After weeks of nervous sell downs, the last few days has seen 'panic buying' of US corn and soy futures, as the market becomes alarm by the prospect of hot, dry weather. Suddenly, corn, which had been languishing close to US$4.60/bushel, gained over 6% in less than two trading days, closing at just under U$5/bushel.

 

Macquarie bank led the way, cutting its expected US corn yield to 155.9 bushels/acre. This figure is still more optimistic than the USDA's projected 154.4bushel/acre yield at this time, which is still enough to produce a record 349.6 million tonne harvest, while causing inventories to jump 152%, to 46.7 million tonnes from last year's 18.5 million.

 

And it must be said that both market sentiment and Macrquarie's conservative projection assumes that the hot dry weather will continue into September -or that the hotter weather's longer growing season will not make up for some of the losses owing to dryness.

 

For this reason, Deutsche Bank and Goldman  Sachs stood by their respective 160 and 161bushel/acre yield estimates. Should the weather turn cooler or wetter on time and Goldman's optimistic yield estimate hold, the market could find itself with an additional 14 million tonnes of corn, closing inventories of 64 million tonnes -and a deflationary stocks-to-use ratio of at least 19.8%.

 

But even if we take market sentiment and the USDA's harsher 154.4bushel/acre crop yield forecast at face value, there is hardly room for an inflationary rally or sky-high prices. Even with this reduced crop yield of 154.4 bushels/acre, the first record US harvest since 2009 is enough to make for a closing 2013-14 US corn stocks-to-use ratio of 14.4%.

 

14.4% is a great improvement from the 6% to 8% level the 5% to 8% level the corn stocks-to-use languished in during recent years.

 

On one hand, although hardly a crisis amount, the 14.4% level is low enough to make corn go inflationary in the presence of a strong monetary stimulus, which is what happened in 2007-08, the last time this grain set a price record.

 

On the other hand, no serious financial meltdown worthy of a massive monetary stimulus has occurred of late, and at this time, there is none on the horizon. Instead, unlike circa 2007-08's 13% corn stocks-to-use ratio, the projected 14% ratio is flying into the teeth of the Fed's mopping up of excess global liquidity, not to mention a sharp slowdown in those emerging markets where most of the incremental demand for corn and meat have come from.

 

Between the lack of strong monetary stimulus and chances the weather could turn wet, or that the heat could prolong the harvest time, there is very little to suggest that corn will go north of US$5.30/bushel. Even if it went that high, it would probably do so for a short time, until the harvest came in.

 

For there is another factor at play here -America traditionally supplied 50% to 70% of the world's corn exports. But in 2012-13, Brazil and Argentina collectively exported 44 million tonnes of corn between them to America's 18 million tonnes. With America's share of the world corn export market at an astoundingly low 19.5% (and recovering to a projected 30% in 2013-14), 15 million tonnes of corn gained or lost in America's corn fields simply does not have the market weight it did in 2007-08, when it supplied 57% of world corn exports.

 

What does all this mean? It means that ideas of corn rallying strongly have to content with the odds of the hot dry weather breaking, the heat helping more of the crop mature before frost hits, the squeeze on world liquidity. Alongside the greatly diminished role US role in the world corn market, it is unlikely that a fluctuation of 4% in America's harvest size could swing market fundamentals back into a bull phase.