Don’t poke the bear: Market crops with care

By Matt Reese

It is never a good idea to poke a bear. Maybe that is why so many economists are encouraging farmers to watch closely for marketing opportunities for their 2012 crops. Ohio State University economist Matt Roberts shares the bearish sentiment of many economists for the

Don't poke the bear.

coming year.

“Corn inventories are very tight because we have had two consecutive below trend, disappointing yields and that is why we have tight supplies and high prices. This is the first time since 1980 there have been two consecutive below-trend corn yields,” he said. “I don’t think that most producers are putting enough weight on the fact that we are in a short crop year. All it takes to lower prices is a normal year. I think there is a tremendous amount of downside risk here.”

With this in mind, Roberts outlines three possible scenarios in the markets.

“If we hit 165 bushels per acre, it would be a solid year, but not a great year,” he said. “This could happen if the weather was good, but not perfect, and planting went well enough to get 95 million acres of corn planted this spring, which is still lower than some people are predicting.”

With a 165-bushel average yield and 95 million acres of corn planted, the nation’s 2012 harvest would be 14.6 billion bushels, which would provide 15.4 billion total bushels of corn with the carryin.

“In this scenario, it will be a matter of how fast the livestock demand can rebound,” Roberts said. “With flat ethanol demand, we would really need a rebound in livestock demand. The cattle cycle is very slow to adjust, so it would have to be poultry that would adjust more quickly. In this high yield scenario, feed use grows by 9% to 10% and we end up with 1.8 to 1.9 billion bushel carryout and a $4.10 marketing year average price.”

If planted corn acreage is only 94 million acres this spring and the grain harvest is 86.48 million acres with a conservative 161.3-bushel yield, it would result in a 13.95 billion-bushel harvest.

“Combined with carryin, there would be 14.8 billion bushels of corn available next fall,” Roberts said. “If livestock rebounds, ethanol is flat, and exports rebound a lot, we get a 1.5 billion-bushel carryout. With my models, that gives us a $4.50 marketing year average price.”

On the low yield side, though not extremely low, the national average yield could be 155 bushels per acre, with a 13 billion bushel harvest. This would be a third consecutive year with corn yields below the trendline.

“With this, we are talking about prices staying where they are, unless we see severe drought or a disaster in South America,” Roberts said.

With these possible scenarios in mind, Roberts has plenty of reasons to be bearish.

“I think a lot of farmers are looking back to last summer and the basis bonanza we had that was in response to that second short crop we had last year. When you get into a year and you’re tight coming into summer, you can get the basis really bid up,” he said. “If we get a normal crop this year, you won’t see that. It can happen, but it is a low probability event. I think we are probably on a downhill slide with price to next harvest. Unless we get a really severe weather event, I don’t see prices getting much higher. If we get delayed planting, that will support prices until the market remembers the 2011 planting.”

For the new crop, Roberts advises marketing soon.

“I believe there is a higher probability of lower prices, that means contract now. If you are worried about higher prices this summer, re-own that on paper. Don’t do that with your physical bushels,” he said. “Soybeans have less downside because they are probably going to lose acres to corn. South American crop stress could support prices as well.”

 

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