Corn Outlook – 2009.05

The USDA confirmed a strong demand outlook for both old crop and new crop corn. A combination of a better demand outlook, a slow start to plantings in the eastern corn belt and a renewed interest from fund traders suggests that the market is likely to build a weather premium in the next 6 weeks. For the supply/demand updates last week and the first look at the new crop season last week, the USDA pegged 2008/09 US ending stocks for corn at 1.6 billion bushels compared to 1.7 billion bushels last month and 1.624 billion last year. Both export and ethanol usage was revised higher for the old crop season as demand has been better than expected. Ending stocks for the 2009/10 marketing year were lowered to 1.145 billion bushels which was well below trade expectations of 1.285 billion. The lower new crop ending stocks were generated by an estimate of reduced production this summer at 12.09 billion bushels along with an increase in total usage in 2009/10 to 12.560 billion, up 420 million from this season. The increased usage comes from a 350 million bushel increase in corn-based ethanol demand next year and an increase of 150 million bushels in domestic feed demand. Ending stocks are expected to be the lowest in six years and the stocks/usage ratio of 9.1% would be the lowest since 1995/96. Keep in mind, the corn stocks/usage ratio has been under 10% only twice since the 1973/74 season.

While we believe that much of the recent rally in corn is from the better than expected demand and the outlook for growing demand next year, weather is beginning to be a bigger factor. Without dryness in the eastern corn belt over the next few weeks, we are going to face a decline in acreage and yield. With the tight situation to start with for the coming year, any further reduction in supply or increases in the demand outlook are likely to have a very positive impact on prices. Rain in the eastern corn belt forecasted for May 13th to the 15th is expected to keep planting progress slow for the week ending May 17th. While producers are likely to get much of the crop planted, the late plantings could hurt yield potential and the lower planted area will also impact total production. In fact, the USDA lowered their yield estimate by 1.5 bushels below the 1990-2008 trend for their first supply/demand outlook for the 2009/10 season last week based on the slow pace of planting in the eastern corn belt. For the week ending May 10th, corn was only 48% planted compared to the 10-year average for this time of year at 69%. Progress remains skewed from east to west with Iowa, Nebraska and Minnesota all ahead of normal, and states such as Illinois and Indiana far behind their normal pace. Illinois was only 10% planted versus a 10-year average of 78% and Indiana is at 11% versus 65% on average. Ohio, Missouri, Michigan, Kentucky, Tennessee and other states are also behind the average pace. Agronomists use a rule of thumb that corn which is not in the ground by May 15th tends to see a drop in yield of about 1 bushel per acre per day due to the shorter crop season.

The enclosed table shows the 2009/10 outlook for the coming year using the base of demand from the USDA numbers and also a few different scenarios for the yield. “If” we get all 85 million acres planted and “if” yield slips just 3% from the current USDA forecast, ending stocks would slip to just 808 million bushels and a stocks/usage of 6.4%. The exercise illustrates how quickly the situation could change with adverse weather. It also shows it would not take much in the way of weather issues to spark an extremely tight situation for the coming season. If yield slips to the level of 2005, the stocks usage falls to 4.5%, a record low. If yield slips to the level of 2003, ending stocks drop to just 123 million bushel with a stocks/usage of 1%.

If anything, the 2009/10 demand estimates look conservative and a moderate recovery in the world economy and/or higher energy prices are likely to support better ethanol demand. While there are certainly longer-term demand issues for ethanol, the new Administration does not appear to be threatening to change mandates and there is still the possibility that the ethanol blend will be increased. If so, the industry will be on track to consume 5.0-5.3 billion bushels of corn eventually and this is likely capped at this level compared with USDA estimates for 4.1 billion bushels for the 09/10 season. In addition, Argentina corn production could slip to under 13 million tonnes from 22 million tonnes last year and Argentina is the world’s second largest corn exporter. While the trade did not make much of an issue of the tightening world supply forecast for the coming season, we should point out that world ending stocks for corn for the 2009/10 season wasprojected to drop to 128.2 million tonnes from 139.6 million this year and 130.3 million the previous year. This would be a world stocks/usage estimate of 16.1% and would be the second lowest stocks/usage in 34 years.

The Commitments of Traders Report for the week ending May 5th showed good net buying by index funds and massive net buying by trend-following funds for corn. Index funds were net buyers of 8,489 contracts to take their overall position to over 270,000 contracts. Index funds have increased their net long position in corn by more than 45,000 contracts since March. Keep in mind; index funds were net long 452,000 contracts last year at this time. Trend-following funds were net buyers of a whopping 46,754 contracts to shift their net position from net short to net long of 8,671 contracts. Their position has shifted back and forth between net long and net short in recent months and it is not uncommon in the last few years for this group to carry a net long position in corn of near 150,00-250,000 contracts with a peak at 312,921 contracts in February of 2007. There seems to be plenty of unspent buying fuel from funds in corn as the market builds a weather premium into the 4th of July weekend.