Has corn’s rally run out of steam?
The grain’s upswing on forecasts for hot weather, an uptick which brought Chicago’s best-traded December contract 7.5% gains last week, has certainly slowed. On Wednesday, the lot fell for the second time in three sessions.
It could be that the contract has peaked for now, and could even be in for a tumble which lasts into harvest if weather forecasts change for the better.
But that doesn’t mean that bears hold all the cards.
Losses containable so far?
Sure, weather damage as currently assessed does not look serious enough to warrant a fresh crack at record prices.
Corn’s prospects have suffered from a hot weather blow in a sensitive spot – pollination. But the maths suggests that’s well covered by current price moves.
Plug in a figure of 156 bushels per acre – the midpoint of the range of between 152 bushels per acre and 161 bushels per acre that Agrimoney.com has heard about – and the harvest comes in at 13.2bn bushels, using the US Department of Agriculture’s latest acreage forecast.
While that’s 230m bushels fewer than USDA officials are currently expecting, a noteworthy amount when inventories are thin, it is not enough to get the balance sheet back to where prices were in the run up to last month’s high.
It’s not even enough to reverse even the extra 2011 corn production the USDA factored into its latest crop data, last week, let alone the increased number for stocks left over from last year’s harvest.
The acreage question
However, that’s not all investors have to factor in.
Further scorching weather might cut yield forecasts nearer to 150 bushels per acre, and lift prices further.
But so would a drop in the number of acres planted – which is still a possibility even if it appears to have dropped off investors’ radars for now.
Bulls could have two bites at this cherry.
The first is a cut to the official estimate for US corn sown.
The critics who attacked the USDA’s upgraded figure of 92.3m acres may yet be proven right when revised data are released next month. After all, in North Dakota alone, as Rabobank pointed out, a downgrade of only 2.3m acres total sowings appeared conservative when set against separate survey data showing more than 6m acres unplanted.
The second is the estimate for abandonment.
The USDA currently sees 7.4m acres, or 8.0%, of US corn not making it to harvest. That figure may prove optimistic given the flooding which has claimed huge areas around the Mississippi, Missouri and Ohio rivers.
Indeed, larger losses are hardly uncommon. Half the harvests over the last decade have seen abandonment reach at least 9%, with a 10% rate "not out of the question" for this year, Australia & New Zealand Bank said.
Yield x area
Plug more aggressive estimates on these scores into the balance sheet for US corn and it is not difficult to get more worrying ideas of corn supplies.
Using a 10% abandonment rate alone takes the lost production to more than 500m bushels.
Sure, investors need to watch the how productive harvested corn crops will be. But they shouldn’t forget the question about how much was sown in the first place, and how much of that will get lost along the way.