April 10, 2008
U.S. Corn Acres needed, but Yield is most important!!
Analysis of:
Corn Acres Adjustments | online.wsj.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Implications: 1. Prospective corn planted acres by USDA are at 86 million2. If realized, expected harvested acres are 79 million3. Usage of Corn continues to rise with Ethanol production plus emerging middle class diet improvement in South/East Asia4. In the end, Yields will be the most important factor for this year's crop5. Expect extremely volatile commodity markets this year.6. The markets may be forced to find a price at which corn usage is actually rationed.
Analysis: The "Prospective Planting" report from the USDA reported that corn acres are expected to be around 86 million acres. That implies harvest acres of around 79 million acres (there is always a flood or drought somewhere coupled with silage off take). Usage of Corn for the September 1, 2008 to August 31, 2009 period is around 13.1 billion bushels.
Analysis: The "Prospective Planting" report from the USDA reported that corn acres are expected to be around 86 million acres. That implies harvest acres of around 79 million acres (there is always a flood or drought somewhere coupled with silage off take). Usage of Corn for the September 1, 2008 to August 31, 2009 period is around 13.1 billion bushels.
To get enough corn to hold current stocks at the end of the next crop year will require a yield of about 166 bushels per acre (BPA) if 86 million planted is realized. That would be a record by about 5 BPA. Can that happen?? Likely not. So, how do we solve the problem??
The corn market saw this problem and now is doing its job of convincing farmers to switch from Soy Beans to Corn. It is now planting time and some switching can occur. Corn at over $6.00 per bushel is very attractive to farmers.
The biggest issue that I see is the tremendous pressure that will be put on Yields to get the quantity of corn needed to satisfy the current demand projections. On September 1, 2008, the U.S. is expected to have corn stocks of about 1.3 billion bushels. Below 500 million is considered unacceptable (statistically).
Lets assume for a minute that 2 million acres shift to corn up from the Prospective Plantings report which would then imply 81 million acres harvested. The U.S. is expected to use 13.1 billion next year (assuming current profit-abilities for usage. That means that the U.S. must grow around 12.5 billion bushels to protect against going below 500 million as a carry out on September 1, 2009.
If harvested acres are at 81 million and we must grow 12.5 billion, that implies the need for yields to get to 154 BPA. That would be the second largest yield realized in the U.S. in history. Will that happen??
The trend line yields are reported to be between 152 bpa and 154 bpa. Any "perceived" threat to yields this summer will be met with extreme price volatility. My heart goes out to those folks in Procurement positions at Ethanol Plants and Food companies. This will indeed be a long summer.
Bottom line: The market is about to turn its eyes to yield potential. Expect extreme volatility in not only Corn prices but also all basic commodities. These times are like non other in the history of basic agriculture. The real question is "At what price do the market actually ration demand?". We may find that out this summer.
Brian Stevenson
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