Partly due to disappointing export sales, partly due to index fund repositioning at the turn of the year, feed crops have sagged. But even though corn has sagged below US$7/bushel, the medium-term supply situation is far from certain. Collectively, Goldman Sachs, Societe Generale, Morgan Stanley and Rabobank forecasts price corn from US$7.39/bushel to US$8.25/bushel, with the two average forecasts calling for the price to be closer to US8/bushel than US$7/bushel. That implies an average expected gain of about 10% in 3 months, close to 40% on an annualized basis.

 

The reason is that despite the current deflation and disappointing demand, supplies are far from recovered. As mentioned in previous reports, South America's crop could come in at least 5 million tonnes below initial expectations and be delayed.

 

Depending on the forecast in question, the consensus of these and other observers that despite America's depressed livestock production, prices must rise by another 7% to 15% for US demand rationing to balance demand with its abnormally low corn inventory levels. Morgan Stanley comments that, "With US corn production falling 1.6bn bushels [40.6 million tonnes] year-on-year, prices need to rise materially in early 2013 to incentivise further demand rationing from the US livestock sector. The decline in production still requires US demand to fall by 10.5% year on year simply to keep stocks above historical minimums."

 

Over the medium term, Rabobank is forecasting "the largest ever year-on-year increase in world corn demand in 2013-14, 43m tonnes above the previous record use in 2011-12." It concludes that this, "Strengthening global consumption of corn is forecast to prevent stocks-to-use levels from recovering to long-run average levels." While it forecasts the world corn stocks-to-use ratio to rise from 12.4% to 15.9%, that is still below its 10-year average of 17.2% -which itself is below the 20th century average of near 25%.

 

Even this limited inventory recovery has a lot of assumptions behind it. On one hand, the historically high price levels will see close to 100 million acres of US land planted with corn, far above the recent averages of 91 to 94 million acres. Assuming yields recover to around 160bushels/acre, that could produce a monster harvest of over 400 million tonnes.

 

-The problem is that for yields to recover, snowfall needs to be 50% above average throughout the Midwest areas that suffered drought -and so far, the snowfall has been below average. This implies that even if US planted area hits a new record, the crop may not be as large as anticipated, over even a record crop.

 

With demand already forecast to rebound very strongly and inventories languishing at low levels, everyone is expecting softer prices in the latter half of 2013. We the US growing 40% of the world's corn and its inventories the thinnest of all, we advise you to keep an eye on the US Midwest snow cover. If it does not recover, neither will 2013-14 inventories. Corn has consistently performed stronger than expected and sparse winter time precipitation may yet yield a third quarter supply surprise.