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Corn outlook

The U.S. corn market has a large influence on world coarse grain values and the Canadian barley market. Over the past month, we’ve seen barley prices delivered Lethbridge increase from $180/mt to $195/mt moving directly in line with the corn market. When barley stocks are extremely tight, barley needs to trade at a premium to U.S. corn to attract imports into Alberta. During years that barley supplies are burdensome, barley tends to trade at a discount to corn as the market functions to encourage demand. The U.S. corn market also indirectly affects feeder cattle prices. We all remember the Midwest drought of 2012 when corn prices reached historical highs causing feeder cattle values to drop sharply and temper Canadian feeder cattle exports to the U.S. Therefore, it is important that all cattle producers have a good idea of the U.S. corn fundamentals.

The USDA estimated corn acres at 91.7 million, down four per cent from the seeded area of 2013. Across most of the Midwest, temperatures have been below normal while precipitation has been normal to above normal in certain regions. If this weather trend continues, it appears the corn crop will be seeded later than normal which tends to result in below-average yields. Later seeding will have the crop pollinating during late July and early August which is usually the hottest period of the summer. A year-over-year decline in acreage will cause the market to be extremely sensitive to weather during this time frame and the futures market generally incorporates a risk premium due to the uncertainty in production.

In the table, I’ve discussed three case scenarios using the USDA seeded acreage estimate but have altered the yields for a simple sensitivity analysis. In the first case study, I’ve used an average yield of 150 bushels per acre which is just above the seven-year average yield of 149 bushels per acre. Over the past years, analysts have become accustomed to factoring in 160 bushels per acre plus but it is important to realize the recent average even with the better-yielding varieties. In this example, production potential is 12.6 billion bushels resulting in a carry-out of 851 million bushels. A fundamental structure this tight would result in corn prices above touching $7 per bushel at some point in the crop year. This scenario would be extremely bearish for feeder cattle prices due to the rising input prices and could result in year-over-year price decline of $20/cwt at local auction markets.

The second scenario portrays an average yield of 158 bushels per acre which is very similar to the 2013 yield. Production would still be under year-ago levels but the carry-out would finish at 1.3 billion bushels, which is basically the same as in 2013-14 and the same as the seven-year average. Using this yield scenario, we can project that prices would also trade in the seven-year average price range between $5 and $7 per bushel. This outlook is neutral to slightly bearish on feeder cattle. Although the carry-out is the same, there would be bouts of higher prices above $6 per bushel which is significantly higher than the prices experienced during the winter of 2013-14.

The final case study uses a yield of 165 bushels per acre which would obviously occur under perfect growing conditions. Using this yield estimate, production would finish near 13.8 billion bushels and the carry-out would likely come in near 1.8 billion bushels. This scenario is bearish for new-crop corn values and supportive to bullish for feeder cattle prices. New-crop corn futures are trading near $5 per bushel and the market is concerned about the delayed planting potential. If the carry-out finishes above 1.8 billion bushels, corn prices will drop to the $4 area. Lower input costs will keep feeder cattle prices well established.

When analysts look at a sensitivity analysis like the one above, the question also arises, what does the market need to do for spring of 2015? In the first scenario, the market obviously needs to encourage a sharp increase in acreage through higher prices. The second scenario also needs to see a small increase in acreage to be comfortable but in the third scenario, the market can keep acreage the same or even experience a small decline.

Cow-calf producers and feedlot operators should have a prudent risk management strategy in place given the risks in the market at this time. We all know how quickly the market can change for feed grains and feeder cattle and this year has potential to be a very volatile period in both markets.

Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. He can be reached at [email protected].

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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