MARCH is a month when market analysts and farmers do a lot of guesswork; it can be the proverbial "calm before the storm" -- that lull in the marketing year between the onset of the South American harvest and the North American planting season.
The market is divided, in a sense, while waiting for more information to develop heading into the seeding of the U.S. corn and soybean crops.
On one hand, the market assumes a return to ideal weather conditions and trend yields, meaning lower prices.
On the other hand, of course, is the reality that stocks, both domestically and globally, are tight as a drum, and the margin for error in producing a bumper crop is razor-thin.
Starting off with the hopes for larger production and lower prices, the University of Missouri's Food & Agricultural Policy Research Institute (FAPRI) released its annual baseline projections last week that are calling for a record corn crop and a $2/bu. drop in prices.
University of Missouri economist Pat Westhoff said corn prices are projected to be $5/bu., down from the $7 harvest price last fall. That price, of course, depends on farmers planting a near-record 96.9 million acres, the second-largest planted area since the 1930s and just off last year's record.
With that planted area and a return to average weather conditions, Westhoff based the FAPRI baseline on a return to a trend-line yield of 162 bu. per acre, well above the drought-stricken 123 bu. average of 2012, which was 23% below the trend line.
Westhoff projected that corn prices will stay just under $5/bu. throughout FAPRI's the 10-year projection, for an average of $4.81; while that price is below recent highs, it is still below pre-2007 levels.
FAPRI said the additional corn production will keep a lid on prices, relatively speaking, and allow some demand from the feed and ethanol sectors to return to the market.
Using an economic methodology involving dynamic stochastic analysis, FAPRI's computer models measured 500 potential outcomes for the 10-year baseline. Among those, sub-$3.50 corn occurred 10% of the time, and $6-plus corn occurred equally as often.
The FAPRI baseline projects soybean planting at 78.5 million acres in 2013 versus last year's 77.2 million. With the additional production, the baseline calls for an average soybean price of $11.48/bu. over the period.
Among the most obvious challenges to the assumption that domestic production will rebound this year is the possibility of multi-year drought. For some parts of the U.S., that is a lingering reality. For the Corn Belt, 2012 was the worst drought in decades.
While weather conditions in recent weeks have brought additional moisture to many of the most parched grain-producing areas of the country, temperatures have remained unseasonably warm for a second straight year.
In fact, the National Oceanic & Atmospheric Administration reported last week that February's global temperatures were the ninth hottest on record. Many areas, including a large swath of the U.S., experienced hotter-than-average monthly temperatures, as did Eastern Europe, the former Soviet Union countries and much of Canada.
However, new research suggests that when it comes to crop yields, high heat is not the biggest threat; lack of precipitation is a much bigger factor.
Advanced climate modeling from University of Queensland crop scientist Graeme Hammer suggests that the effects of drought on crop yields have far more to do with the availability of water than the oppressive heat.
In a report published earlier this month in the journal Nature Climate Change, Hammer and his colleagues noted that an anticipated increase in global temperatures associated with global warming is not directly linked to an expected decline in crop yields. Rather, the model suggests that an associated increase in the evaporative demand for water might ultimately be responsible for an expected drop in yields.
"These two factors are often related, but until now, we were simply attributing projected yield declines to increases in temperature and heat stress -- and it's more complex than that," Hammer explained. "Increasing temperatures mean increasing demand for water and, (thus,) greater plant water use and, ultimately, more water stress during the crop life cycle."
Should drought return during the North American growing season, the sky may be the limit when it comes to prices.
The February "Feed Outlook" from the U.S. Department of Agriculture's Economic Research Service (ERS) noted that with U.S. corn ending stocks projected to be 632 million bu., off 36% from the previous year, the supply of corn will be at the smallest level since 1996.
Ending stocks have trended lower annually since 2009 as sustained demand from the feed, ethanol and export sectors combined with adverse weather conditions to stretch available supplies almost to the breaking point.
Prices, accordingly, have hit record levels, with the USDA-forecasted $7.10/bu. for 2012-13 corn marking the highest price on record.
ERS researchers noted the strong correlation between declining stocks and increasing corn prices, underscoring the link between supply and demand in that market (Figure 1).
In fact, the stocks-to-use ratio for U.S. corn has remained near or below 20% for nearly two decades (Figure 2) and has remained below 10% for the past few growing seasons as production fell below trend.
The first demand sector to "cry uncle" at such record prices has been the export market, with sales abroad declining steadily almost each month since December 2011.
USDA's March "World Agricultural Supply & Demand Estimates" (WASDE) report sparked a mini-rally in corn and awakened the bears in the soybean market.
Corn prices settled higher in four of five sessions following the March 8 WASDE report, while soybeans settled lower just as many times.
Farm Futures market analyst Paul Burgener noted last week that for soybeans, tight supplies and concerns about South American weather and infrastructure continue to support prices. On the other hand, South American soybeans are now moving into the market at an improved pace, slowing U.S. exports for the time being and fueling the sell-off.
"Old-crop soybeans have moved back under the $15/bu. level after a couple of days' opportunity to sell beans above that price," he explained. "There may be more chances (for farmers) to price beans at $15, but the risk of waiting could be increasing."
Corn prices showed decent strength for the week, but concerns resurfaced midweek about demand destruction due to sustained high prices.
The weekly petroleum report from the Energy Information Administration showed that production had slowed for a second consecutive week, off 8,000 barrels per day to an average pace of 797,000 barrels. Imports of ethanol were nil for a second straight week, and stocks hit a 15-week low at 18.7 million barrels. Gasoline demand jumped to a 16-week high, and as a percentage of demand, daily ethanol production was only 9.24%, the third smallest percentage of the year.
While the corn export pace remains slow, weekly shipments last week gained 11% from the previous week, sparking some enthusiasm among traders when coupled with an earlier announcement of China purchasing 120,000 metric tons of corn for 2013-14 delivery.
Of concern is that global customers will increasingly turn to other grains instead of corn if prices remain locked near $7/bu. for much longer.
USDA reported an unusually large sale of grain sorghum last week, with 114,300 mt heading to "unknown" destinations for the current marketing year.
Soybean meal continued to set the pace for most protein ingredients. One merchandiser of rendered products in the South reported last week that international demand for meat and bone meal will be "soaring" in the coming weeks.
Protein markets were firm overseas, and rumors started circulating that Indonesia will reopen its market to U.S. ruminant meat and bone meal sometime in April, marking nearly a full year since that market closed for U.S. exporters. Malaysia recently opened up as an export destination for these products as well, meaning that more meat and bone meal will be leaving U.S. ports in the coming weeks and months.
While some talk is circulating domestically about ration reformulation as prices continue to firm, action on that front has remained light to this point.