The Fading Effects of the 2012 Drought

Grain supplies will continue to be tight this summer until the fall harvest comes in.

By Kyle Schrad, INTL FCStone

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The 30-year historic drought of 2012 will have a lasting impact affecting the upcoming 2013/2014 corn crop. As proven in 2012, weather is the greatest impacting factor on corn yield and undoubtedly also the hardest to forecast, and we are again tasked with forecasting yield (based on weather) and demand, as well as trying to figure out price implications.

Last crop year saw yield forecasts start May 10 with a USDA estimate of a 166 bushel per acre yield for 2012/13, a carryout-to-use ratio of 13.7 percent and an estimated price range of $4.20-5.00. As the season progressed, the Aug. 10 report saw that estimated yield drop to 123.4 bushels, a carryout-to-use ratio of 5.8 percent and an average farm price of $7.50-8.90. Now, with the calendar turned to 2013, people are questioning what to expect for the remainder of the year and into the 2013/14 crop.

Thus far in the crop year, livestock operators under margin duress have sustained their usage levels through the high prices of 2012, while both exports and ethanol usage have declined rather sharply. These trends seem likely to continue throughout the crop year and, with ending carryout currently projected at 602 million bushels, things will be tight during the summer months as the crop year comes to an end.

One area of concern for buyers is that the past few years have seen significant increases in on-farm storage, and that has meant that even when the futures price has dropped, basis has increased in order to entice product onto the market. The drought that brought high prices and therefore attractive profit margins for many grain farmers has afforded them a position of strength, in terms of marketing, the likes of which we’ve never seen. Based on this, we expect grains to be in very tight hands near the end of the crop year, which likely means elevated prices be that through futures or basis gains.

A bumper crop for this year’s harvest could certainly provide some alleviation from strong grain prices. Currently, private estimates expect to see around 99 million acres of corn planted this spring and, assuming a near-normal acreage abandonment, would leave harvested acreage at 90 million acres. Using the assumed acreage and varying yields for the upcoming season: At the upper end of anticipated yield of 165 bushels per acre (BPA), we’d see production come in at 15.015 billion bushels; while, near the 2012 yield of 125 BPA, we would see total production at 12.003 billion bushels. Clearly these wide ranging estimates would have large implications on price, and expectations of larger production would weigh heavily on grain prices late in the season.

The scenario with the largest production number of 15-plus billion bushels would provide relief from the need to ration product, and thus we would look for demand to rebound potentially above 2010/11 levels at 13.250 billion bushels. Even with the substantial growth in demand this would allow carryout to increase sharply from 602 to 2.391 billion bushels, giving us a carryout-to-use ratio of 18.0percent, a number not seen since 2004/05. In my opinion this would likely result in an average farm price for the year somewhere in the $3.50-4.00 range.

This sounds great to end users after the past couple of years, but we have to examine the possibility of another historic drought, which could hammer production for a second consecutive year. Assuming total production of 12.003 billion bushels we can once again note our previously assumed demand would exceed total production. This time, however, we are using a total demand of 11.480 billion bushels that would actually exceed the production level -- meaning carryout would fall below USDA’s current expectation for this year of 602 million bushels down to 523 million bushels and a carryout-to-use ratio of 4.6 percent. A 4.6 percent carryout ratio would be the lowest seen over the past 20 years and would likely mean prices slightly higher than the current year, which USDA projects from $6.80-8.00.

Currently the market seems to be pricing-in a yield near the middle of this range around 145 BPA. So keep an eye out for deviations from that number as USDA expectations are released this spring and throughout the summer. Changes here will likely drive price direction for both old and new crops as the season progresses.

While there is no certainty, this should give a clearer picture as to how the most extreme scenarios would play out regarding supply, demand and therefore price. We are cautiously bearish but guarded relative to the potential for continued drought on an already water-challenged crop.

This article originally appeared in the April 2013 issue of Food Processing Magazine.

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