Corn set to stay tight despite US crop hopes

Financial Times

Fears of a food crisis may have receded, but markets for some agricultural commodities, from corn to soyabeans, are uncomfortably tight. This week the US Department of Agriculture will begin an annual ritual that has extra significance this year. When officials ask more than 80,000 farmers what crops they plan to plant – and, crucially, how much – the response is likely to determine the direction of many food staples. The US is the world’s biggest exporter of corn, cotton and wheat, and rivals Brazil as a soyabeans exporter. The USDA reveals the answers on March 30, but traders are already looking for clues. The important role played by US farmers was evident when the department published its annual outlook in Washington last week. There, its chief economist and commodity analysts presented forecasts to more than 2,000 people representing companies including IBM; Wells Fargo; Blenheim, a $5bn commodities hedge fund; and Noble Group, the trading house.

Corn is setting the tone for other big grains because, right now, it suffers the biggest constraints in supply. By this year’s autumn US harvest, global stocks of corn as a share of consumption will have fallen to the lowest level since 1974, the USDA says.

“There has been no rebound in global corn stocks. This has maintained very tight markets for corn,” says Ed Allen of the department’s economic research service.

Based on preliminary models, not a survey, the government projects that farmers will this year plant 94m acres (37.6m hectares) of corn, the most since the second world war.

Indeed, global corn production is likely to rise to a record high of 864m tonnes, up 36.6m tonnes from last year. Mr Allen says “spectacular” gains in Ukraine will offset a poor crop in Argentina, usually the world’s second-biggest exporter.

Yet heavy sowing does not guarantee greater supplies. Last spring, for example, wet weather affected some planting while a hot summer damaged young stalks. This year the USDA forecasts the average corn field yield will return to its long-term upward trend after two consecutive years of falls.

A third successive year of decline would be an extremely rare occurrence but, as economists at the University of Illinois wrote this month, there is a 40 per cent chance corn yields will fall short of the trend in any given year: “The odds slightly favour a corn yield above trend in 2012, but there is certainly precedent for another year below trend. More specific expectations about the 2012 average yield will depend on how the planting and growing season unfolds.”

After two years of wild swings, and after hitting a record high of $7.99¾ a bushel in June amid fears of a repeat of the 2007-08 food crisis, corn has been trading in a $1 range since September. On Tuesday it was at $6.53½ a bushel on the Chicago Board of Trade.

What happens in the corn market will affect prices of other crops, notably soyabeans. Used for animal feed, vegetable oil and biodiesel, soyabeans are the main alternative to corn on US farmland.

Soyabean prices of $13 a bushel are only about twice the price of corn, traditionally not a big enough premium to prompt farmers to shift to beans. The USDA forecasts that the country’s farmers will maintain the amount of land used for soyabeans at 75m acres.

This could be a missed opportunity. In South America, the biggest soyabean producing region, dry weather has forced analysts to downgrade estimates of the crop. As a result, the USDA expects global soyabean output to fall 12.7m tonnes to 251.5m tonnes. Oil World, a German forecaster, expects production to tumble a “staggering” 19m tonnes, which by its count would be a record fall.

“At this stage it looks like corn will get the acres. That means if there’s any disruptions, then soya has the potential to move higher,” says Bill Cordingley, head of food and agribusiness research for the Americas at Rabobank.

Wheat, meanwhile, has emerged as the possible spoiler for commodities bulls. Global stock cover has risen more than half from the low levels of a few years ago. Low-quality soft wheat, traded in Chicago, has hovered at about the same price as corn, with livestock farmers feeding both grains to animals.

“Wheat prices would be significantly lower were it not for corn” being so tight, says Bill Tierney, chief economist at AgResource, a forecaster. The USDA forecasts record global wheat supplies this year.

On the demand side, the rising global population and increasing wealth in emerging markets offers long-term price support. And, with oil prices high, corn is likely to be further underpinned by the attractions of using ethanol, made from corn, as an alternative fuel. “Every year we don’t get a bumper crop is another year when the risk is really on the upside,” Mr Cordingley says.

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