The corn market is not following the script. New-crop prices have rallied more than $1 per bushel in just over one week (Chart 1). The annual weather scare is in full force, although the timing is a bit off. The US crop was planted much earlier than typical, which was expected to shield the crop from any early-autumn frost. What farmers did not anticipate was an early heat wave.
Normally the key pollination window comes in mid-July. Since the crop was planted so early, pollination will take place about two weeks earlier, which makes the weather in the last week of June and the first week of July critical.
Temperatures in some key Midwest growing regions reached 100°F and are threatening to compromise forecasts for record bushel-per acre (bpa) yields. To get an idea of how this would affect the US corn harvest – and ultimately ending stocks – consider: The USDA’s June estimate was unchanged from the original May estimate, at 166 bpa. That would have been substantially higher than yields in 2011-12 and 2010-11 of 147.2 bpa and 152.8 bpa, respectively. The resulting crop would have been a record 14.790 billion bushels. The previous record was 13.092 billion bushels, grown in 2009-10.
The most recent crop progress report released on June 25 is not up to date with the effects of the weather of the past few days. But even so, the downgrade to the crop’s health was steep. The good-to-excellent portion of the crop fell to 56% from 63% the week before. Last year at this time, the good-to-excellent section was 68%. The July 2 progress report will almost certainly contain a further reduction in the estimate for the quality of the crop.
Naturally, the revised estimates are all over the map. If we get yields of 155 bpa – still considerably higher than the previous two seasons and the third highest on record – the estimate for the crop would fall by about 1 billion bushels. That would slash the forecast for ending stocks from the current estimate of 1.881 billion bushels, or 13.65% of consumption, to 880 million bushels, or 6.4% of consumption.
If the scenario materializes in Murphy’s Law fashion, it would prove to be a great disappointment for bears. The massive increase in acreage for the 2012-13 was expected to be the belated response to the explosive growth in ethanol consumption. Instead, the 6.4% of usage carryover would be the lowest US ending stock figure since the first leg of the bull market began in 2007! (It’s not the lowest on record – that was in the mid-1990s bull market when the carryover sank to 5% of usage at the end the 1995-96 season).
The impact to the global market is severe in terms of what had been expected of the US crop. Inventories would have been restored to more comfortable levels of 16.8% of usage according to the USDA’s June crop report. Instead, that figure falls back to 14.2%, which would be the lowest since the 1973-74 season.
What are the sobering factors? In the June crop report the USDA raised its estimate for US 2011-12 ethanol usage by 50 million bushels, to 5.05 billion bushels. That was a bit of a surprise. However, in keeping with our belief that ethanol demand growth has peaked, its early forecast for 2012-13 is back to 5 billion bushels.
Furthermore, the USDA is anticipating a huge jump in exports for the new marketing year that begins in September. The early forecast calls for a 15% increase in foreign sales. If activity over the past few months is any indication, that is very optimistic. Aside from a 3.4-million-tonne single-week old- and new-crop spurt in early-May, sales have been sluggish. At the current pace, we’ll be lucky to meet the USDA target for 2011-12, which is already at a 10-year low. The four-week average for commitments has been 176,000 tonnes, but weekly commitments would have to be over 300,000 tonnes to make the estimate.
There’s much emotion that swirls around during weather scares. It’s hard to know much damage was done. We’ve been bearish on this market, primarily because the extraordinary US crop was going to be introduced to the market just as demand had flattened out. We’re stopped out of our May 11 short sale recommendation, and we’ll stand aside for now.