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CME: Good Crop Plantings Cause Futures Decline

CME: Good Crop Plantings Cause Futures Decline

13 May 2015

US - Crop plantings are off to an excellent start this year and this has contributed to the steady decline in corn futures prices so far this spring, write Steve Meyer and Len Steiner.

December 2015 corn futures were trading around $4.15/bushel in late March as producers were getting ready to plant the new crop. Today, corn futures are trading around $3.72, down about 10 per cent from those March levels, with most of the decline happening in the last three weeks.

USDA reported on Monday evening that corn plantings are now 75 per cent complete, well above year ago and five year average levels (see chart).

Although past studies have showed very mixed results in using plantings to project final yields, at this point this is one tangible piece of evidence that market participants can utilise in their forward projections.

Timely plantings tend to reduce the number of acres that switch to beans or are abandoned. Also, by getting the crop in the ground early, it reaches maturity before the summer heat has a chance to damage the crop. Plenty of weather can happen between now and August.

However, for market participants, the early plantings are a positive sign that the new crop season is off to a good start.

USDA provided its first estimate of the corn crop at noon ET yesterday, and the table summarises estimates from a number of analysts polled by Reuters.

On average, analysts expect corn ending stocks for the 2015-16 marketing year to be 1.752 billion bushels, about 6 per cent lower than a year ago. But as you can see, there is a very wide range of opinions regarding final ending stocks - to be expected at the start of the growing window.

What does the 1.752 billion bushel number imply in terms of corn output and, ultimately, prices?

According to the USDA planting intentions survey, US corn farmers are expected to plant 89.2 million acres with corn this year.

It is likely this is the number USDA will use in their balance table although private analysts likely have different numbers in their calculations based on how early the crop is planted and price differentials with soybeans.

Using a 91.5 per cent harvesting ratio, we come up with a potential 81.6 million harvested acres. Everyone has an opinion on yields and it is expected that USDA will use some sort of trend yield in their estimate.

Some analysts, however, think a trend yield may be too high as past crops following a record year have failed to match trend.

Last year’s yield was a record 171 bushels per acre. In February, USDA used a yield of 166.8 bushels per acre.

Using that yield and the harvested acres number above gives us a possible corn production estimate for 2015-16 of around 13.6 billion bushels.

Last year corn production was 14.2 billion bushels but keep in mind that this year we will have an additional 600 million bushels in carryover stock than in 2014-15.

Based on these calculations, we come up with around 15.46 billion bushels of available supply for the new marketing year, this is almost exactly the same number we had in 2014-15.

The demand side of the balance sheet is also quite uncertain. Early USDA estimates for 2015-16 had feed use at around 5.275 billion bushels, only slightly higher than in 2014-15.

The average of analysts estimates would imply this number as well. However, we are seeing continued expansion in the broiler and hog industry and this could help bolster feed use for the upcoming marketing year.

Export demand remains a wild card. A strong US dollar and good harvests in other markets could limit US exports. At this point, it seems many analysts are using a 1.85 billion bushel figure.

Adding up these numbers we can visualise a corn balance table that yields a 1.75 billion bushel ending stocks figure. The stocks to use ratio comes up as 13.1 per cent, only slightly lower than in 2014-15 and implying a corn price in the $4 per bushel range.

But the season is young and summer weather is ahead of us. Betting on trend or above trend yields is always a risky proposition, especially after the record number we got last year.

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