Sample Issue Index
CORN QUARTERLY REPORT
Prepared by Prudential Securities, Inc.
Introduction
World corn production is expected to increase for the second consecutive year, thus causing a rise in ending stocks by 14 million tonnes and a rise in the stocks-to-use ratio to 15.2% in 1997/98 from 11.7% the previous season. However, the stocks-to-use ratio remains tight enough to warrant concern that a production shortfall could jeopardize the stability of world ending stocks and cause prices to skyrocket again. Substantiating this concern is the trend for world corn consumption to rise at a faster, more stable rate than world corn production. Under this situation, higher prices would be needed to ration demand. Indeed, futures prices for both old- and new-crop contracts are 20-30 cents per bushel higher than normal for this time of the year, and are likely to see even higher price levels as we enter the growing season.
Nearby corn futures prices have had tremendous volatility over the last 10 months, falling almost $3 from the 1996 highs in five months, and rebounding 50 cents since establishing contract lows in mid-January. The precipitous price decline did not begin until the market was assured that 1996 coarse grain production would adequately cover 1996/97 world demand. This season's world coarse grain stocks are projected to increase to 109.1 million tonnes from 92.9 million the previous year; of that total, world corn stocks should account for 73.9 million tonnes versus 64.1 million the previous season. The stocks/use ratio for world corn is expected to rise from its 20-year low of 11.7% to a more comfortable (yet still tight) 13.1% in 1996/97. These gains are largely expected because the United States is projected to more than double the 1995/96 carryover to 979 million bushels by the end of the current marketing year. This would effectively cause the U.S. stocks-to-use ratio to reach 11% in 1996/97, up from 5% the previous year.
Assuming that ending stocks on both a domestic and world basis are projected to significantly increase this season, here are some of the major questions with which the market is struggling:
1. Why are corn futures 20-30 cents over average prices for this time
period? 2. Why are the spreads inverted out to new-crop contracts? 3. Why
doesn't this corn futures market break?
Stocks-To-Use Tightness Still Exists
Even though old-crop world ending stocks and world stocks-to-use ratios are projected to increase (doubling in the United States), the world corn balance sheet remains tight. The world managed to struggle through last year with historically tight stocks-to-use ratios for coarse grains and corn, but only by sending the average daily nearby corn futures price to $3.89. This price level, $1.45 above the previous marketing year's average, rationed U.S. demand by 900 million bushels, or 9%. So far in the current marketing year, the average daily nearby futures price has averaged $2.83, more than $1 below the 1995/96 average, yet 40 cents above the average level in 1994/95 when the stocks/use ratios for world coarse grains and corn were a comfortable 16%-17%.
There is not much room for a shortfall in 1997 U.S. corn production considering the relatively low stocks/use ratios for 1996/97 in world coarse grains (12.5%), world corn (13.1%) and U.S. corn (11%, which equals less than six weeks of U.S. consumption). Because the market must make sure that production risk in 1997/98 is fairly accounted for, corn futures are 20-30 cents higher than normal at this time of year.
Last year was extraordinary for corn production around the world as China, Argentina, South Africa and the EU-15 enjoyed fantastic crops. Can this be repeated? Perhaps in the EU and China, where planted area is up versus a year ago. However, China has had record or near-record yields for the last two years, at levels near the projected trend yield. If yields fall short of trend by 5%, then China's corn production would fall 6.0 million tonnes and decrease the world stocks/use ratio by 1.1 percentage points to 12.0%. Although world yields might reach record levels this year, falling short of these heights could have a major impact on a balance sheet that is still recovering from the tight levels experienced in 1995/96.
Heightened Uncertainty Surrounding 1997/98
Corn Plantings Keeps The Market Volatile
The USDA is currently surveying corn producers about what they will plant this year, the results of which will be released in the March 31 Planting Intentions report. This is the first hard data that will define the potential for the 1997/98 corn crop. Consequently, the market is keenly interested in estimating what this report will indicate.
Table 4 depicts March 31 estimates versus the final planted acreage figure released in the January following harvest. Historically, the intentions report has had a tendency to overstate plantings by 1.3% of the final planted corn acreage estimate in January. Thus, the USDA baseline projection of 81.5 million acres for 1997/98 plantings could be closer to 80.5 million acres at the final report if history is accurate. The current trade range for 1997/98 corn plantings is about 79-82 million acres versus 79.5 million planted last year. We estimate 1997/98 corn plantings at 80.8 million acres.
