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PRUDENTIAL SECURITIES, INC.
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New York, New York
SHORT-TERM PRICE OUTLOOK:
0-15 DAYS
MEDIUM-TERM PRICE OUTLOOK:
45-60 DAYS
LONG-TERM PRICE OUTLOOK
(June 9, 1997) CORN: Supply/Demand report on June 12: The USDA will release its June supply/demand figures on Thursday morning.
Although 1996/97 supplies are fairly well known and should not change significantly, demand estimates remain in flux. Currently, the USDA is projecting feed/residual demand for 1996/97 at 5.325 million bushels, exports at 1.8215 million, and food/seed/industrial use at 1,760 million bushels. We expect the USDA will make adjustments in these figures that will result in a 50-million-bushel reduction in the already tight carry out of 909 million bushels. Given the relationship between first-half usage and second-half usage. we expect the feed/residual could approach 5,400 million bushels. However. given the slack export shipment pace coupled with a seasonal tendency for shipments to decline into the last four months of the crop year, export demand could drop to 1.1800 million bushels. If the USDA makes these changes, the old- crop stocks/use ratio would decline to 9.7% from 10.3% for the second tightest balance sheet since the mid-1970's.
We believe the USDA will leave its current new-crop estimates relatively untouched as it is still early in the growing season. These figures include: production at 9,840 million bushels: 75.1 million harvested acres (a record 92.2% of planted); and an above- trend yield of 131 bushels per acre. Despite recent ideas suggesting corn acres could increase from the current USDA estimate of 81.42 million. we believe USDA will prefer to wait for the June 30 Acreage report before adjusting the planting intentions figure. We expect a similar stance on yield estimates because the crop is currently rated as 100.5% of normal. Given this spring's quick planting season. the U.S. 1997 crop has excellent prospects of achieving the current estimated yield, despite the recent spell of below-normal temperatures. A yield of 131 bushels would be the first back-to-back good yield in the 1990's, coming on the heels of last year's yield of 127.1 bushels, the third largest in history. The prospect of a large yield and the second-largest crop in history does not necessarily preclude a price rally as pollination approaches. Indeed. the history of a large yield being followed by a small yield should tend to increase price volatility during the pollination period (estimated at July 10-25 this year). The most critical time period during the growing season is when the plants pollinate. Hot and dry weather can prevent pollination and drastically cut yields.
Although the USDA is currently projecting domestic demand at a record 9,410 million bushels, new-crop supplies will largely determine the ultimate demand totals. given the limited old-crop carryout projection. Thus, until 1997/98 production prospects are better assured. expect to see demand estimates remain very fluid as they reflect changes in supply. Considering what we know today, i.e., large acreage combined with favorable crop conditions and weather forecasts, prospects are strong that ending stocks will increase by a significant amount versus the 1996/97 situation.
SHORT-TERM PRICE OUTLOOK: 0-15 DAYS--July futures have fallen 56 cents per bushel since April 1 and have bounced 10 cents off the lows. The market has discounted the prospects of a 10-billion- bushel crop this season and left little leeway for a problem, such as the recent spate of cool temperatures, to develop. If the corn market is in the process of recapturing some of the weather premium that it has given up since April, it could easily trend higher to the $2.85 resistance area over the next several sessions.
Consequently, we advocate commercial scale-down buying programs and speculative long positions at current levels to take advantage of expected price moves over the next two months. Given the recent volatile moves in corn, soybeans and wheat, we strongly recommend using options strategies whenever economically viable.
MEDIUM-TERM PRICE OUTLOOK: 45-60 DAYS--Even with the recent cool temperatures, production prospects for 1997/98 remain very favorable. However, there is a seasonal tendency for July corn to rally 30 cents from the May low, which suggests an initial objective in the $2.94 to $3.00 area. Above the $3 mark, there is resistance at $3.10 and $3.20. Because the old-crop balance sheet is likely to tighten further due to increasing feed/residual demand, July could easily trade at $3.00 or higher on the first whiff of a weather problem. However, the new crop will have to be seriously threatened for old-crop prices to reach beyond the next two tiers of resistance. From a historical standpoint, the summer rally peaks in late June, ahead of the pollination period. However, if there is a problem with pollination, then prices will continue to rally into the pollination period, historically occurring between July 5 and July 25.
LONG-TERM PRICE OUTLOOK: HARVEST--We project that December corn will make a post-pollination low near $2.30 level, 10 cents lower than previous projections because the market has fallen faster and a little further than we anticipated. Additionally, the corn crop has strong prospects of equaling or exceeding the USDA's current yield mark of 131 bushels per acre; if so, harvest prices could be very soft. The average price low for December futures over the last 10 years is about $2.26; over the last five years, $2.35. Although the low typically occurs during harvest, it also has been known to appear in August or September. Even though projected 1997/98 demand is expected to reach a new record, harvest supplies far outweigh immediate demand and prices during harvest generally reflect that near-term imbalance.
Tom Levis
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