This year’s big corn crop, which is projected by USDA to push the stocks-to-use ratio to almost double what it was a year ago, is the key influence on commodity markets nowadays, says John Anderson, deputy chief economist, American Farm Bureau Federation. But longer term, he said at the annual meeting of the Mississippi Farm Bureau Federation, competition from other corn-producing countries is a factor that growers will have to consider in their cropping plans.
Anderson, who conducts policy analysis and market commentary for AFBF in Washington, says this year’s near 14 billion bushel corn crop is “a really big number,” coming on the heels of 2012’s drought-plagued crop that was 20 percent below the national yield trendline .
“Despite the very late planting, most places in the Corn Belt — where there’s a real potential to have an impact on the corn market — had really good yields, resulting in a big production number nationally.
“That big number is what’s got everyone’s attention and is what’s driving a lot of what’s going on in the row crop markets. We’ve gone through a period when we’ve been playing catch-up in the corn market. We’ve had big runs in demand and it has taken a while to bring production back online.
“But that production is there now, and supply has pretty much caught up with demand, which puts the market in a real transition period.”
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There tends to be a pretty close relationship between stocks-to-use and price, Anderson says. “For a fairly long period of time, we’ve trended down toward very low stocks-to-use levels, 6 percent or 7 percent — historically really tight levels. Response has been pretty dramatic in terms of price.
“At end of 2013-14 marketing year, we’re expecting stocks-to-use to get back close to 15 percent. It’s been a good while since we’ve carried that level of corn stocks.”
But, he says, the global market picture has changed over the last six or seven years, and “I think now a 14 to 15 percent stocks-to-use ratio is going to seem a lot bigger to the market than it would have six or seven years ago.”
While an almost-15 percent stocks-to-use ratio doesn’t look huge historically — there have been years with 20 percent to 30 percent carryover — “things are different today,” Anderson says. “From the market’s point of view, a 15 percent stocks-to-use number is bigger than the same number was five or six years ago.
“One thing we’re going to have to consider in years ahead: We’ve got more people producing larger amounts of corn — since 2005, we’ve had more people coming into the game, not just in the U.S., but globally.
“There has been a pretty dramatic change in the U.S. share of global corn exports, each year going back to the mid-1990s. As recently as 2007, we had almost two-thirds of corn exports globally; last year, we had 20 percent. That was an unusual year, granted, because of the drought, and this year we’ll bounce back to about a one-third share.
“But still, we’ve gone from having a two-thirds share of the world export market to just one-third. There are now a lot more people playing in that market, more people we’ve got to compete with, more people who aren’t going to stop growing corn just because we have a good U.S. crop. And I think that’s the long-term challenge we’re going to have to face.
“Going back to 2007-08, U.S. corn exports were nearly double those of the next top 10 exporting countries. Now, the situation has basically flipped, and U.S. exports last year were only about half that of the next 10 exporting countries.
Other countries major players
“Over last five or six years, Brazil and Argentina and, surprisingly, Ukraine, have become big players in this market, and they’re not going to shut down corn production overnight, regardless of what we do.”
It’s a similar situation, Anderson says, to that of South America’s soybean production. “Markets have learned to live with a tighter U.S. soybean balance sheet because of the South American crop. We may see the same phenomenon developing with corn, and looking ahead, that could really change the marketing environment — not so much this year, but over the next five to 10 years. And because of that, if we’ve got these other major players out there teaching the world to live with a tighter U.S. supply situation, it may change how you have to think about marketing your crop.”
The corn supply situation has loosened up quite a bit with this year’s large crop, “perhaps a bit more than the raw USDA number indicates,” Anderson says, “and we’re looking at the corn price coming down to about $4.50 for a market year average, according to USDA.”
There will be a lot of debate, looking ahead to next year, on what’s the right trend yield to use for corn,” he says. “Should it be 164 bushels, or 157, or somewhere in between? There are some really strong differences of opinion on this, and that will have a big impact on what our expectations are going forward.
“I have a more simple approach, and tend to be on the low end of that scale — a high 150-bushel yield. But, some analysts will be using 165 bushels, and that is certainly doable.”
