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In corn, the bigger the bull, the bigger the bear

In corn, the bigger the bull, the bigger the bear

The potential for a big U.S. corn crop could be troublesome for the market this season. Demand is also lagging. USDA has estimated U.S. corn plantings at 94 million acres and a 164-bushel yield, which could produce a 14-billion bushel crop.

Grain analyst Richard Brock didn’t say the bull market run for corn was over for sure, but his firm’s position on corn was very telling – 100 percent sold in old crop and 70 percent sold on new crop.

“These are interesting times,” said Brock, a speaker at the Mid-South Farm and Gin Show, in Memphis. “I don’t know that we’ve ever seen anything like it. Farm incomes have never been better. Everybody is excited. The question on everyone’s mind is how much longer this can continue. Anyone who has been farming for more than 10 years knows this is a cyclical business. Bad times don’t last forever. The bad news is that historically, the good times haven’t either. There’s always a ripple in the road.”

The ripple could be the potential for a big U.S. corn crop this season.

USDA has estimated U.S. corn plantings at 94 million acres, not far off from Brock’s estimate of 94.5 million acres. “I think that is very attainable. We’re estimating a yield of 161 bushels per acre. USDA is using a 164- bushel yield.”

Last year, U.S. corn planted acres were around 92 million acres, but sub-par average yields of 147.2 bushels resulted in a crop of 12.3 million bushels. With a good crop this year, Brock forecasts corn production for 2012-13 at slightly over 14 billion bushels. “The bottom line is that if you get a 94.5 million acres planted and a yield of 161 bushels, carryover goes from 820 million bushels to 1.9 billion bushels. That’s a major headache.”

Even if U.S. producers plant only 93.5 million acres to corn, and yield is only 156 bushels, “carryover would still come in around 897 million bushels.”

Consumption is also a concern in corn, Brock said. “Everybody is concentrating on planting acres for the coming year, but what we seem to forget is that $7 corn may end up being the worst thing that could have happened. It hurt our demand across the board.

“Feed and residual use went from 4.8 billion bushels to 4.6 billion bushels this year. Our livestock feed usage as a percent of the crop is the lowest in history. This was caused by a number of factors, including wheat prices getting so low that we saw a lot of wheat substitution in livestock rations, particularly in the Southwest in cattle.”

Brock also figures that the U.S. pork industry will contract this year. “Banks don’t want to lend money to the industry. More significantly, pork producers are going to have to go to bigger pens because of the efforts of animal rights groups. Estimates are that this will result in a reduction in production of about 3 percent over the next three years.”

Another bearish factor – the high quality of last year’s corn crop could mean fewer bushels consumed for ethanol. To arrive at usage for ethanol, USDA determines gallons of ethanol produced, then uses a conversion rate to determine how many bushels were consumed in the process.

“USDA uses a conversion rate of about 2.7 gallons of ethanol per bushel of corn. But due to the higher quality of last year’s corn crop, that conversion rate is actually about 2.9 gallons per bushels. That means you can produce the same amount of ethanol with 400 million fewer bushels of corn. Most everybody in the industry thinks the corn for ethanol numbers are going to come down because of the quality of the corn crop.”

Brock says only a major crop disaster can hold corn inventories where they are today. “That’s what’s really different this year. You would have to have a major drought throughout two-thirds of the Corn Belt. I have a hard time thinking of a bullish surprise that would keep this market going up. We have a lot of commodity fund buying and other outside influences helping support this market. But the fundamentals look pretty scary.”

Brock says corn could decline toward $4 a bushel on a decent to good crop. “I’m bearish corn. The short-term trend is up, but when it turns, it’s going to leave no survivors. Markets go up slow and they come down fast.”

Brock says producers need to make smart marketing decisions, and fairly soon, too. “If you put off a marketing decision until the crop is planted in the spring, by that time, it may be too late.

“Most grain sales are still emotionally-driven. “Most of us sell too early in a bull market. Why? On the way up, you’re comparing $4 corn to $3 corn. On the way down, you’re comparing to $7, and you’re not compelled to sell. This never changes. Emotionally, it’s difficult. Compare to the averages not the tops or bottoms. Today’s prices for corn and soybeans are way above the average of the last three years. These are high prices we’re seeing right now.”

And remember, “The bigger the bull, the bigger the bear,” Brock said. “This one will not be any different.”

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