FEED Business Worldwide - May, 2012

 

Corn market cross-currents to end sideways price behavior: Our two quarter forecast 

 

by Eric J. BROOKS

 

 

The last quarter has seen a taming of corn's previous two years of market volatility, trading within a +/- 5% price band of US$6.35/bushel. The historically high plateau corn finds itself on reflects a confluence of factors, both bullish and bearish. These include bottom-touching inventory lows in some major importers and exporters, booming planted area, drought and USDA oversights that we expect to be revisited later.

 

Of course, to properly appreciate its future price path, we need to take the factors which can influence its price, and assign them a proper relative weight before the market does so - and we attempt to do this below. We examine each of these issues in greater detail below, going from factors based on mere chance to more concrete certainties. What we see is a strong market through to mid-year, followed by two inflection points, one around July, another in the late third quarter. The way CBOT corn goes after these two market humps depends on how much the weather fulfils - or disappoints - key USDA inventory assumptions.

 

 

 

With this in mind, it gives me no pleasure to declare the USDA's most recent US corn supply numbers the most discountable - and utterly incredulous - of market influencing variables. Farmers never trust the weather but this year, the USDA put its full faith into the weather gods.

 

Early April had analysts sitting on the edge of their chairs, waiting to see how much the USDA would cut its estimated ending corn inventory -only to see them left unchanged at 20.3 million tonnes, after boosting them from 18.3 million tonnes in February.  Analysts were so shocked and the market so disappointed that CBOT corn barely moved in response to this bearish assessment. Why did the market so ignore the USDA?

 

It must be appreciated that since boosting its expected ending inventory by 2 million tonnes in the first quarter, the world has lost 5 million expected tonnes of corn exports from Argentina. As a result, US corn export volumes turned upwards strongly in the late first quarter and early second quarter.

 

Furthermore, this upturn in American corn exports was more than reflected in the USDA's own statistics: By late March, American corn inventories had fallen 3.8 million tonnes or 4.7% lower than it had projected. With America's own harvest six months away and no southern hemisphere country able to make up for Argentina's supply deficit, everything made sense - except for the USDA's reasoning.

 

Following record early spring time sowings, the USDA concluded that end-of-season corn inventories would avoid falling to lower levels by the likelihood of an earlier corn harvest this year:  Japanese style, just-in-time inventory management comes to the US corn market, courtesy of the weather gods?

 

 

 

Hence, we are left weighing the concrete realities of an already failed Latin American harvest and months of declining US corn inventories against the hope for five months of perfect weather in a country spanning three time zones. Obviously bullish inventory trends win out over the bearish possibility of just-in-time good weather over an entire continental land mass.

 

With US corn stocks already some four million tonnes below expectations, demand in Asia is turning upwards in a manner not fully reflected in the USDA's own statistics. It is still assuming that China will import 4 million tonnes of corn this marketing year, even though this number will probably be exceeded by the time you read these words.

 

The USDA also assumed 800,000 tonnes more of imports going to Mexico and an additional 100,000 tonnes going into Southeast Asia but many private analysts expect their import volumes to be higher by at least several hundred thousand tonnes, totaling up to an additional 1.5 million tonnes. But China is the new big fish, capable of moving the market, and it appears ready to move it, though it will do so in the strategic manner we've gotten accustomed to.

 

eFeedLink officially expects China's corn imports to total 6 million tonnes this marketing year, 2 million tonnes more than the USDA.

 

Add that in to the higher Southeast Asian and Mexican corn demand and the following arithmetic kicks in: 3 million tonnes of demand added to the market from East Asia and Mexico plus 5 million tonnes of supply lost to Argentina's drought. Conservatively speaking, unless the USDA's 'miracle weather' corn harvest comes in early, that implies an American corn inventory climb down of some 3 to 6 million tonnes before this marketing year is over.