Corn Drop Seen as U.S. Sows Most Since 1936: Commodities
“Farmers are looking for every acre possible to plant this year,” said Bill Bayliss, 67, who is expanding acreage by 10 percent on land he farms in West Mansfield, Ohio, where drought conditions have disappeared. “The price is attractive, and we have seen an improvement in soil moisture.”
Corn acreage in the U.S., the world’s top grower and exporter, will be the largest since 1936, yielding an all-time high of 13.863 billion bushels at harvest should weather conditions improve, the average of 17 analysts’ estimates in a Bloomberg survey shows. The U.S. Department of Agriculture, in a report today, predicted output will jump 34.8 percent to a record 14.53 billion. Futures contracts show traders expect corn prices to fall 19 percent by December to $5.54 a bushel as supply grows after the harvest, cutting costs for livestock producers and ethanol distillers.
While adverse weather the past three years prompted the USDA to back off predictions made in May before planting started, corn prices that are higher than 2012’s record average mean the crop remains profitable for farmers. The grain dropped to a six-week low today in Chicago, settling at $6.855.
“We are in a major transition to a more-abundant supply situation,” said Don Roose, president of U.S. Commodities Inc. in West Des Moines, Iowa, who grows corn and soybeans on his farm. “We have sent a clear price signal to the rest of the world to produce more corn.” Prices may drop below $4 in Chicago this year, he said.
Corn futures that reached a record $8.49 in September have fallen 7.4 percent this month on the Chicago Board of Trade. The Standard & Poor’s GSCI Spot Index of 24 commodities is down 2.7 percent, while the MSCI World Index of shares fell 1.1 percent. Treasuries lost 0.05 percent, a Bank of America index shows.
Farmers have the capital needed to boost production of corn, the biggest domestic crop valued at a record $77.35 billion in 2012, as the financial condition of U.S. agriculture has never been better, government and Federal Reserve data show.
Farm income will jump to a record $128.2 billion this year, Midwest cropland values are the highest ever and the ratio of debt to equity is the lowest on record at 11.3 percent, according to the USDA. While the worst drought since the 1930s cut output by 13 percent last year, farmers were protected from losses by crop-insurance payouts that reached an all-time high of $14.7 billion, with more claims expected.
Planting from March to June will reach 97.73 million acres, up from a 75-year high of 97.155 million in 2012, according to the Bloomberg survey. The USDA forecast a 0.7 percent drop to 96.5 million acres. While the drought cut output 13 percent to 10.78 billion bushels last year, improved weather and better yields in 2013 will help boost stockpiles before the 2014 harvest to 1.795 billion bushels, the most since 2006 and up from a 17-year low of 632 million this year, according to the survey.
Hedge funds and other large speculators cut their net-long corn positions, or bets on higher prices, by 31 percent in the week ended Feb. 12 to 126,363 futures and options, the biggest reduction since June, U.S. Commodity Futures Trading Commission data show. Holdings are down from 279,010 contracts on Dec. 4.
Most farmers “expect prices to ratchet lower,” said Bayliss, the Ohio farmer. “I’m looking for cash prices to fall below $4.50 and hope it’s not $3.50 or $2.50.”
The USDA, at its annual outlook conference today in Arlington, Virginia, forecast prices will plunge 33 percent to average $4.80 in the year ending Aug. 31, 2014, from $7.20 a year earlier.
With a return to normal yields this year, “a rebuilding of stocks and lower commodity prices would be expected in the fall,” Joseph Glauber, the chief economist at the USDA, said Jan. 14 at a Senate Agriculture Committee hearing in Washington.
Drought conditions remain in the Great Plains and Midwest, the main growing area. As of Feb. 19, 83 percent of the six-state region from Kansas to North Dakota has soil moisture below 10 percent of normal, with some at zero, and where water shortages and crop damage are likely, according to the U.S. Drought Monitor. A year ago, 6.1 percent was in drought.
Severe drought covers the entire state of Nebraska, the fourth-largest corn grower, more than half of Iowa, the biggest producer, and 70 percent of Minnesota, ranked No. 2, the monitor shows. Drought conditions will persist in the Plains and Southeast through April 30, the government said Feb. 7.
