As planting season gets underway, every year getting the crop in the ground and good growing weather is important. This year may be more important on both fronts than normal, however.
At the risk of being a two-armed economist pointing in both directions, the table below is not a stretch as to the extremes where the corn balance sheet might end by harvest. About the only fundamental fact on the balance sheets that can be viewed with accuracy is the beginning stocks number, which, whether you use USDA’s estimates, ours or one of our competitors, all fall in the range of 801-820 million bushels.
The other important issue on the balance sheet that few people are discussing is the reduction in demand that occurred as a result of high-priced corn last year. Feed usage is down, corn for ethanol is flattening off and exports got hit pretty hard.
That brings a factor to the balance sheet this year that we have typically not seen in years past. Even if one were to assume that planting conditions might result in only planting 93.5 million acres, note that because of the drop in usage carryover, supplies still go up in the 2012-2013 marketing season. One would have to see a yield under 150 bu./acre nationwide in order for the carryover supplies to decline in 2012-2013.
The middle (average) column, I feel, is the best bet for where corn supplies will end at the end of this season. As this is written, planting conditions are nearly ideal to get the crop in early. That should result in at least 94.5 million acres being planted and trendline yield this year, depending on how you read the chart, is anywhere from 161 to 164 bu./acre.
One can argue that yield drag will not allow the yields to be that high. There will always be discussions of a drought hurting yields. The list can go on and on, and some are valid arguments, but at this stage of the game, it is most logical to assume trendline yield, particularly after two disastrous yield years back to back.
Under this “average” scenario, note the carryover jumps to over 1.8 billion bushels! That’s a stocks-to-usage ratio of 14.6%. Should this occur, by late summer corn prices in the central Corn Belt could be in the low $4 range.
The bearish scenario is not one many people would want to imagine happening. I give the odds of this scenario happening no more than 20% – but is certainly not out of the realm of possibility if weather conditions are ideal.
The bottom line: I’m trying to imagine how a bullish scenario can happen in corn this year from the $6 price range. I’m aware that most readers want to think that that can happen, but the reality is, it will take a disaster of disasters production wise in order to stop this bear market.
Could China come to the rescue? That’s a possibility, and there is little doubt that it will buy more than the previous estimate of 3 million metric tons from the U.S. But even if the number doubles, it’s not going to change the balance sheet significantly. What this proves is the old saying, “The cure for high prices is high prices.” Keep any commodity too high too long and someone finds a way to either grow more or use less. We are now in the final few months of this scenario playing out.