We all had a great deal of enthusiasm for the corn market on March 31, when USDA shocked the market with a 5% reduction in corn acres (instead of the 1% expectations).
After calculating out the impact of the additional acreage cut, we were looking at nearly 400 mb less production than expected- enough for Pro Ag to cut our projected carryout from 1.7 billion bu in 06/07 to only 1.3 billion bushels of corn. That was projecting a "trend" yield for corn, and at the time Illinois and a good share of the Corn Belt was in a drought situation - both for soil moisture levels and the current weather pattern.
Much has changed as we move forward 35 days, as rain amounts across the Corn Belt have been very good-so good in fact that Illinois is really no longer a "drought watch" state. Most of the Corn Belt has very good topsoil moisture levels such that germination of planted crops should be outstanding. Aiding in that excellent stand-count establishment are warm soils from a warmer-than-normal April that allowed soils to warm considerably this spring. With that, it only takes a few days for excellent germination to occur, and after that we only need a few good rains in the summer, and we could have a bumper crop.
Progressive Ag looks at the rapid planting progress (a record 52% of the nation's corn planted in April) and the excellent topsoil moisture/temperature conditions and has to increase projected 2006 corn yields (3-5 bushels???). If it's 5 bushels, that is about 350 mb extra production. Guess what? That 350 mb extra production from bigger than average yields is almost a perfect offset to the bullish March 31 acreage report.
We're right back to square one in corn, then, which is about 1.7 billion projected carryout. If this is a fact, once the market knows it, will we have to kiss our $3 corn goodbye?
At this point, corn has not rallied off the acreage report when fundamentals say it should, so does at least some of the market know something we don't? What is holding corn back? We know that USDA will release a May report in a week or so, and we know they are going to use the intended acreage from the March 31 report (bullish). We also know that in the past, USDA has a tendency to hike yields in years of early planting. USDA has a history of hiking yields to offset other bullish factors, too, on the month they are reported. It's probably a good bet USDA will offset at least half the bullish implications of the acreage report (200 mb hike from higher yields to offset half the 400 mb cut from smaller acreage?. The only fact left to learn is crop conditions, with USDA likely to start corn crop conditions at the end of May.
Our $3 corn market might have a chance to occur yet, then, but by late May we will know whether we can remain bullish, or kiss our $3 corn goodbye for another year. Let's hope speculators want to buy corn on the bullish ethanol demand, high crude oil prices, and the bioenergy boom for the next few weeks. If that doesn't happen, then we may be left hoping for some major production problem this summer just to get prices back to where they are now.
Yes, some day inflation will eventually come to impact the corn market, and probably offer prices that are available whenever a 1 billion bushel carryout is a serious threat. As of today, though, 2007 is a much better bet for that to occur than 2006 based on the most recent information. When bullish information comes, we might be surprised how much and how fast corn prices can rise. But, we still need bullish information to come (like bad weather/late planting/freeze damage), not bearish information (wet in dry areas, dry in wet areas). What happens if its another 2004 or 1994 in the year 2006, where nothing bad ever happens weatherwise to the crop? Inflation threats might then be a distant memory in the corn market!
Like most years, if you were to summarize in three words or less what gives the grain market direction during most summers, it would be "weather, weather, weather." Or is that only one word? Regardless, keep your eyes on the skies the next few months, and the 2006 market secrets will be revealed to you. Can you hear the signs? Recognize them? And in time to react to market opportunities?
