Is Big News Coming to the Corn Market?

March-10-07

USDA made no changes in the supply and usage estimates in their March update, but the “big news” may come on March 30th. For now, ending stocks were left at 752 million bushels which represents just a 23 day supply at the end of August. This is just 6.4% of usage and is only surpassed by 5% in 1995/96.

Feed usage was left unchanged at 5.975 billion bushels. Some had felt feed usage would be lowered as livestock production will likely drop somewhat with continued high corn prices. Cattle on feed are now down 3% as placements have been off 14% in the past three months. The numbers of heifer and cows in feedlots are both up reflecting anticipated reductions in the breeding herd. Since the corn price increase began in September 2006, livestock and poultry estimated production for 2007 has been lowered by about 1%. The March 30th stocks report will provide an estimate of the how much winter feeding has been cut due to high corn prices and to substitution of distiller’s grains for corn as more ethanol plants come on-line.

Foreign buyers have shown little cut-back in their purchases. Now, one-half way through the marketing year, commitments to purchase corn remain 122% above last year. USDA is estimating only a 5% increase.

Corn prices so far reached their highs on February 26 with May Futures at $4.49 per bushel. Since that time, prices have dropped, but only about 32 cents from that high mark. Thus, the market seems to be in a consolidation phase, as traders await more information to determine price direction into the spring. The most likely sources of that information are from March 30th USDA reports and spring weather.

The March 30, reports include the Prospective Plantings report and the Grain Stocks report. The USDA has used a preliminary planted acreage number of 87 million acres, up 8.7 million from last year. Private estimates have ranged from 87 million up to near 91 million acres. There is a wide range of opinions, but producers have clearly gotten the message that corn is preferred in 2007, so I believe the numbers will be at 88 to 90 million acres.

Weather forecast from the National Weather Service for spring and summer (at this writing) provide no clues as to direction with equal chance for above/below normal precipitation and temperatures. In the shorter run, forecast through March 23 are for generally dryer and warmer than normal conditions for the Midwest, which is a favorable forecast for early planting.

Seasonal tendencies are for corn prices to rise from late February into early May. The market will look to the March 30th reports for the next significant information for possible change of direction. More than likely, prices will not be able to exceed the late February highs, prior to those reports. Thus, to make new highs will likely require bullish March 30th reports or weather concerns later in the spring or summer.
This means that pricing some portion of remaining old-crop and new-crop prior to the report should be considered. When ready to price old-crop, be sure to ask about bids for June or July delivery. At some locations, those bids are sufficient to cover storage costs. This is especially true at locations that have an ethanol plant starting in production this spring.

Since corn stocks are so tight, weather concerns would drive markets to new highs. Many will want to retain upside price potential on a portion of their old crop. This can be done by holding, say 20% of old crop inventory, or by selling the cash and buying call options on that 20%. At-the-money December calls are priced about 43 cents per bushel. One might plan to hold those until about mid-July and then make a decision to liquidate them, if the growing season has gone well.

For new-crop, the traditional guidelines are to have 25% to 35% of expected production priced in the spring pricing window from mid-March to mid-May. Thus, having around 1/3rd of that done prior to the March 30th report might be a guideline.

Chris Hurt
March-10-07
Purdue University