After looking at the USDA's supply and demand numbers for corn, I thought maybe we should play with the numbers and review this market on a fundamental basis.
When comparing this year's weather vs. the past two growing seasons, there is a marked difference. The last two growing seasons dealt with a cool and wet spring. Some areas took preventive plant on corn acres or planted soybeans because the weather was just too wet to get the corn in. One such area was North Dakota. This year, most of the corn acres got in, with the exception of North Dakota, and again some preventive plant or soybeans were planted instead.
However, this year, unlike last year, corn was planted very timely. The last two years have had summer days that were cooler, which slowed the crop fill and dry down. This year, the days from April on have been warmer than the last two years, and if this continues, the crop will come home quicker and result in an easier harvest.
Last year, USDA estimated the final yield for corn at 164.7 bushels per acre, and this year, it is down slightly, at 163.5. This year has been a year where we came in with an El Nino influence and have quickly shifted to a La Nina. Shifting into a La Nina during July or August should provide the farmer with good harvest weather this fall.
USDA estimates that 81 million acres will be harvested this year. Now, 81 million acres times a yield of 163.5 bushels per acre gives a production of 13.24 billion bushels of corn and adds to beginning stocks of 1.48 billion bushels for a supply of corn at 1.47 billion bushels and then add a fudge factor of 10 million bushels for imports. Now we have total supply at 1.47 billion bushels.
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USDA has been notorious for underestimating demand. Demand is elusive and hard to quantify. However, USDA has usage less than this year. Well, first off, if we had record production last year, but the crop was of poorer quality; then it would have taken more of the commodity in usage to reach the end results needed. So is USDA trying to say that while the yield will be down from last year, the quality will be better and therefore we will use less? I don't think so. The change in usage came purely from a reduction of exports.
USDA did raise usage for the old crop corn in the feed and residual category by 175 million bushels and left everything else the same, other than a 50 million-bushel decrease for ethanol. Ethanol production has slowed in recent months. Now reducing exports in the new crop is interesting. Perhaps fewer crops would mean less to export. However, Russia's crop of wheat is estimated to be down 20 percent, Kazakhstan is estimated to decline 30 percent and Canada is forecast to decline 17 percent in their production of wheat. There still is time for more reductions and if China got off to a bad start on its corn production season, I would anticipate that with the potential inability to get wheat readily from Russia, China may well turn to the U.S. for wheat and even more corn.
A researcher at Japan's largest trading firm says he expects China to import 40 million bushels of corn in the current marketing year. He went on to say that he expects that figure to grow by ten-fold in the next five years as China abandons its policy of corn self-sufficiency. Therefore, it is rather critical this year's U.S. corn crop reaches trend line yields to address the growing.
There is a potential for a bull market in corn. Mother Nature's effect on world wheat and U.S. corn production along with the anticipation of what the rest of the world will need to meet their demand remains key.
