Carryout Number and Prices Favor Higher Corn Acreage
USDA’s World Supply and Agricultural Estimates report released this morning will likely elevate new-crop corn prices. USDA lowered the 2010-11 U.S. corn carryout by 70 million bushels to 675 million bushels, mostly due to increased ethanol use.
"Corn used for ethanol is projected 50 million bushels higher on a higher-than-expected November final ethanol production estimate and weekly ethanol data that indicate record output for December and January," wrote USDA in the report.
The current estimated corn carryout is 60 percent smaller than last year’s 1.7 billion bushels. The corn stocks-to-use ratio of about 5% is one of the smallest in history, notes MSDEike Krueger, president of the Money Farm, Fargo, N.D. "Seventy million acres of ending stocks is the equivalent of planting 500,000 more acres to corn," he adds.
Krueger notes that USDA has consistently underestimated ethanol production by 10 to 20 percent because most plants are relatively new and operate at above capacity rates.
World stocks of corn at 122.5 million metric tons are also exceptionally tight. The only change USDA made to world ending stocks was based on the reduction in the U.S. carryout.
"December corn is one of the most undervalued commodities," Krueger says. Growers need to produce 5 million to 6 million more acres of corn this year. He expects a strong market today for corn and notes that longer-term May or July corn futures could break $7.50 and December futures could hit $6.50 or $7/bu.
Michael Swanson, agricultural economist for Wells Fargo, Minneapolis, notes that corn is one of the only crops that gives growers the opportunity to hit a home run. With a picture-perfect growing-season, Swanson says corn growers can get an additional 20 bu. per acre, whereas soybean growers might only get an additional 2 bu. per acre.
"We have not had a major drop in corn yield for the past decade," says Swanson. "The 2010 corn crop was a trend line average crop. The lack of yield volatility has been an open question over the last decade. Some claim new genetics won’t let the big misses happen." If by chance corn yields were to drop significantly below trend, Swanson says the price move would be "monstrous."
A couple of outside risks could change the current upward price direction of corn, says Krueger, but none are very likely. First, he says, the U.S. government could take steps to curtail ethanol production long enough to build carryout stocks. "But there’s not much chance of that happening," he says.
Second, if the economy in China were to come to a screeching halt, U.S. soybean exports to China could plummet, pressuring bean prices lower. The decline in soybean prices would then spillover into the corn market, notes Krueger. Chinese officials raised interest rates for the third time yesterday in an effort to slow economic growth and curtail inflation, particularly rising food prices.
USDA left 2010-11 U.S. ending stocks on wheat unchanged at 22.26 million metric tons, but increased the marketing-year average price received by producers by 10 cents on the lower end of the range to $5.60 to $5.80/bu. "Continued gains in cash and futures prices boost the farm price outlook for the remainder the marketing year," says USDA. The department reduced global 2010-11 wheat supplies slightly to reflect a 350,000 metric ton drop in Ukraine production.
Despite steady ending stocks, supplies of high-quality, high-protein wheat are exceptionally tight worldwide due to drought in Russia and flooding in Australia. Drought in China’s wheat growing region is now threatening China’s current wheat crop. "Lots of wheat tenders from around the world are starting to show up," says Krueger.
USDA also left U.S. ending stocks for soybeans unchanged at 140 million bushels. The department projects the 2010-11 U.S. average price for soybeans at $11.20 to $12.20/bu., also unchanged from the previous month.
