in an 11 month downturn with prices finding a low in mid-December.
Prior to last week's USDA January Supply and Demand report, corn prices rallied 70 cents on weather developments in the southern Hemisphere and pre-report estimates anticipating tightening inventory. With the report showing carryout remaining mostly unchanged, prices wasted little time dropping 50 to 70 cents, creating heavy liquidation and pressuring prices, changing bullish momentum to bearish.
Is it too early to worry about drought or dry weather conditions? Most meteorologists, as well as most farmers, will probably tell you no. Yet, maps indicating drought conditions in the South suggest dry conditions permeating all the way to the Dakotas. It doesn’t take a lot of imagination to wonder what happens if drought conditions persist. Farmers in those dry regions will certainly tell you it’s on their mind, despite it only being mid-January.
Weather is dominating both Argentina and Brazil crop prospects. Prices have recently responded with positive gains as hot and dry conditions persist. Private estimates are suggesting the Argentine corn crop could be somewhere between 23 and 25 million metric tonnes, compared to the most recent USDA estimate of 29 million. The rally has provided opportunity to price inventory.