Drought's impact becomes clearer

by Ron Sterk
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Nearby corn and soybean prices tumbled 17% from drought-induced record highs set during the summer and then posted partial recoveries as crop sizes became better known in September and October. The price action illustrated markets that “work” with high prices appearing to ration demand as supply scenarios have been honed.

“Prices over the past two months for corn and the past month for soybeans appear to be in the classic ‘short crop, long tail’ pattern where prices peak early in the year off sharply lower production and then decline in the post-harvest period as the smaller supplies get rationed and production rebounds the following year,” said Darrel Good, a University of Illinois agricultural economist, in his Oct. 8 Weekly Outlook. “A change in the trend of lower prices will require an additional supply shock or evidence that supplies have not been sufficiently rationed.”

The worst drought since the 1950s across most of America’s primary corn and soybean growing region significantly sliced corn production from early lofty forecasts and trimmed soybean output as well, although later-planted soybeans have fared a bit better than early-planted corn.

As the devastation of the drought became better known, the U.S. Department of Agriculture cut its 2012 U.S. corn production forecast in July by 12% to 12,970 million bus from its initial trend-line projection of 14,790 million bus in May and June. The crop was trimmed further to 10,779 million bus in August, then to 10,727 million bus in September and finally to 10,706 million bus in October. The crop went from potentially the largest ever by 13% over the 2009 record of 13,092 million bus to 18% below the 2009 record, 28% below the initial forecast and the smallest since 2006.

Prices responded accordingly. Corn futures set all-time highs several times over with the nearby contract finally topping out at $8.49 a bu on Aug. 10, the day of the first U.S.D.A. survey-based crop estimate. Prices tumbled 17% to a low of $7.05 a bu on Sept. 28, the day of the U.S.D.A.’s key quarterly Grain Stocks report, recovered to $7.76 a bu on Oct. 11 and then slipped back to trade on either side of $7.50 a bu most of last week, about 12% below the summer high.

Corn futures prices were fairly flat through July 2013, reflecting the smaller 2012 crop and tight supply situation, then dropped sharply beginning with the September 2013 contract on ideas the 2013 crop will rebound as there won’t be two consecutive years of drought and as farmers respond to high prices.

Comparisons to 2008, the most recent year of record-high corn prices that were wiped out this year, were common as prices were rising. But other than record high prices in both 2008 and 2012, there are few other similarities to suggest prices may react in a similar way the rest of the year, including domestic stocks and use forecasts.

The record high in 2008 was $8.21½ a bu set in late June (ironically due in part to excess rainfall and flooding). By mid-October 2008, nearby corn futures prices had tumbled 50% to around $4 a bu and saw only slight gains by the end of the year. The staggering price decline came that year even as U.S. corn production estimates dropped 2% from the initial August forecast to November, finally ending the year at 12,092 million bus, down 7% from then record production a year earlier. In contrast, the 2012 crop in October was estimated only down 0.7% from the initial August forecast.

But corn stocks and demand were vastly different in 2008 and 2012, which will tend to support higher prices for a longer period this year. Sept. 1, 2008, corn stocks reported by the U.S.D.A. were 1,624 million bus, 64% larger than the 988 million bu on Sept. 1, 2012. Total corn supply for 2008-09 was projected in October 2008 at 13,673 million bus compared with 11,769 million bus projected on Oct. 11, 2012, for 2012-13. Total use in 2008-09 was projected at 12,585 million bus, down 0.5% from a year earlier, and carryover on Sept. 1, 2009, at 1,088 million bus, was up 7%. Total use for 2012-13 was projected at 11,150 million bus, down 11% from last year, with carryover on Sept. 1, 2013, at 619 million bus, down 37% from 2012. The average price paid to farmers was projected at $4.25@5.25 a bu for 2008-09, compared with $7.10@8.50 a bu for 2012-13.

For 2012-13, every demand category has been reduced from 2011-12, with projected food use of corn down 5%, feed and residual down 9%, ethanol down 10% and exports down 25%.

“The projection of corn consumption was reduced by 100 million bus (from the September projection), acknowledging that total consumption will be limited by the smaller crop and smaller-than-expected stocks of old crop corn,” Mr. Good said in his Oct. 15 Weekly Outlook. “While the November production forecasts will provide a clearer picture of the availability of corn and soybeans, prices will now take direction primarily from the ongoing rate of consumption.”
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