June 20, 2008

  

Corn demand needs to be cut as US production to fall below usage levels

Harvested corn acreage might be lower than what the government is currently forecasting and demand would have to be cut if corn usage exceeds production and inventory levels, says a Merrill Lynch analyst.

 

Examining previous years of extremely wet weather indicates that harvested acreage typically falls well below the normal 91.5 percent of planted acreage due to poor crop quality, said Merrill Lynch research analyst Don Carson in a report issued Monday but released to the media Thursday.

 

This is at odds with current USDA projections, which assume harvested acreage at 91.6 percent of planted acreage, which is currently estimated at 86 million acres.

 

Referring to 1993, a year of historic flooding, Carson noted that harvested acreage was only 85.9 percent of planted acreage. If a shortfall of such magnitude occurred this year, it would reduce harvested acreage by almost five million acres versus the current USDA forecast assuming harvested acreage at 91.6 percent of planted acreage, Carson said.

 

A decline of five million acres this fall would effectively wipe out the current USDA projection for the 2008/09 ending US corn inventory, said Carson. The USDA is currently projecting 2008/09 ending corn inventories of 673 million bushels.

 

At the current USDA projected corn yield of 148.9 bushels per acre, however, a five million acre decline in harvested acreage would reduce production by 733 million bushels. Since grain inventories cannot fall below zero, more demand destruction is required, said Carson.

 

The USDA is already forecasting feed and export demand for corn to decline by one billion bushels and 450 million bushels respectively in 2008/09. Carson also said the USDA's assumption of a one billion bushel increase in corn consumption for ethanol production is likely optimistic given declining variable margins for ethanol producers. An increased likelihood of a temporary suspension in the 54 cent per gallon ethanol import tax could also alter consumption dynamics, Carson said.

 

Carson's analysis comes on the heels of the weekly USDA crop progress report issued Monday, which rates the quality of the US corn crop. The percentage of the corn crop rated good-to-excellent was 57 percent in the week ended Sunday, down three percentage points from the previous week and 13 percentage points below the previous year. The deteriorating crop condition raises the odds of declining yields, said Carson.

 

All of this looks positive for fertilizer and seed producers, both of whom are expecting more US corn acres in 2009, said Carson. Nitrogen and potash prices have surged in anticipation of robust fall demand in the US, said Carson.

 

A June 30 USDA acreage report will provide an updated view on planted acreage. Determining short falls in harvested acreage will not be possible, however, until later in the growing season.