This probably won't be one of the more popular columns I've written. As I write this, I've just completed giving 22 seminars. The more I travel and the more I talk to farmers, the more bearish I get on the corn market.
It's truly amazing how fast things change. A year ago it was difficult to find a bull anywhere in the corn market. Today it's just the opposite. A large share of producers are in the “hope” phase of marketing — merely hoping that prices get back to where they were last September.
Instead of comparing today's prices to the September highs — maybe we should be comparing today's prices to the lows of last year.
Why so bearish? Here are several reasons why I believe the downside risk in the corn market is much greater than the upside potential:
This is a short crop year. Short crops peak early and have a long tail. Odds favor that the highest cash prices for corn in this marketing year occurred last September. In past short crop years, however, there typically have been two good opportunities to sell the market. One just before harvest and one during a late winter-early spring rally. My concern is that that rally will likely occur from price levels below where we are today.
The Farm Bill is still the same. It encourages large production in the U.S. as well as overseas. One bad crop year is not going to change that.
Supplies are adequate. Some people want to compare the 2002-2003 crop year to 1995-1996. During that period, carryover supplies were only 426 million bushels compared to the current estimate of 848 million. We will not run out of corn this year.
Planted acreage will go up. My guess is currently at 80.3 million acres vs. 78.8 this past year.
Trend-line yield should push to 140 bu/acre or more compared to a 2002 crop yield of 127.6. History clearly points out that the year following one of a significant yield drop results in a sharp increase in yield — above trend line. This happened following the droughts of 1983 and 1988 and the flood of 1993.
Attitudes are either bullish or complacent. The very same people who couldn't wait to forward sell corn a year ago are now sitting back and doing nothing. They sold early in 2002 and “learned their lesson.” All people learned last year was that they should not have forward sold corn last year.
| Bullish | Average | Bearish | ||
|---|---|---|---|---|
| Supply: | ||||
| Beginning stocks | 195 | 195 | 195 | |
| Production | 2,556 | 2,628 | 2,736 | |
| Total supply | 2,757 | 2,829 | 2,937 | |
| Usage: | ||||
| Crush | 1,670 | 1,690 | 1,700 | |
| Exports | 810 | 830 | 850 | |
| Seed/Residual | 155 | 173 | 165 | |
| Total usage | 2,635 | 2,683 | 2,715 | |
| Ending stocks: | 122 | 146 | 222 | |
| Average price: | $5.50-$6.50 | $5.20-$6 | $5-$5.50 | |
| Acreage: | ||||
| Planted | 73.0 | 73.0 | 73.0 | |
| Harvested | 72.0 | 72.0 | 72.0 | |
| Yield per acre | 35.5 | 36.5 | 38.0 | |
| Free Stocks/Use Ratio | 4.6% | 5.4% | 8.1% | |
| * Supply, usage and ending stocks are in million bushels, acreage in million acres, yield in bushels/acre. | ||||
The tables outline how far 2003-crop corn prices could fall. The “average” column is my best guess scenario for 2003-04, which would push carryover supplies up to 1.26 billion bushels.
The bearish column, however, has an above-average possibility of occurring.
The bottom line: With December corn futures above $2.40 as I write this, in a few months many producers are going to be wondering why they weren't selling at this level.
| Bullish | Average | Bearish | ||
|---|---|---|---|---|
| Supply: | ||||
| Beginning stocks | 888 | 888 | 938 | |
| Production | 9,357 | 10,234 | 10,409 | |
| Imports | 10 | 10 | 10 | |
| Total supply | 10,255 | 11,132 | 11,357 | |
| Usage: | ||||
| Food/seed | 2,200 | 2,270 | 2,270 | |
| Feed/residual | 5,650 | 5,650 | 5,650 | |
| Exports | 1,900 | 1,950 | 1,950 | |
| Total usage | 9,750 | 9,870 | 9,870 | |
| Ending stocks: | 505 | 1,262 | 1,487 | |
| CCC stocks | 5 | 5 | 5 | |
| Free stocks | 500 | 1,257 | 1,482 | |
| Average price: | $2.40-$3 | $1.80-$2.10 | $1.70-$2 | |
| Acreage: | ||||
| Planted | 80.3 | 80.3 | 80.5 | |
| Harvested | 73.1 | 73.1 | 73.3 | |
| Yield per acre | 128.0 | 140.0 | 142.0 | |
| Free Stocks/Use Ratio | 5.1% | 12.7% | 15.0% | |
| * Supply, usage and ending stocks are in million bushels, acreage in million acres, yield in bushels/acre. | ||||
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.