CME: Bearish Corn Outlook for 2012/13

US - USDA presented a decidedly bearish outlook for US corn supplies and prices in 2012/13, writes Steve Meyer and Len Steiner.
calendar icon 28 February 2012
clock icon 4 minute read

The 2012/13 outlook was expected by market participants, however, considering much speculation among market participants that farmers will add some +2 million corn acres this spring. USDA’s early estimates are based on trend yields for the period 1990/91 - 2010/11, leaving out the yield from last year which was seen as an outlier. The USDA balance table uses a trend yield of 164 bushels per acre, on the high side of private analyst estimates. The combination of higher yields and higher acres is expected to generate an almost 2 billion bushel increase in US corn production come fall. The increase in production is large enough to double expected ending stocks for 2012/13. If this type of increase materializes, it would likely pressure corn prices below the $5 benchmark by Q4 of this year and in early 2013. December corn futures, however, still are hovering at around $5.60/ bushel.

On the demand side, USDA expects a big increase in the amount of corn going into livestock and poultry feed. Total feed and residual (unknown use) for the 2012/13 marketing year is projected at 5.2 billion bushels, the highest since 2007/08 when corn feed use was 5.858 billion bushels. Much has changed in US livestock and poultry feeding since then, however. The primary change has been the inclusion of more ethanol by-products in livestock and poultry feed (DDGs). By some estimates, these by-products have displaced more than 1 billion bushels of corn.

The USDA projection for a 600 million bushel increase in feed use implies increases in both livestock and poultry numbers. It is a given that the increase will not come from the cattle industry given a smaller calf crop and the potential for some heifer retention in 2012/13, which will limit the number of cattle going into feedlots. Hog slaughter for 2012 is forecast to increase by 2% in 2012 while hog weights are seen as flat. This kind of increase in pork will be insufficient to absorb the expected 13% jump in feed use. This leaves broiler industry as a primary candidate for higher corn use. So far broiler producers show little appetite for expansion, as evidenced by the lower egg sets and chick placements. USDA 2012 forecast is for broiler production to be down 3% from year ago levels. A good part of this decline will likely happen in the first half of 2012, however. Still, there is plenty of uncertainty about the outlook for future feed use. Should current feed estimates fall short, it will further add to the projected ending stocks. USDA believes that ethanol has hit the blend wall limit and demand will struggle given lower gasoline consumption in the US (less gasoline means less ethanol needed to create a 10% blend). Corn exports are forecast to rise by 200 million bushels although there is ongoing uncertainty about Chinese corn demand in the upcoming year. In all, a generally bearish view of US corn supplies, which bodes well for US livestock and poultry producers. Now if we could only get Mother Nature to read the report and concur.

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