The March 27 USDA US Planting Intentions and Quarterly Stocks Reports broke the back of the corn market...well, sort of. The two reports showed that more acres than expected will be planted and that March 1 stocks stood at considerably higher levels than analysts had forecast, respectively. Prices fell sharply. There has been a lot of noise since those two reports were released – including a rally back to pre-report levels – but prices have since fallen back to the lows.
The April 11 USDA crop report was a non-confirmation of the stocks report, though, because the estimate for domestic feed was not as weak as analysts had expected, which created some confusion. The crop report seems to be the more accurate reflection of the current old-crop situation. Spot corn prices are still trading 50¢ per bushel above May futures, indicating that the market remains tight. It is widely expected that 2012-13 ending stocks will remain scarce until new-crop supplies are available in the fall.
Attention has therefore turned to new-crop issues. The early part of the planting season has been a disaster. Heavy rain in some regions and late snow in others resulted in very wet fields that did not allow farmers to start planting their crops. The May 6 weekly planting progress report showed that only 12% of the crop had been planted. That is down from the five-year average of 47% at this juncture of the season and dramatically below last year’s 69%.
There is drier weather in the forecast that should allow some serious catch up. The concerns are that the late planting could result in some yield loss, and in some regions, the planting window could close completely, forcing farms to plant soybeans or cotton instead.
Studies of previous late-planted crops show that over the past 30 years, there was significant acreage and yield loss about half the time, which makes historical precedent inconclusive. Besides, analysts have rationalized that we have an edge and that there is no need to panic at this point for two reasons. First, the extra moisture is welcome after last year’s debilitating drought left many fields with inadequate subsoil moisture to accommodate a high-yielding crop, and that could increase yields. Second, any comparison of late planting between 2013- 14 and other years is not reliable, because advanced technology has brought genetically modified seeds that require less moisture and shorter growing seasons.
China, the world’s second-largest producer and consumer of corn behind the U.S., is experiencing widespread weather-related planting delays as well. The northeast is wet and the northwest has drought.
Mitigating the potential for smaller-than expected Northern Hemisphere 2013-14 crops, to some degree, are the excellent results being achieved in Brazil. The 2012-13 harvest is not complete, and ideal growing conditions have resulted in upwardly-revised estimates. The April USDA estimate was 74 million tonnes, revised up from the 72.5-million-tonne March estimate. Some analysts have raised the forecast to 76.5 million tonnes. It reads well in the headlines, but it would be a drop in the bucket if set against a Northern Hemisphere crop failure.
The coming U.S. crop is expected to replenish inventories. At 14.5% of consumption, 2012-13 global ending stocks are at their lowest level since 1973-74. As illustrated, farmers should get the crop in the ground eventually, and there is a better than even chance that we’ll muddle through and avoid a disaster. However, at present, with the prices hovering near the recent lows, it would seem that the market is discounting a normal crop.
Our April 5 recommendation was “... to follow the weather and buy new-crop months at the slightest hint of a disappointing crop.” Well, we believe we’re there. We are not predicting further bad weather. Rather, we believe that the U.S. crop is highly vulnerable, and the market is presenting a potential low risk/high reward trade if anything short of perfect conditions do not appear – real soon.
Buy December corn, place initial stops at $5.05, close only. Alternatively – for the more patient trader – surrender a little territory and wait for the market to declare that things aren’t going as well as they should be. Place buy stops at $5.50, also close only, to enter the long side.