MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(November 13, 1997) CORN: On Monday, November 10, the USDA gave confirmation of the dampening of expectations for a strong U.S. corn export program for 1997/98. A significant reduction in the USDA's export projection of 100 million bushels to 1.925 billion bushels provided the impetus for corn prices to break sharply. Since the report is still fresh, the longer-term implications are difficult to project at this time but, for now, the lackluster demand for U.S. corn has taken the forefront of the market's attention. Export sales of corn during the first quarter of the 1997/98 marketing year have regularly been disappointing. That is known feature to the market. However, in perspective, until there is verification to the market that the overall outlook is weakening relative to longer-term projections, optimism sometimes reigns in price action. That appeared to be the case prior to the November USDA supply/usage balance revisions. Unfortunately, even at the current USDA projection, U.S. corn sales and shipments will have to improve dramatically from this point forward to prevent another downward revision in the months ahead. That is looking increasingly unlikely, though.
The chart takes a look at weekly export shipments of corn over the first ten weeks of the 1997/98 marketing year. As seen, after a decent initial start, exports have quickly fallen off relative to year-ago levels. As of November 6, cumulative exports for the year fell below last year's level for the first time at 274 million bushels versus 278 million in 1996/97. A rather impressive period of shipments was seen a year ago over the next several weeks heading into the first of the year as weekly exports averaged 50 million bushels per week. Given the level of export sales already on the books and the lackluster pace of new sales recently, we are not anticipating an increase in shipments to anywhere near that level over the coming weeks. Cumulative exports should continue to suffer relative to year ago levels in the months ahead and likely will result in an overhanging negative feature for the corn market.
The current dilemma in the U.S. corn export situation does not appear to be just a near-term, isolated phenomenon. Instead, the occurrences to begin the 1997/98 marketing year may have long-lasting implications.
The most recent export sales data available compared to last year by destination shows exports so far this year have been equal to those in 1996/97 for the first two months of the marketing year. However, it is the outstanding sales which are the concern as they are down 49% from a year earlier. The ongoing sales of corn by China and general lack of concern about sharply higher prices have certainly hurt U.S. sales, particularly to the Asian markets. South Korean total commitments of U.S. corn are down 77 million bushels from last year, or 68%. Taiwanese commitments are down 28% and Japanese commitments are down 17%. As of October 30, total commitments to all Asian markets were 343 million bushels, down 33% from last year. While a recovery from these levels is possible, it must be kept in mind that the current sales of Chinese corn to these markets is lost business for the U.S., as opposed to poor demand caused by high prices which could recaptured with a change in the pricing structure. With that in mind, we remain less optimistic than the USDA towards this year's exports and feel that a continued weak program in the months ahead could lead to a further reduction in the USDA's export projection and an upward revision in their 1997/98 U.S. ending stocks estimate of 928 million bushels.
The corn market has slid from the recent highs given the disappointing export program. While additional downside is viewed as somewhat limited given the relatively low level of anticipated U.S. ending stocks by historical standards, significant price strength is unlikely, as well, without strong export demand. As discussed, that is not anticipated in the near term. We remain of the opinion that corn will trade in a range-bound fashion in the near term, with prices expected to migrate towards the middle to lower end of our expected range of $2.70-$3.10 basis March futures. Longer term, we do feel that limited price strength is possible once the Chinese export situation becomes more clear. If China halts corn exports from April 1998 forward, as is currently expected, a pick-up in U.S. corn sales in the months ahead would likely be supportive for the market. A close eye is also being kept on the South African corn crop as early planting weather has been less than ideal and there is a strong correlation between El Nino and South African dryness. We have already penciled in limited U.S. exports of corn to South Africa this year anticipating a less than ideal growing season. However, a full-blown drought could result in substantially higher U.S. corn exports to that region.
(Reprinted by permission. Copyright © 1997, Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
Randy Mittelstaedt
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