Following the Jan. 12 crop report, the industry was in shock that the numbers were not as bullish as anticipated. Granted, the trend in usage in both corn and soybeans is in the wrong direction, but this does not make the 2012 crop any less significant.
The key issue revealed is, as we’ve said many times, the laws of economics have not been repealed. Keep the price of any commodity too high too long, and someone finds a way to use less of the product, something else or to produce more (supply and demand working).
The report showed soybean exports down 15% from a year ago and resulting ending stocks of up 28%. Corn exports for 2011-2012 are anticipated to be down 10%, but at the same time carryover is a 25% decline from 2010-2011.
What Does It Mean? We no longer have a significant shortage of either corn or soybeans. Soybeans are more than adequate, and corn could be classified as tight if we have a repeat production year in 2012 similar to 2011.
Secondly, the report confirms that if producers do have trendline yields in both corn and soybeans in 2012, carryovers will shoot substantially higher and result in significantly lower prices.
Corn yields are key. Trendline yield in corn for 2012 is approximately 161 bu./acre. In 2011 the national average yield was only 146.7 bu./acre compared to 2010-2011 yields of 152.8. The U.S. has experienced two significant declines of national average corn yields – the first time this has happened in at least 30 years. One can argue that part of the problem is corn on corn yield drag. On the other hand, the bears can argue that these issues are being addressed by the seed industry. And with two declines in yield back to back, odds are high for a significant 2012 yield increase. We can all argue either side of this debate.
The important issue then becomes getting the crop planted this spring. And if the acreage comes in even close to the expected 94.5 million acres, it would take even more than a poor yield to keep prices where they are.
Think about it this way: If the trendline yield comes in at 161 bu./acre, production will exceed usage by 1.1 billion bushels and result in a carryover supply more than double 2011-2012. The potential here is for an incredible swing in carryover supplies with just a “normal” corn yield.
Historically, this type of market climate results in a top before the middle of March. As I’ve said many times, the top in cash corn and soybeans for this marketing season already occurred – back in September. But the intermediate top should still be expected before March. Assuming the crop gets planted, the trend should remain lower into the late summer. Remember that markets are anticipatory but sometimes anticipate problems that don’t ever occur. This is still a long-term bear market, and rallies must be sold.