Corn prices have recently moved in three distinct patterns, according to Dr. Darrel Good, University of Illinois agricultural economist. He said these three movements are new-crop futures, old-crop futures, and old-crop cash prices. December 2012 futures reached a high of $6.735 on August 31, 2011, and declined erratically to the current low of $5.15 per bushel. The decline since the third week of April totaled about 50 cents, he noted earlier this week and prior to USDA’s WASDE report yesterday. “Continued weakness reflects a combination of large crop expectations and demand concerns,” Good said. “The early planting season along with non-threatening weather conditions to date have created expectations for an above-trend yield in 2012. In combination with large acreage, yield expectations point to a crop well above 14 billion bushels.”
New-crop demand concerns are in two categories, Good explained. “First, the delayed and likely slow implementation of 15 percent ethanol blends in the United States fuel supply point to stagnating corn consumption in that category next year as the E10 blend wall rapidly approaches,” he said. “Second, the European debt crisis, a slower pace of economic growth in China, and the slow pace of job creation in the United States dampen commodity demand expectations for the year ahead.
“The one bright spot may be a larger export market for U.S. corn, as USDA has recently announced large sales to both China and other unknown destinations. Conditions currently point to a substantial buildup of U.S. corn inventories next year and increasing expectations that prices will return to the lower averages experienced in the 2007-08 through 2009-10 marketing years. Average prices received by farmers in that three-year period averaged just under $4.00,” Good explained.
Old-crop July futures reached a high of $7.95 on August 30, 2011, declined to about $5.92 on April 18, 2012, and are currently trading near $6.15. The premium of July futures over December futures is nearly $1.00 and has increased about 36 cents over the past two weeks, he said. Good said the weakness in July futures reflects increasing expectations that old crop inventories, while tight, will be sufficient until new crop supplies are available. Old-crop export sales have been brisk, but the pace of shipments remains well below the pace needed to reach the USDA projection of 1.7 billion bushels for the year. The pace of ethanol production suggests that corn use in that category will not exceed the USDA projection of 5 billion bushels. “Use in the feed and residual category remains difficult to predict, but on the surface, declining animal numbers and prospects for increased wheat feeding point to weaker feed demand this summer. In general, the old-crop price premium provides an incentive for users to delay consumption as much as possible until new crop supplies are available,” Good said.
Declining futures prices, particularly for deferred contracts, reflect the expectations of adequate old crop stocks and prospects for a substantial increase in stocks next year, he added. In that context, the higher price for May futures and strengthening basis levels remain a bit of a mystery. In general, a strong basis reflects tight stocks or a slow pace of movement of corn to market relative to the pace of consumption. “The basis levels should be expected to collapse whenever producers give up and move old crop stocks in preparation for harvest of a large crop. Alternatively, the long period of strong basis may reflect a higher rate of feed and residual use than has been revealed to date and the cash market’s expectation of much tighter year-ending stocks. If that is the case, a strong basis may persist through the end of the marketing year. The question boils down to which market, cash or futures, has better anticipated consumption and ending stocks.” Good concluded.
