February 2, 2011

 

USDA's forum may offer means for corn sell-off

 

 

A key US agricultural jamboree which is happening later in the month could prove a channel for a sell-off in corn futures, as history suggests.

 

Societe Generale has warned, adding that grain prices may fall slightly.

 

The USDA's annual Agricultural Outlook Forum - one of the key events of the world farm commodities calendar - four years ago prompted a five-month downturn in corn futures, even in the midst of the 2006-08 rallies which trebled Chicago prices.

 

This year's event, on February 24 and 25, could do the same - even if, as expected, the USDA forecasts for 2011-12 another season of tight domestic supplies, Societe Generale analyst Emmanuel Jayet said.

 

"The upward trend in corn prices could stop temporarily until the supply-and-demand balance scenario for 2011-12 becomes clearer," he said.

 

The thesis is based on an observation that output forecasts play a far bigger part in determining initial investment sentiment than how that harvest is expected to play out in terms of inventory levels.

 

"Corn prices and spreads move on significant production increases and not on the further tightening of stocks," Jayet said.

 

After the March 2007 outlook meeting, it was an estimate of a 1.6 million bushel rise in corn output that markets focused on, rather than a forecast that American corn stocks would tighten despite the bumper harvest.

 

"Corn prices lost 20% in a little more than a month," Jayet continued.

 

This year's event, which is expected to forecast a rise of some 2-3 million acres in output and 1.3 billion bushels in output, "could have a similar impact on corn prices, albeit to a lesser extent", despite being likely to project US inventories "still at a very tight level".

 

Where the reaction to this year's meeting may differ is in movements in spreads between different corn contracts.

 

Now, as in 2007, the corn futures curve is in so-called backwardation, in which near-term lots are more expensive than further-ahead contracts, an abnormal pattern.

 

Typically, distant lots garner the premium to allow for storage costs and production risks.

 

However, while the USDA forum four years ago prompted sharp reversal of that backwardation, corn stocks left over from last year's harvest are so thin that they may prove enough to keep near-term lots ahead.

 

"Contrary to what happened in 2007, we expect the spread to remain backwardated as the level of stocks is at a record low, which should provide support to old crop contracts until the 2010-11 season nears its end," Jayet said.

 

The USDA Agricultural Outlook Forum is being held at Arlington, Virginia, with speakers including Tom Vilsack, the US agriculture secretary, and former president Bill Clinton.