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Corn outlook for 2013: Potential for market volatility is ‘extreme,’ says Farm Bureau economist

BILLY HARRISON left Pontotoc Miss and Kenneth Thompson right Philadelphia Miss visit with John Anderson American Farm Bureau Federation deputy chief economist at the annual meeting of the Mississippi Farm Bureau Federation
<p> <em><strong>BILLY HARRISON, left, Pontotoc, Miss., and Kenneth Thompson, right, Philadelphia, Miss., visit with John Anderson, American Farm Bureau Federation deputy chief economist, at the annual meeting of the Mississippi Farm Bureau Federation.</strong></em></p>
&quot;If we get into 2013 and the western corn belt is still dealing with drought, all bets are off on where the corn market could go,&quot; says John Anderson, deputy chief economist for the American Farm Bureau Federation.&nbsp; &ldquo;If we get another yield that is below the projected trend &mdash; as was the case this year &mdash; I don&rsquo;t think anybody could predict a market top. The question is, how high would the price have to go to allocate a crop that short?&rdquo;

John Anderson laughingly says he’s embarrassed to even try and predict what corn prices may do in 2013.

“There are so many unknowns,” says the deputy chief economist for the American Farm Bureau Federation in Washington. “The potential for volatility in this market is extreme. We’ve been in a volatile situation the last two or three years, but 2013 could be even more volatile. So, my range for corn could be from $4 or $4.50 on the low end to $10 on the high end.

“There is more potential downside, and upside, in the grain market than we’ve seen in a long time,” he said at the annual meeting of the Mississippi Farm Bureau Federation.  “It’s because supplies are tight. When we have a stocks-to-use ratio of 12 percent to 18 percent, as we’ve had many years in the past, it provides a pretty big buffer in the market, and reduces volatility, regardless of what happens with production.

“But when stocks-to-use is at 5.8 percent, as it is now — basically pipeline supply — there’s no longer that buffer, and the market is going to react to every change in production.

“It’s embarrassing to even talk about a price range for grains,” Anderson says. “It’s all going to come down to how much we get planted — which I think will be a lot — and how production turns out (that’s the part that’s really up in the air.)

“What we do know is that we won’t have much corn left as we get to the end of this marketing year. What we don’t know is what kind of year we’ll have in 2013, and that could put us in a pretty broad range as far as price is concerned.”

If growers plant the projected 96 million to 96.5 million acres and yields come in around 160 bushels, Anderson says, “I could see a price in the mid-$4 range. If conditions stay dry in the Midwest, and we have a second short crop year, I don’t think we have any precedent for how we’ll deal with it. I don’t know where the top could be.”

Midwest corn farmers could start the year drier than they’d like to be and still make a good crop if they get timely rains, he says. But continuing drought “would certainly increase the odds pretty dramatically that we’d end up on the low side of yield projections. In which case, I don’t know where the price top would be.

How high would price go?

“If, heaven forbid, we get another yield that is below the projected trend — as was the case this year — I don’t think anybody could predict a top. Stocks-to-use wouldn’t drop much below 5 percent; the question is, how high would the price have to go to allocate a crop that short?”

Right now, Anderson says, “It’s a very tight market, and the prices we’re seeing are well-supported. Generally, the situation with corn and beans is as tight as we’ve seen at this time of year in a long, long time. “

But, he cautions, “Don’t think that situation can’t change quickly. Think back to early 2012, when the USDA was projecting a 164-bushel yield for this year’s corn crop. What if we had got that 164-bushel yield? We wouldn’t be here today talking about how tight the market is. We’d be talking about how high corn is piled up in Nebraska and elsewhere. It’d be a much different conversation.

“Things can change quickly. We’re in a situation where these markets could be really volatile, and it’s all going to hinge on weather.

“It sounds like there’s a lot of downside in the market — but there could be another drought. There still is a drought going on. Will we get back to normal yields? At this time of year, talking about market outlook, the only thing that makes any sense is to assume we will get back to normal. There is time for that to happen.

But it’s not necessarily going to happen. That’s the risk for the upside.

“The most recent seasonal drought outlook from USDA/NOAA shows persistence of drought over part of the country. Draw a circle 150 miles out from Omaha, Nebraska, and it looks pretty dry. The good news is there is a lot of improvement in parts of Illinois and Indiana, which were just devastated this year.

“But, if we get into 2013 and the western corn belt is still dealing with drought, all bets are off on where markets could go. Those areas need soil moisture recharge pretty badly. Looking at the NOAA chart on the amount of additional rain needed to bring the Palmer Drought Index into the low end of the normal range, we can see that in Iowa, in a lot of cases, they need 9, 10, 12 inches of rain to get back to normal.

“Can they make a good crop starting the year with below normal rainfall? Yes, but for some peace of mind we’d like to see them start the year with adequate soil moisture — and they’re going to need a really wet winter to make that happen.

“If we do get back to normal yields, we’ll be dealing with a much different supply situation next year than this year. But that’s the big question right now, whether we’ll get back to normal. A wet winter in the Midwest would make a big difference.

“If weather cooperates at all, we’ll get a big crop planted. If we get back to normal on yields, the supply side of the market will look a lot different by next fall. So, keep that in mind as you make plans for 2013.”

As analysts make projections for the 2013 corn crop, Anderson says, “We’ll hear a lot of disagreement about where to put the yield number. There will be all manner of debate about this, and you’ll see numbers from 155 bushels to 167 bushels.

“It has been a long time since there’s been this much disagreement at the beginning of the year on corn yields. Over the past 10 years, there has hardly been a 1 bushel spread between anybody’s yield estimates. This coming year will change that.

“My yield estimate for 2013 is 158.7 bushels. That isn’t based on soil moisture maps, El Niño, La Niña, sunspots, what have you — just a simple trendline. It’s a pretty low estimate, but it highlights how much an impact this year’s drought could have on yield.”

But yield is only half the production equation, Anderson notes — acreage being the other part.

“I think we’re going to see a lot of corn planted in 2013. We have the acres in this country to do it. Looking at total acres planted to 10 major crops, we planted 261.1 million acres in 2012, the most since 1991.

“For corn, soybeans, cotton, and wheat in 2012, we planted a total of 242 million acres. Doing a ‘what if?’ illustration for 2013, what if we planted 96 million acres of corn, 78 million acres of beans, 10 million acres of cotton, and 56 million acres of wheat, for a total 240 million acres? Is that doable? I think so — we planted more than that last year.

“I’m not predicting those acreages, but it’s a realistic number for those crops. Then, what if we plant that many acres and we attain my estimated corn yield of 158.6 bushels, 43 bushels for soybeans, 820 pounds for cotton, and 44 bushels for wheat?

“Those aren’t predictions, just realistic yield numbers. With those acreages and yields, we could increase corn use by quite a bit, from 11.1 to 12.8 billion bushels, a nice rebound in one year’s time. We could incrementally increase soybean usage and maintain strong exports, increase cotton use, and drop wheat use just a bit because won’t feed as much as in 2012.

“Look what would happen to the stocks-to-use ratios: We’d get well above 10 percent on corn; back up over 6 percent on soybeans, which is fairly healthy; 30 percent on cotton; and about 30 percent on wheat.

“Corn has been driving the train in the grain markets,” Anderson says, “but even as tight as the grains supply situation is now, if we get back to normal yields, things will turn quickly. So, producers and end users of these crops need to keep their eyes on how this situation is playing out.”


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