Corn Stocks, Acreage, and Yield

Corn Stocks, Acreage, and Yield
Darrel Good, Agricultural Economist - University of Illinois

The price of corn in Chicago is up about 75 cents since the end of March and this may represent a good new crop corn marketing opportunity. Todd Gleason has more from the University of Illinois.

The price strength comes from dry weather conditions…
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The price strength comes from dry weather conditions in South America and the associated strength in export demand for U.S. corn writes University of Illinois Agricultural Economist Darrel Good on the Farm Doc Daily website. He also indicates there are expectations for planted acreage to fall short of intentions; and some recent yield concerns associated with an extended period of hot weather. Good says that last note is really important, but that the end of the month USDA reports are likely to weigh heavily on the trade.

Good :24 …during the third quarter of the marketing year.

Quote Summary - Prices will continue to reflect weather conditions and summer weather forecasts, but will also be influenced by the USDA’s Grain Stocks and Acreage reports to be released on June 30. The estimate of corn stocks as of June 1 will reflect the recent increase in the pace of exports and will reveal the pace of feed and residual use during the third quarter of the marketing year.

The expected size of June 1 stocks can be calculated based on consumption data currently available and on the assumption that feed and residual use is on pace with the USDA projection of 5.25 billion bushels for the year. Based on the USDA’s Grain Crushings and Co-Products Production reports for March and April and on the EIA weekly estimates of ethanol production during May, corn used for ethanol production during the third quarter of the marketing year is estimated at 1.24 billion bushels. Corn used for other domestic industrial and food products is estimated at 360 million bushels.

Adding those numbers to the cumulative export inspections during the first three quarters of the marketing year, along with some other calculations, and it sums June 1 stocks of 4.623 billion bushels. This is 170 million larger than stocks of a year ago. Stocks would likely have to differ from that estimate by more than 50 million bushels to produce a price response, admits Darrel Good.

The June estimate of planted acreage of corn is generally expected to be less than intentions of 93.6 million acres reported in March as some acreage may have been switched to soybeans due to the increase in soybean prices. Again, however, with the decline in prevent plant acres this year and some increase in crop prices during the planting season, total acreage of spring planted crops may have exceeded the surprisingly small March intentions. That potential increase creates some uncertainty about the magnitude of corn acreage. A June estimate near March intentions would be somewhat bearish, depending on late month weather and weather forecasts.

The bottomline writes Darrel Good is that without substantial surprises in the upcoming USDA reports, corn prices will be mostly influenced by weather and yield expectations, which is usually the case this time of year. He says the market has already begun to price in the risk of a 2016 average yield below trend. Increasingly, analysts are drawing parallels between the late 1982–83 weather pattern that resulted in very low corn yields and the 2015–16 weather pattern to date. Here’s what Darrel Good thinks farmers should do with this knowledge.

Good :43 …use of options or options-based cash contracts.

Quote Summary - Producers have waited for and now welcome the higher corn prices. The higher prices coupled with uncertainty about summer weather, however, means that producers now have more price risk along with some production risk. December futures prices are now $0.60 above the crop revenue insurance price established in February so there is revenue risk for unpriced new crop corn. Still, prices would continue to increase with unfavorable weather conditions. What to do? Managing the current new-crop price risk can be accomplished with a combination of the timing of incremental sales and the use of options or options-based cash contracts.

The choice of strategy, thinks Darrel Good, will be influenced by local crop conditions and production expectations. While developing a marketing strategy is challenging, he says it is important to have a strategy since weather markets provide a window of pricing opportunity that typically persist for a relatively short period.

One other important item; Darrel Good says the strategy probably should include plans for pricing some of the 2017 crop.