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Market Talk – for May. 16, 2011

I’ve had many inquiries over the past month in regards to the corn outlook for 2011-12 crop year. The USDA March 31 seeding intentions survey had 2011 corn acres at 92.2 million which would be one of the largest acreages on record. Despite the larger plantings, the corn market has made new record highs and it doesn’t look like the trend is over just yet. The corn market has a strong influence on the price of imported DDGS from the U.S. When Western Canada has a normal-quality wheat crop, barley prices also move in line with corn values. The U.S. is the world’s largest producer of corn and the fundamentals influence the world feed grain complex as wheat also moves into feed channels when priced appropriately. U.S. feeder cattle price are also priced according to corn in the feedlot margin structure. Therefore, it is important that Canadian cow-calf producers and feedlot operators have a good idea of the U.S. corn outlook.

The 2010-11 corn carryout is expected to finish near 675 million bushels. While the March 31 stocks figure came in below expectations, the USDA did not lower the expected carryout on the April report. This implies that demand rationing will take place in the last quarter of the crop year. At this time, feedlot operators are experiencing favourable margins and ethanol production is running ahead of schedule. Export sales also remain strong so the question remains, at what price will the market start rationing demand? Usually, the market has to trade at a premium to HRW wheat to encourage wheat feeding in the U.S. southern Plains. The problem is that Kansas, Texas and parts of Oklahoma are extremely dry and HRW production will be down from earlier expectations. Feed demand will slow later in the crop year as cattle on feed numbers decline which will likely result in lower feed demand during the summer.

Looking at 2011-12, corn acres are expected to reach 92.2 million acres. It is important to note that the expansion in acreage is coming in the west and south, which is not prime corn-growing area. Last August, when Russia banned exports of cereal grains, the wheat market skyrocketed causing U.S. farmers in the Midwest to increase soft red winter wheat acres by 40 per cent. This is prime corn-growing area where higher yields are achieved. We saw limited acreage expansion in the Midwest on the USDA acreage report. Using a USDA trend yield of 162 bushels per acre, production has potential to reach 13.8 billion bushels.

It is important to realize that this trend yield is the second-highest yield on record. Achieving this yield is a very low probability because the acreage expansion is not in the prime corn-growing region. At the time of writing this article, later seeding would also result in lower projected yields. Therefore, realistically, one can only cautiously assume 159 bushel-per acre national average resulting in production of 13.5 billion bushels.

The demand equation continues to grow. Hog inventories are expanding and U.S. cattle on feed numbers will be similar to last year. Ethanol production continues to grow and export demand will also marginally improve. Most analysts are projecting a two to four per cent increase in corn demand for 2011-12. This will result in an ending stocks number under 500 million bushels, which is actually lower than the current crop year. Corn supplies will be tighter in the next crop year which will keep the market trading near historical highs.

There are a few other factors to consider. First, the Russian export ban may not be totally lifted or export quotas will allow a certain amount of grain onto the world market. However, it is important to note that food inflation is a problem and despite larger wheat production in 2011, Ukraine and Russia may not lift the export ban totally to keep domestic prices at 2010 levels. U.S. hard red winter wheat production will be down from last year causing stocks to drop to historically low levels. Don’t count on excessive feeding of hard red winter wheat limiting the substitution effect on corn. Investment money flow continues to move into CBOT corn where open interest has consistently exceeded that of NYMEX crude oil. Pension funds, Hollywood celebrities and professional athletes now count on corn as a prime investment vehicle with similar risk/reward scenario to equity markets. Look for the speculative trade influence to increase, not decrease in the upcoming crop year. Any threat to yield potential could cause futures to rally up to $9 or $10 per bushel.

Feedlot operators may want to look at buying some out of the money call options on the new crop corn futures. Also, if Canada has a normal wheat crop where 80 per cent is milling quality, barley prices could also move to historical highs rallying $50 to $80 per mt from current levels resulting in a similar price structure to the corn market.

GeraldKlassenanalyzesmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinSouthernAlberta.Hecanbereachedat [email protected] or204-287-8268.

About the author


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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