Corn-Crop Stunner for Morgan Stanley Means U.S. is Overestimating Supply
U.S. corn supplies may be smaller than expected this year, according to analysts including Morgan Stanley’s Hussein Allidina who were surprised by a government forecast for the second-highest planted acreage since 1944.
The U.S. Department of Agriculture raised its estimate on June 30 to 92.282 million acres, after all 31 analysts in a Bloomberg survey anticipated a decline because of flooding and unusually wet weather in the Midwest. The USDA report sent corn futures in Chicago to the lowest level this year and prompted Goldman Sachs Group Inc. to cut its price forecast.
The USDA underestimated planting delays and the risk of yield loss before the harvest, Allidina said. The government plans to resurvey farmers in North Dakota, South Dakota, Minnesota and Montana, where some areas got triple the normal rainfall in May and June. There also are no signs that demand is slowing for corn from the U.S., the world’s largest grower and exporter, he said.
“The acreage number, there is little doubt in my opinion, will be revised lower,” Allidina, Morgan Stanley’s head of commodity research in New York, said in an interview. “Inventories are tight. The likelihood that last week’s numbers are correct and the likelihood that we have good weather are very low. You still want to be long December 2011 corn.”
Corn futures for December delivery may rally to $7.50 a bushel on the Chicago Board of Trade from yesterday’s close at $6.155, according to Allidina. If weather problems erode yields in July or August, prices may reach a record $8, he said.
That’s below Allidina’s forecast last month of more than $9, partly because crude oil’s 13 percent slump since the end of April eroded the value of corn-based ethanol, he said. Corn futures for July delivery touched a record $7.9975 on June 10.
Commerzbank AG said yesterday that corn will average $6.80 in the second half and may top $7 if production estimates are reduced. “Given the tight fundamental situation, we do not expect low corn prices on a lasting basis,” the bank said in a report.
“The acreage report was a travesty,” said Roy Huckabay, an executive vice president for the Linn Group in Chicago. “Questions remain as to exactly how much of the recent Midwest flooding was captured in the acreage survey, which was conducted in early June. Harvested acreage will be lower than the USDA said.”
Huckabay said corn may reach $10 by July 2012 as output drops and demand increases, reiterating his forecast from before last week’s report.
USDA Surveys Farmers
The USDA’s National Agricultural Statistics Service surveyed 70,000 farmers and collected 11,000 field samples from May 28 to June 17 to make its June 30 estimate, which was an increase from the 92.18 million acres the government forecast in March. A Bloomberg survey on June 27 showed analysts expected a drop to 90.629 million acres. The agency may update its estimate on Aug. 11.
During the time of the USDA’s survey, some farmers may have been too optimistic about what they could still plant, said Todd Davis, a senior economist at the American Farm Bureau Federation in Washington. Unrelenting rain in the second half of June kept many producers out of fields until it was too late to sow crops without risking yield losses and damage from harvest-time frost.
“Mother Nature has a major impact on final acreage,” Davis said. “The harvested acreage is the key number that will impact final production, with all the flooding along the Missouri and Mississippi rivers and drought across the southern growing region.”
North Dakota Floods
Wet weather may have prevented a record 6.3 million total crop acres from being planted this year in North Dakota, Aaron Krauter, the executive director of the state’s USDA Farm Service Agency in Fargo, said on June 28. The agency oversees disaster assistance programs. USDA’s NASS estimated that North Dakota crop area would only drop by 1.572 million acres from last year.
Floods along the Missouri River in South Dakota, Iowa, Nebraska and Missouri also may reduce the amount of crops farmers are able to harvest, Linn Group’s Huckabay said. The USDA currently estimates farmers will collect grain from 84.888 million acres this year. Total U.S. corn production is expected to be 13.2 billion bushels, the most ever.
“I doubt the corn crop will top 13 billion bushels,” which means smaller inventories next year as demand improves, he said.
The USDA said June 9 that corn inventories before next year’s harvest may drop to 695 million bushels, the least since 1996. If the USDA’s more-recent acreage forecast is correct, as well as its estimate for average yields at 158.7 bushels an acre, stockpiles may actually jump to 1.2 billion bushels, said Chad Hart, an agricultural economist at Iowa State University.
Hot, dry Midwest weather in the next two months may erode yields and prevent a record harvest, Hart said. Crops also are more susceptible to frost this year, since many fields were planted later than normal, he said.
“If all this acreage makes it to harvest, then producers have a whale of a crop coming down the line,” Hart said from Ames, Iowa. “It does help fill the supply hole we were worried about.”
The USDA forecast that 92 percent of the planted area will be harvested this year, the same rate as last year, when 81.446 million were harvested. The department also estimated U.S. stockpiles on June 1 were 3.67 billion bushels, 12 percent higher than anticipated in the Bloomberg survey. That implies a 44 percent drop in feed use in the three months ended May 31, according to Allidina.
Goldman Cuts Forecast
Goldman Sachs analysts Damien Courvalin and Allison Nathan, in a report, slashed their price outlook on July 1, calling for $5.90 in the next three months, compared with $8 previously, because of the expectation for larger supplies.
Corn yields may be lower than the government expects, as excess moisture has sapped nutrients from fields in the eastern Midwest, while dry soil hurts crops from North Carolina to Texas, said Michael Cordonnier, the president of the Soybean and Corn Advisor in Hinsdale, Illinois. Cordonnier, who toured corn fields in Ohio, Indiana and Illinois last week, said yields will fall to 157 bushels an acre and may reach 150 bushels if hot, dry weather expands.
A corn rally may depend on demand that has improved after prices fell in the past month. China, the world’s largest consumer after the U.S., became a net importer last year for the first time since 1996. The USDA yesterday said China purchased 540,000 metric tons from U.S. exporters. South Korea and Egypt also have boosted purchases since prices fell.
More Feed Demand
U.S. livestock producers didn’t cut back their herds even when feed costs were rising, Morgan Stanley’s Allidina said.
The number of cattle on feedlots totaled 10.928 million head on June 1, up 4.1 percent from a year earlier, the USDA said last month. The number of hogs to be sold for slaughter on June 1 was 59.197 million, up 0.6 percent from 58.862 million a year earlier, the agency said on June 24. JBS SA (JBSS3), the world’s biggest beef producer, is betting on a rebound in U.S. meat exports because of the weak dollar, Chief Executive Officer Wesley Batista said yesterday.
Ethanol producers may use a record 5.05 billion bushels of corn next year, or 38 percent of the U.S. crop and topping demand for livestock feed for the first time ever, the USDA estimates.
“The price has to move to ration demand,” Allidina said. “We’re not rationing demand today, and that concerns me, given the amount of demand we have.”
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