Darrell Mark
In the Cattle Markets
Corn market volatility to continue.
Let's recap the corn acreage estimates thus far for 2011's crop. On March 31, the U.S. Department of Agriculture-National Agricultural Statistics Service (USDA-NASS) reported U.S. corn farmers intended to plant 92.2 million acres of corn this year. USDA's World Agricultural Outlook Board (WAOB) maintained that estimate in its May World Agricultural Supply and Demand Estimates (WASDE), despite significant delays in planting across the Corn Belt. USDA-WAOB did, though, drop planted acreage by 1.5 million acres to 90.7 million acres in its June 9 WASDE report, as many expected.
Twenty-one days later, USDA-NASS released its June 30 acreage report, shocking most corn market participants by increasing corn planted acreage to 92.3 million acres amidst significant late planting, prevented planting, severe drought in the Southern Plains, and severe flooding across much of the Midwest Corn Belt. In the July 12 WASDE report, USDA-WAOB maintained this 92.3 million acres of corn planted in 2011.
A variety of things about this might be interesting to close observers of these important market data, but at the surface is a rather large swing in acres during a marketing year projected to have a tight stocks-to-use ratio, making the market ultrasensitive to this information. Indeed, December 2011 corn futures saw a rally of $1.72 per bushel (bu.) from the March low to June high, a drop of $1.44 per bu. in the second half of June, and a rally of 78¢ per bu. since the beginning of July.
USDA has been more consistent in its yield estimate for 2011, maintaining a below-trend line forecast of 158.7 bu. per acre since its first WASDE report in May for the 2011-2012 marketing year to reflect the difficult growing conditions this year. Interestingly, though, harvested acreage as a percentage of planted acreage has been increased this spring and, at 91.98%, is higher than the previous five-year average.
Certainly, high corn prices provide a strong incentive to harvest any acres possible, but significant flooding in some areas since planting time have had to reduce the number of acres that would be harvested.
Despite a 420-million-bu. increase in total supply for the 2011-2012 marketing year since last month's report, USDA-WAOB did increase total use by 245 million bu., resulting in a more bullish-than-expected supply-demand balance. Since June, feed demand was increased by 50 million bu., ethanol demand by 100 million bu., and exports by 100 million bu. (primarily due to increased sales interest from China). Thus, ending stocks for 2011-2012, at 870 million, were 175 million bu. higher than in the June estimates. However, it was well below the average prerelease trade expectation (around 994 million bu.); thus, the trade response was quite bullish and partially supported the 25¢-per-bu. gain in December 2011 futures on Tuesday following the report's release.
Are the huge changes in acreage, yield, and demand estimates over? They generally are at this point in the summer. This year, though, that's hardly the case. USDA-NASS has indicated that it will survey Montana, Minnesota, North Dakota and South Dakota again to obtain additional acreage data. Further, acreage certification data collected by Farm Service Agency (FSA) and crop insurance data collected through FCIC that can help calibrate the planted acreage numbers are less complete this year by the end of June due to late planting. The greatest yield risk typically occurs during the first weeks of July during pollination. Due to the late planting this year, pollination is delayed and is just now starting in earnest. Coincidentally, the June 10 weather outlook calls for much above normal temperatures and below average precipitation across wide swaths of the Corn Belt, which would stress corn plants during this most critical time period.
Given all these uncertainties, it is difficult to predict which direction corn prices will go. It seems relatively certain, though, that market price volatility will continue. Measuring the crop size isn't an easy task in a perfect growing season, so the wide swings in acreage already observed and possibly to come in yield forecasts that USDA publishes is understandable (of note, these data are the best available and are gathered and analyzed by talented and knowledgeable individuals).
Strategies for cattle feeders
So, assuming that this volatility will continue, what should cattle feeders and other corn buyers do? Buying immediate needs on price breaks (like observed at the end of June) is appropriate. Further, producers in areas with particularly tight stocks of corn should work to obtain physical needs through the end of the summer (or before new crop supplies are available).
At this point, corn supplies held by farmers are dwindling and ethanol plants continue to provide stiff competition for remaining bushels. Remember, the Aug. 31, 2011, ending stocks figure of 880 million bu. is quite tight and barely sufficient to provide "pipeline" supplies. Locking in price levels on these bushels physically needed isn't necessarily the best option, especially as corn prices are rallying again, but basis contracts may be appropriate to consider.
Longer term, there will be volatility from the corn market and a variety of world events that should provide an opportunity to lock in more favorable corn prices this fall during harvest. However, conservatively locking in a portion of fall/winter needs to cover some of the feed needs for calves contracted for fall delivery may be prudent as well — especially if those calves were bought with a positive projected margin.