USDA’s projection of 5.2 billion bushels for feed and residual use “is a challenge when I try to figure out what’s going on in the grain markets,” Anderson says. “For the last marketing year, it was 4.3 billion bushels. So, the big question is: Can we go from 4.3 billion to 5.2 billion bushels in just one year? Can we change feed use that fast?
“I’m very pessimistic about that. But, residuals are also a part of that number, and it’s a rather nebulous category — you can make the number pretty much whatever you want. It’s the fudge factor in the corn balance sheet. But with a big crop, we should expect bigger residual use. I still think that number’s a bit high, but maybe not by more than 100 million bushels or so.”
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Corn use for ethanol, projected by USDA at 4.9 billion bushels, would be up from last year, Anderson notes, but “there is controversy around that number following the EPA’s recent proposed change in the Renewable Fuel Standard.
“I frankly don’t think the proposed rule change will affect the ethanol expectation at all this year, given where the market is and the amount of time it would take to make adjustments to higher blend levels. I tend to agree with USDA that 4.9 billion bushels for ethanol use is pretty realistic. The impact of the proposed rule would be more long term. For this marketing year, I think we’ll stick somewhere around 4.9 million bushels, regardless of what EPA does.”
Large exports increase?
USDA’s estimate for corn exports is “really interesting,” Anderson says — going from about 700 million bushels last year to nearly double that in this marketing year. That’s a big jump; in historic terms, it’s a huge change. The question: Is it realistic that we’ll see that big a change in exports in a year’s time?
“Certainly, that number can change fast. But, we have to consider that while U.S. supply has been tight, other countries have stepped in and have been meeting export market needs. Can we get that much share back from them in a year’s time? Historically, it’s not a huge level of exports, and it’s probably doable — but we’d have to be pretty aggressive to do it.
The bottom line for corn: If we get to a 14.6 percent stocks-to-use number at the end of the marketing year, that’s going to put more pressure on prices than we’ve seen in the last two or three years. It’s been a while since we’ve seen that level of carryover — nearly a doubling of where we were a year ago — and I think USDA’s pretty much in the ballpark with their $4.50 market year average price estimate.”
The overriding question with the corn outlook, Anderson says, is, “Do these numbers seem realistic? Can we see feed numbers and export numbers increase that much from last year to this year? Historically, going back to the mid-1970s, there have been only two other times when we had that big an increase in year-over-year corn use.
“Can the market really do that? Can it support that big an increase in corn use in a year’s time? Looking at the charts, it seems unrealistic. We’re talking about a pretty heavy lift for the market to move use that much.”
But, he says, reducing numbers for some of the use categories “would give us an even bigger carryover than is being projected. There is only one other time we’ve seen as big a percentage change in carryover as we’re calling for this year.
“We’re pretty much in a situation that either we’re going to see a really big run-up in corn use to take some of this big crop off the market, or we’re going to see an unprecedentedly big increase in carryover.
“Looking at USDA’s balance sheets, I think they’re saying we’ll have a historically big increase in corn use and a historically big increase in carryover. But changing either number much would put us in uncharted territory in terms of increase in total use or carryover. We’re starting with a pretty low level of carryover, so it’s hard for me to see carryover change much more.”
The market, Anderson says, “obviously is taking note of all this. If we look at the Dec. 13 corn contract or the Sept. 2014 contract, a lot of the really strong support we’ve had for price the last two years has eased. That doesn’t mean we’re going to go back to loan rate corn, but there’s still a pretty big difference between $7.50 corn and $4.50 corn.”
Of the three global food grains — corn, wheat, and rice — held by major exporters, “Corn stocks are expected to be at highest level in a long time,” Anderson says. “The same is true for milled rice. Wheat is the one crop that has tightened up in the last few years.
“Compared to three years ago, it has tightened quite a bit, and that’s something to keep an eye on in terms of factors that can support the market. We’re not to the point anyone is panicking about wheat availability, but were we to have one more short crop in a major producing country, we could see the wheat market start to get excited in a fairly short time.
“On the other hand, if there are no production disruptions, I think wheat stocks will grow fairly rapidly over the next year or two. But because we don’t have huge wheat stocks, we do need to watch it as a source of potential price support.”