“The market is not paying attention to the potential problems from dry soils,” said Dan Basse, the president of AgResource Co. in Chicago. “If we don’t see an improvement in the weather and soil conditions by April 10, the market will respond just like last year. It’s premature to be talking about sub-$5 corn when parts of the Midwest need 6 inches to 14 inches of rain to restore soil moisture.”
Dry soil across the western Midwest will limit the rebound in output, leaving prices in 12 months at $6, Goldman Sachs Group Inc. said in a Feb. 10 report. Standard Chartered Bank said in a Feb. 14 report that corn will average $6.80 in the fourth quarter, 23 percent more than the December futures.
After predicting record crops, the USDA revised its forecasts lower in 2010 as fields were damaged by heavy rains during planting and a later heat wave, and again the following two years because of droughts.
It will take two or three years for a return to bumper crops, Randall Miles, a soil scientist at the University of Missouri in Columbia, said in a report last week. Rainfall would need to be 16 inches above normal to recharge soil moisture depleted by roots that went as deep as 8 feet to survive the drought, Miles said.
The drought is beginning to diminish in Midwest areas east of the Mississippi River and in the Great Plains and western Midwest, Drought Monitor data show. Warming equatorial waters in the Pacific Ocean and stronger trade winds are shifting from dry patterns to ones with increased rain in the central U.S., Gail Martell, president of Martell Crop Projections in Whitefish Bay, Wisconsin, said in a Feb. 12 report.
Corn production also is rising outside the U.S. after four years of higher-than-average prices. Traditional buyers of U.S. corn including Japan, South Korea and Mexico are purchasing more from Brazil, Argentina and Ukraine. Output in Brazil and Argentina, the biggest exporters after the U.S., will increase 5.9 percent to a record this year, the USDA said Feb. 8.
While corn futures for December delivery in Chicago trade at $1.315 a bushel less than the May contract, the price is still 35 percent higher on average for post-harvest supplies during the past decade and above the cost of production, said Richard Guse, 52, who farms with his brother in Waseca, Minnesota. That’s an incentive to grow more, he said.
Guse estimates he can earn $135 an acre on corn this year, compared with $25 if he grew soybeans, based on current prices.
Corn yields in the U.S. will jump 31 percent to 161.5 bushels an acre this year from a 17-year low of 123.4 bushels in 2012, Deere & Co. (DE), the world’s largest farm-equipment seller, said on Feb. 13. The average estimate of analysts surveyed by Bloomberg was 155.4 bushels. Deere, based in Moline, Illinois, said prices will drop 24 percent this year to average $5.25.
“We can plant more corn and make more money,” said Chad Blindauer, 41, who farms corn, soybeans, wheat and alfalfa with his father and older brother in Mitchell, South Dakota. “It’s remarkable how well corn performs in dry weather. When farmers see corn yields going up every year and other grain yields essentially stagnate, there is a big incentive to plant more corn.”
A record crop and lower prices would make a “world of difference” in feed costs for livestock producers, which eventually would reduce U.S. retail-beef prices that reached a record in January, said Jim McCann, 67, the owner of Shining Cross Cattle Co. near Miller, Missouri.
“The price is going to come down in the supermarket because our input costs will be lower,” said McCann, whose operation in southwest Missouri buys light-weight steers, feeds them on pasture and corn and then sells them to feedlots.
Production of corn-based ethanol has tumbled to 789,000 barrels a day in the week ended Feb. 8, compared with 920,000 eight months earlier, when the drought began to send grain prices surging, U.S. Department of Energy data show. Weekly output last month was the lowest since June 2010.
Archer-Daniels-Midland Co. (ADM), the largest U.S. ethanol refiner, has been paying an average premium of 34.6 cents a bushel over futures for delivery this month in Decatur, Illinois, where the company is based, up from 27 cents a year earlier, data compiled by Bloomberg show.
“We can come out of this supply hole very quickly,” said Roger Fray, the executive vice president of grain at the farmer-owned West Central Cooperative in Ralston, Iowa, with 28 locations in the state. “The odds are against a repeat of the severe drought of 2012. Cash prices will likely fall below $4 at harvest.”
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