A South American-inspired corn rally?

As the Southern Hemisphere growing season advances, the grain markets have been rallying since mid-December under the cover story of extremely dry weather in South America. March corn has been up as much as 70¢ per bushel since it bottomed on December 15.

Growth in South American soybean production is old hat, but the 2011-12 marketing year will mark the first year in which planted area in Argentina and Brazil expanded enough for a significant increase in corn production. Table 1 shows a comparison – based on the December USDA crop report – between 2010-2011 output and exports for Argentina and Brazil and estimates for 2011- 12. Although Brazilian output is estimated to jump to a record 61 million tonnes, exports are not expected to increase by much. A disappointment in the form of a weather-damaged Argentinian crop, on the other hand, could have a meaningful impact on the pool of supplies available for world trade.

Table 1

2010-11

2011-12

Argentina

-output

22.5

29

-exports

15

20

Brazil

-outputs

57.5

61

-exports

9

8.5

In millions of tonnes

Analysts have all lowered their Argentinian estimates by about 2 million tonnes, but the starting points were spread over a wide range between 26.5 million tonnes and 32 million tonnes. The USDA’s December 29-milliontonne estimate was still based on acreage and trendline yields and has not yet accounted for 2 million tonnes slashed from its estimate.

The net effect on the global balance sheet is negligible, however. US yields were revised downward all summer long, to the extent that production estimates fell by about 10% from mid-summer forecasts to the current estimate. But even after accounting for the drought, South American estimates are still higher than they were in the summer. In fact, estimates for all major growing regions, including the EU, the FSU, and China have been raised significantly. The estimate for global demand has remained fairly constant, which has resulted in an increase in the estimate for the stocks-to-usage ratio, from 13% in August, to the current 14.6%.

Although US exports are running behind last year’s pace, they are actually quite strong relative to expectations. The USDA forecast for 2011-12 is calling for a sharp, 6-milliontonne, or 12.8%, drop from 2010-11 exports. Year-to-date commitments stand at 24.37 million tonnes, only 6% less than last year at this time. Year-to-date shipments are 12.2 million tonnes, or 30% of the USDA target. Last year, shipments were 27% of final sales at this juncture of the marketing year. So the export diagnostics are bullish.

The anticipation of a greater reliance on South American supplies – once harvesting begins in the spring – should mean that US sales will tail off and explains why the USDA has kept its estimate at 40.66 million tonnes for annual sales, despite the strong commitment and shipment tallies. Of course, this is why weather in Brazil and Argentina is more important for corn than it ever has been in the past. If the bleak forecasts come to fruition, Argentina may just eke out small gains over 2010-11, and US corn would be in greater demand than anyone would have imagined. As it is, US ending stocks remain near historic lows. After falling by $2 per bushel since August, a rally in corn prices was well warranted.

Nevertheless, it is hard to get very bullish for the long term. Informa Economics raised its already robust estimate for spring planting of the 2012-13 US corn crop to 94.389 million acres, up from 91.5 million acres planted in 2011-12, a modern-day record by far. Bushelper-acre yields in 2011-12 were a disastrous 146.7, down from 152.8 in 2010-11 and 164.7 in 2009-10. A return to normal yields would deliver a record US corn crop of well over 13 billion bushels.

South American weather can push corn to further gains, but we believe that this market reached its highs back in the summer. Any indication that the weather scare in South America has been overstated should be viewed as a sell signal. Remain sidelined for the moment.

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