Summary
Historically the perception of an El Nino has been associated with Midwest drought. Given the transition towards an El Nino summer event, US grain supply and demand is likely to be scrutinized over the next several months.
Analysis
With east of the Mississippi River weather related problems, spring time planting for corn has been less than normal. It may come as little surprise Allendale Inc has reduced its yield per acre prospects for the 2009 crop.
Allendale has officially released its complete supply and demand breakdown for corn, soybeans and wheat in anticipation of USDA’s June 10th crop production and world supply-demand estimates. What may be most surprising are the projected end stocks to use for 2009/10 corn working toward a record low level dating back to 1999.
By reducing the yield per acre 2 bushels, Allendale Inc projects corn end stocks at 1.015 billion bushels and estimates end stocks to use at 8%, vs the previous level low of 9% in 2003. If this low level of end stocks to use continues its pattern, it likely represents supportive prices for new crop 2009 corn for the producer, but could constrict profit margins for the end users of corn within the feed, fuel and food sectors.
Take a look at the chart and you will learn the projected end stocks to use for 2009 soybeans are also at a level of 8%. At first glance the end stocks to use for soybean appear to be at precariously low levels but look closer to realize since 1999, there have been five previous years when soybean end stocks to use have experienced tighter levels.
Consider with less than cooperative spring planting of corn in the states of North Dakota, Missouri, Illinois, and Indiana, additional acres of soybeans are likely to be considered for 2009 and increase the end stocks to use for soybeans to slightly more than reasonable levels.
In the most recent hours the Climate Prediction Center has publicized conditions are favorable for a transition from ENSO-neutral to El Nino conditions June-August 2009!
Perception typically associates an El Nino event with hot, dry weather for the US Midwest. In fact an El Nino summer is most closely associated with a wetter bias for the west cornbelt.
It is the perception Allendale Inc is most concerned about as we enter the summer growing season when forecasting weather becomes more difficult even on a short term basis. It could be very likely the futures trade could perceive any small stretch of dry, hot weather, closely associated with the El Nino event.
To magnify the sensitivity of low end stocks to use and warmer, dryer temps within the major Midwest is the present crop conditions which indicate 70% good to excellent vs 69% five year average and if conditions follow recent five year average trends, typically erodes 10% as the crop enters the annual harvest. As wheat has recently proven, the old adage of “it’s difficult to make a great crop greater”, Allendale Inc anticipates 2009 corn conditions are likely to prove the same.
Constricting end stocks to use, commodity and index funds building of longs, uncertainty of how many acres of corn will be planted in the east and now an injection of the transition away from a neutral ENSO to a El Nino event is expected to find the world corn producers, end users and associated service industries intensity amplified.
