USDA’s May World Agricultural Supply and Demand Estimates (WASDE) report, released last Friday, was the first to include forecasts of corn production and use for the upcoming 2013/14 marketing year (beginning Sept. 1, 2013). While the February Outlook Forum and March Prospective Plantings numbers provided the foundation for the projections for next year, this was also the first opportunity USDA had to revise production numbers to reflect this year’s late planting caused by cold and wet conditions. Still, the report didn’t provide the market any bullish surprises and corn prices fell over a dime last Friday as the market traded a more favorable planting weather forecast for next week.
Consistent with the March 28 Prospective Plantings report, USDA left corn planted acreage at 97.3 million acres for 2013, 100,000 acres more than last year. While some might expect a few corn acres to be switched to soybeans due to the late planting progress this spring (see my comments on this in last week’s Cattle & Corn Comments), USDA typically relies on its March producer survey of planting intentions until after its June 30 Acreage report. What was interesting, though, is that USDA did lower its national yield estimate by 5.6 bu/acre from its trendline forecast of 163.5 bu/acre to 158 bu/acre as a result of the slow planting progress. This yield decrease served to lower production by a half billion bushels, based on a harvested acreage of 89.5 million bushels. Thus, total production for 2013/14 is projected at 14.14 billion bushels. While this was relatively well anticipated going into the report, it is important to remember that this is the key driver to why the 2013/14 marketing year will likely have much lower prices than the two previous years: 2013 production will be about 3.36 billion bushels more than in 2012. And, with growing world supplies, corn prices will not have to rally like they did in 2012 unless another major weather event impacts production and further lowers yields this year.
USDA increased total corn use for 2013/14 by almost 1.8 billion bushels, reflecting the much larger expected crop. It projected feed and residual use at 5.325 billion bushels, up from 4.4 billion bushels in 2012/13. Additionally, it raised ethanol use of corn by 250 million bushels and other industrial uses by 60 million bushels. Finally, exports for next marketing year were increased to 1.3 billion bushels, up from the current marketing year’s short 750 million bushels. So, projected corn use in 2013/14 is 12.92 billion bushels. This puts ending stocks for the next marketing year at 2.004 billion bushels, about 1.2 billion bushels more than the 2012/13 marketing year. This surge in estimated carryout stocks of corn would push the ending stocks-to-use ratio up from 6.9% this year to 15.5% in 2013/14. USDA projects that this increase would lower U.S. farm average prices to $4.30-5.10/bu for the 2013/14 marketing year. If realized, this would be more than $2/bu less than the 2012/13 marketing year, and likely below the cost of production for some growers.
The projections for 2013/14 supply and demand certainly point to much lower prices ahead. And yet, very similar forecasts were made for the 2012/13 marketing year at this time last May. Because those forecasts were substantially changed due to the 2012 drought, it makes discussing the prospects for much lower prices this next year reminiscent to the boy who cried wolf one to many times. It is possible that flood, drought, or some other weather calamity could substantially lower national yields again this year. However, the likelihood of such a weather event covering the entire Corn Belt again this year is rather low – and the cost of being wrong in assuming the ending stocks won’t actually double or triple next year is astoundingly high. Further, growing world supplies would absorb a production shortfall in the U.S. this year, unlike last year.
So, what should corn producers do in developing their 2013/14 corn marketing plan in light of these projections? December 2013 corn futures have been in a downtrend since last September, and if rapid planting progress occurs this week, new crop futures could continue to work lower. At this point, producers need to estimate their cost of production as accurately as possible and be willing to make some incremental sales of their insured bushels on small rallies. Whether the late planting progress rally continues to build in the next two weeks or subsides as the crop gets planted, it is likely that there will be some weather event in the June/July timeframe (especially during pollination) that will provide some strength to prices and open an opportunity for pricing new crop corn. Thus, it probably isn’t necessary to be in a tremendous hurry to price new crop bushels in the next couple of weeks, but it is important to adjust price expectations and be ready and willing to do so during the first half of the growing season. For post harvest marketing, growers may want to consider storage hedges as there is about a $0.25/bu premium of July 2014 corn futures over December 2013. That carry, combined with seasonal basis appreciation, could provide a nice return to storage this year. With the very tight stocks the last couple of years creating an inverse carrying charge in the market, producers have had less incentive to store grain. However, with a return to a 2 billion bushel carryout this next marketing year, the market will likely return to a more normal positive carrying charge.
Source: Darrell Mark
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