| Year | Jan 1 | Mar 31 | Jun 1 | Aug 1 | Final | Mar-Jan Change | Mar-Jan Percent Change |
|---|---|---|---|---|---|---|---|
| 1963 | NA | 69.8 | 65.8 | NA | 68.8 | ||
| 1964 | NA | 68.9 | 67.4 | NA | 65.8 | 3.1 | 4.5% |
| 1965 | NA | 66.9 | 65.2 | NA | 65.2 | 1.7 | 2.5% |
| 1966 | NA | 68.4 | 67.7 | NA | 66.3 | 2.1 | 3.1% |
| 1967 | NA | 70.6 | 71.4 | NA | 71.2 | -0.6 | -0.8% |
| 1968 | NA | 6t.9 | 55.1 | NA | 65.1 | -0.2 | -0.3% |
| 1969 | NA | 64.4 | 63.7 | NA | 64.3 | 0.1 | 0.2% |
| 1970 | NA | 66.7 | 67.4 | NA | 66.9 | -0.2 | -0.3% |
| 1971 | 71.3 | 71.5 | 74.7 | NA | 74.2 | -2.7 | -3.8% |
| 1972 | 71.2 | 68.5 | 66.8 | NA | 67.1 | 1.4 | 2.0% |
| 1973 | 71.7 | 71.6 | 72.4 | 71.3 | 72.3 | -0,7 | -1.0% |
| 1974 | 78.8 | 78.8 | 77.7 | 77.4 | 77.9 | 0.9 | 1.1 % |
| 1975 | 77.4 | 75.3 | 77.5 | 77.7 | 78.7 | -3.4 | -4.5% |
| 1976 | 80.8 | 82.7 | 84.1 | 84.1 | 84.6 | -1.9 | -2.3% |
| 1977 | 84.5 | 83.9 | 82.7 | 82.4 | 84.3 | -0.4 | -0.5% |
| 1978 | 80.9 | 80.2 | 78.7 | 78.5 | 81.7 | -1.5 | -1.9% |
| 1979 | 80.7 | 79.2 | 79.8 | 79.9 | 81.4 | -2.2 | -2.8% |
| 1980 | 83.1 | 82.0 | 83.5 | 83.5 | 84.0 | -2.0 | -2.4% |
| 1981 | NA | 84.0 | 84.7 | 84.3 | 84.1 | -0.1 | -0.1 % |
| 1982 | NA | 84.7 | 82.1 | 81.9 | 81.9 | 2.8 | 3.3 % |
| 1983 | 69.6 | 58.8 | 60.1 | 60.2 | 60.2 | -1.4 | -2.4% |
| 1984 | NA | 81.8 | 79.9 | 80.5 | 80.5 | 1.3 | 1.6% |
| 1985 | NA | 82.0 | 83.2 | 83.2 | 83.4 | -1.4 | -1.7% |
| 1986 | NA | 78.1 | 76.6 | 76.6 | 76.7 | 1.4 | l.8% |
| 1987 | NA | 67.6 | 66.8 | 65.9 | 65.7 | l.9 | 2.8% |
| 1988 | NA | 66.9 | 67.5 | 64.6 | 67.6 | -0.7 | -1.0% |
| 1989 | NA | 73.3 | 72.8 | 72.3 | 72.8 | 0.5 | 0.7% |
| 1990 | NA | 74.8 | 74.7 | 74.5 | 74.2 | 0.6 | 0.8% |
| 1991 | NA | 76.1 | 75.9 | 75.9 | 75.9 | 0.2 | 0.3% |
| 1992 | NA | 79.0 | 79.3 | 79.3 | 79.3 | -0.3 | -0.4% |
| 1993 | NA | 76.5 | 74.3 | 73.7 | 74.2 | 2.3 | 3.0% |
| 1994 | NA | 78.6 | 78.8 | 78.8 | 79.2 | -0.6 | -0.8% |
| 1995 | NA | 75.3 | 72.0 | 71.3 | 71.2 | 4.1 | 5.4% |
| 1996 | NA | 79.9 | 80.4 | 79.6 | 79.5 | 0.4 | 0.5% |
| 1997 | NA | (PSI) 80.8 | |||||
| . | . | . | . | . | 1990s Average | 1.0 | 1.3% |
Of course, the Freedom to Farm Act could throw a wrench into the historical accuracy of the intentions report this year. This is the first season since the 1960's that all farmers are able to fully react to market signals and plant the crop that earns the highest return without fear of losing farm program benefits. As a result, speculation abounds as to whether producers will make planting decisions for the upcoming year based upon market signals or past cropping patterns. The Freedom to Farm Act allows producers more control of their financial destiny, but also increases the likelihood of greater year-to-year planting volatility. Expect to see the accuracy of planting estimates decline because of this new government program.
The new-crop corn/bean ratio is a commonly cited market signal that roughly determines whether corn or beans are more profitable to plant. This ratio should receive heightened focus by the trade during the survey period. Historically, November soybean prices that are 2.4-2.5 times the price of December corn are considered neutral. Corn plantings are favored when the ratio is below 2.5:1; beans are favored when the ratio is above 2.5:1. The new-crop corn/bean ratio has moved from a low of 2.38:1 in November to a high of 2.63:1 in mid-January and now is back below the 2.5:1 mark at to 2.46:1. Due to the Freedom to Farm legislation passed last year, the neutral figure is likely to be higher, perhaps in the range of 2.5-2.6:1.
