CORN AT THE CROSSROADS: OUTLOOK FOR 2006 Special Report February 22, 2006
The corn market is building a tremendous demand base and could be in a position to see higher prices in the year ahead if there is any threat of a tightening of supply on the world or US market. The development of industrial and energy uses for corn combined with relatively cheap prices for the past few years has helped build this demand base. The corn market appears to have a better chance for stronger prices for the coming year, as normal yield and a steady rise in demand are factors which should allow for a slight production deficit for the US and the world.
USDA Forecasts US Corn Deficit
After the surge higher in prices over the past few weeks, the trade is currently seeing corn as an “overbought” commodity, meaning that prices may have risen too far too fast, especially with troubles in the poultry industry in the US and abroad. However, if the bird flu crisis passes without a major impact on the world poultry situation, the price uptrend in corn, established off of the December, 2005 lows, looks to continue. The USDA Outlook Conference numbers released last week could have some impact on the trade over the near term. For the 2006/2007 season, the USDA projected planted acreage at 80.5 million acres, which was down 1.3 million from last year. This was in line with trade expectations, as corn variable costs are up significantly when compared with soybeans or wheat. Part of the anticipated decline in planted acreage has already been seen in the form of an increase in soft red winter wheat planted acreage in the southeastern US Corn Belt, where producers shifted from corn to wheat after the 2005 harvest. The USDA Conference pegged US corn production for 2006/2007 at 10.810 billion bushels as compared with projected usage at 11.495 billion, a deficit of 0.685 billion. This would leave ending stocks at 1.726 billion bushels, down from 2.401 billion this year.
The USDA is showing a slight decline in their usage of corn for feed in 2006/2007, as profitability in the poultry and pork sectors is down and the market is expected to see greater availability of distillers’ grain or the left over from the ethanol process. Ethanol usage is up to 2.150 billion bushels from 1.575 billion bushels this year. Poultry producers in countries which have been hit with the bird flu virus are seeing steep financial losses, at least for the short term, as consumers shift to other protein sources, and many poultry producing and/or exporting countries could see at least a temporary drop in feed orders. The longer term impact is still very uncertain, but the declining demand could cause world prices to ease in the mean time.
US Corn Export Prospects Improving
Export demand is expected to increase to 2.0 billion bushels for the coming year, and this may be seen as a conservative number if China’s exports continue to slow and they move from a being major exporter to a major importer of corn in the next few years. For the 2005/2006 season the USDA projects US corn exports at 1.850 billion bushels, but this forecast may be too low given the recent export pace. Weekly US export sales for corn for the week ending February 9th came in at 1.249 million metric tonnes as compared to trade expectations between 1.0-1.2 million. Cumulative sales have reached 64.2% of the USDA forecast as compared to 56.2% on average over the last five years (see chart). Sales of 577,100 metric tonnes per week are needed to reach the USDA estimate.
In addition, Argentina production was down sharply due to drought conditions into the pollination period this year. Traders currently estimate Argentina corn production (for the harvest which begins in March of 2006) to come in near 14 million tonnes as compared with 20 million tonnes last year. With less corn for export out of Argentina and heavy losses in the winter wheat crop in Ukraine and Russia, which is the primary source for feedwheat exports and competes with corn on the world market, corn exports look to improve this season and maybe next. Predicting when China might stop exporting corn and begin to import is difficult, but a look at their stocks situation at the end of the 2005/2006 season would suggest that China is close to at least halting exports (see chart). The data would suggest that China has experienced a corn production deficit for 6 years in a row. For the 2005/2006 season, ending stocks are expected to hit their lowest level since the late 1970s at 30.16 million metric tonnes.
World Corn Supplies Tightening
For the February USDA Supply/Demand reports, the USDA pegged US ending stocks for the 2005/2006 season at 2.401 billion bushels as compared with 2.426 billion estimated the previous month. Ethanol usage was boosted by 25 million bushels. World ending stocks for the 2005/2006 season were revised slightly lower to 128.16 million tones, down from 128.26 million tonnes from the January report and down from 131.4 million tonnes this past year. A look at the history of the world corn ending stocks shows that they are near the low end of the range for the past 25 years (see chart). In addition, the world ending stocks to usage ratio is projected at its second lowest level in history. As a result, a poor crop in the US or China or both could trigger a significant drop in world ending stocks for the coming year and leave the market in a supply sensitive situation.
