The expected long ride with high corn prices may be shorter than most are forecasting and the fall may be more severe, says veteran commodity market analyst Richard Brock.
The bottom line, he says, is sell all of last year’s corn, most of this year’s corn and some 2013 corn. He also suggests holding beans to wait for the price to settle in the $13.25-$13.50 range.
Brock, who is one of the country’s most sought after farm commodity consultants, says several key economic indicators lead him to believe what has been a big bull market for corn will turn into a long-running bear market.
Speaking at the recent annual meeting of the Virginia Grain Growers Association, Brock admits some of his peers think he is over-reacting to economic indicators and too quick to pull the plug on high corn prices.
Talk aside, the one-time Indiana farm boy is putting his beliefs in action.
“We have sold all our 2011 corn and 70 percent of our 2012 corn. Plus, we have already sold 30 percent of our 2013 corn,” Brocks says, stressing his belief that corn is facing a protracted battle to push prices back up.
Brock lists several factors that have factored into his appraisal of the corn market.
The trend line for corn yields in the U.S. has gone upward over the past 30 years. During that timeframe there have been a few one-year drops in average yield and only one two-year drop — 2010 and 2011.
These drops are directly related to drought and flooding in the U.S. corn belt. While it is possible to have a third consecutive slowdown in corn yields, Brock says that’s not likely, pointing out it has never happened over the past 30-40 years.
“The meteorologist we use to help make weather-related crop pricing forecasts has been more accurate than most. He says there should be an end to the two-year La Niña weather pattern that has slowed the growth of corn yields over the past two years. And, our weather man contends there should be plenty of moisture to get corn up and growing this spring,” Brock says.
Anhydrous applications point to corn
“The ongoing mild winter has already influenced many grain farmers in the Midwest to apply anhydrous. That tells me they are planning on planting corn. And, talking with growers in the area, there is nothing to indicate they won’t plant more corn, based on winter weather this year,” he adds.
“All the indications we have are that weather will be an incentive to plant more corn and certainly not a detriment that would limit corn acreage in the Midwest,” Brock says.
“The USDA is forecasting 94-95 million acres of corn in the U.S. If the weather pattern holds and growers hit that number and the yield line goes back up to around 160 bushels per acre, we could push our current level of carryover from about 850 million bushels to more than a billion bushels.
“If we top the USDA estimate, say 96 million acres and weather and technological advances come together, and growers get up in the 162 bushel per acre range, we could have a 2 billion bushel carryover,” Brock says.
Lower corn yields the past two years (152 bushels per acre in 2010 and 147 bushels per acre in 2011) have helped keep high corn prices in play.
High prices don’t mean $7 per bushel — that is as artificially high as $2 a pound cotton, but in the $5-$6 range, Brock says.
While $7 a bushel corn was good for corn farmers in the short-term, it was bad in both the short- and long-term for corn buyers. And, as is the case any time commodity prices go high, users of the commodity find alternatives.
“A quick look at livestock numbers makes it easy to understand why we used more corn for ethanol last year than we used to feed livestock. Livestock producers either reduced the size of their operation or they found a more economically suitable feeding system that included less corn.
“High prices can drive demand down quickly, but low prices don’t necessarily drive demand up quickly. In fact, the opposite is almost always true.
“When cotton went to two dollars a pound, textile plants all over the world shifted to polyester for half the cost. Re-tooling mills for lower priced cotton will take a long time, especially if there are no strong economic indicators that cotton prices will remain at less than a dollar a pound.”
The same scenario is true for corn, Brock says. All the supply and demand factors add up to a reduction in demand and potentially a huge carryover that will further push supply up and most likely keep prices low for a while, he says.
In 2011 the story about corn for ethanol being higher than corn for livestock made the rounds in the popular press. The cumulative effect of using corn for fuel or food, as some contend, has been to make the U.S. the only country in the world that is anti-ethanol, Brock says.
In previous years, in fact for most of the history of ethanol production from corn, the industry standard was one bushel of corn for 2.7 gallons of ethanol. Last year the U.S. corn crop was short, but high quality and the standard for conversion went up to 2.9 gallons of ethanol per bushel of corn.
The increase in efficiency, partly due to high quality corn and partly due to improvements in conversion technology, took over a million bushels of corn for ethanol off the market, according to Brock.
Last year carryover stocks for ethanol reached an all-time high of 21.5 million gallons. And, U.S. production seems to have leveled off to about 13.5 billion gallons and on a slow rise to meet the 15 billion gallon federal mandate.
“It doesn’t appear ethanol will demand as much corn as it has in past years. Certainly, there is nothing to indicate to me that demand for corn to make ethanol is going to increase in 2012, nor do much to impact the over-supply that we will have from the 2012 crop,” Brock says.
The agricultural marketing world has been enamored with Chinese imports of commodities over the past few years, but China is not a major, or even a minor, importer of U.S. corn, Brock points out.
“One large grain elevator in Indiana will crush more U.S. corn than China will buy in any given year,” he says.
China grows about the same corn acreage as the U.S., but produces only about half as much corn. There is a reason — The Chinese government has no incentive to build large confinement livestock operations that would demand high quantities of corn for rations. The average size of a Chinese swine operation is about nine pigs, or one litter per year.
“China wants our cotton and our soybeans, but they don’t want our corn. Japan is the largest importer of U.S. corn and there is no indication they are looking to increase the amount of corn they buy from us,” Brock says.
The financial fiasco currently being sorted out in Europe is likely to hurt corn exports to those countries. They have the highest percentage of wealth among all the countries of the world, but their financial house is in a mess.
Don’t count on any significant increase in corn purchases there, the economist says.
“The last two years the U.S. has had short corn crops. Historically, short crops peak in price early and have a long tail,” Brock says.
Short crops almost always peak before, during or just after corn harvest. As evidence, the economist points out that the highest corn prices over the past 6-7 months came in September.
Prices for 2011 corn may stay around $5 a bushel, Brock says. However, 2012 corn and beyond will more likely be closer to $4 a bushel, maybe even lower, if certain supply and demand factors fall in line.
Prices for 2012 soybeans should climb to above $13 per bushel and level off in the $13.25-$13.50 range. “Holding beans until we get in that $13.25-$13.50 range seems like a good strategy to me, “Brock says.