In addition to monitoring the corn/bean futures price ratio, there is a lot more to understand about why a farmer chooses to plant corn or beans, including: production costs; cash basis levels; the previous year's chemical residue; and normal crop rotation preferences. When the total cost of producing corn in the Central Corn Belt is compared to the cost of producing beans (adjusting for yields), the current new-crop corn price of $2.88 would require a "break-even" November soybean futures price of $7.40. Soybean prices in mid-March (on an equivalent basis) indicate a return of $29 per acre less than corn. The break-even prices compute to a corn/bean ratio of about 2.57:1 versus previously "normal" levels of 2.4:1 to 2.5:1.
We expect 1997 U.S. corn plantings to fall within the trade range of 79-82 million acres, with our estimate pegged at 80.8 million acres. The smaller the plantings figure, the greater the yield needed to avoid a reduction in ending stocks, which could keep corn futures prices supported until the market is comfortable with prospects for the 1997/98 corn crop.
Historically Wide Yield Volatility
Using the trade range of 79-82 million planted acres, Table 5 shows various levels of 1997/98 corn production that would result from varied plantings figures against key corn yields that have been achieved in the past. In our opinion, the United States needs to produce at least 9.2 billion to 9.3 billion bushels this year to meet projected demand. As the production matrix indicates, the United States must have large corn plantings near the top of the trade range and a minimum yield of 123.5 bushels per acre (the fourth largest U.S. yield). As acreage declines, corn yields have to increase even higher.
| Yield (bu. per acre) | . | 79 | 79.5 | 80 | 80.5 | 81 | 81.5 | 82 |
|---|---|---|---|---|---|---|---|---|
| Record | 138.6 | 10,073 | 10,137 | 10,201 | 10,265 | 10,328 | 10,392 | 10,456 |
| 2nd Highest | 131.5 | 9,557 | 9,618 | 9.678 | 9,739 | 9,799 | 9,860 | 9,920 |
| Trend | 128.5 | 9,339 | 9.398 | 9.458 | 9,517 | 9,576 | 9,635 | 9,094 |
| 96I97 | 127.1 | 9,238 | 9.296 | 9.355 | 9,413 | 9,471 | 9,530 | 9,588 |
| Needed in 97/98 | 123.5 | 8,976 | 9.033 | 9.090 | 9,146 | 9,203 | 9,260 | 9,317 |
| 1980s Record | 119.8 | 8,976 | 9.033 | 9.090 | 9,146 | 9,203 | 9,260 | 9,317 |
| 95/96 | 113.5 | 8,249 | 8.301 | 8.354 | 8,406 | 8,458 | 8,510 | 8,562 |
| 1990s Lowest | 100.7 | 7,319 | 7,365 | 7,412 | 7,458 | 7,504 | 7,550 | 7,597 |
History tells us that achieving high corn yields back-to-back is difficult, and has not been done in the 1990's. Figure 3 clearly illustrates the extreme yield volatility from year to year. Additionally, the United States has never produced high yields two years in a row. This is not to say that this country cannot produce two consecutive high-yielding crops years, but just that it hasn't happened yet. Thus, we expect corn futures will remain volatile and at these higher levels until more is known about the upcoming corn crop.
Figure 3
Tight Deliverable Stocks
Deliverable stocks for corn are at record-low levels for this time of year. In turn, this has supported the nearby spreads at levels 6 cents to 8 cents above normal. One chief reason that deliverable stocks are only 22% of year-ago levels is that production last year was down in the Eastern Corn Belt, Southeast and parts of the mid-Atlantic. For example, Illinois and Indiana suffered two consecutive years of sub-trend yields. Average yields in some Southeastern states got whacked by as much as 40% under the trend. Yet, that didn't cause the chickens and dairy cows in the Southeast to eat less, it just meant more grain flowed further south and east than usual, resulting in higher basis levels and better price opportunities than those offered by delivery markets. The net result was that there was little incentive to fill Toledo warehouses last fall, and there are few prospects of replenishing these stocks prior to this fall's harvest. So far, deliveries against the March contract have been light, and we do not expect to see any major expiration fireworks. However, the tight deliverable stocks situation should support the spreads into the March and May expirations because the problem will roll forward, particularly if commercials try to move stocks out of deliverable positions.
Price Outlook
Expect prices to remain above normal levels for this time of the year and very volatile until the pollination period this summer. Despite both the world and U.S. corn balance sheets becoming less tight than in the previous year, there is not a lot of room for a crop shortfall. Both old- and new-crop contracts should remain firm until more is known about the 1997 U.S. corn crop. The major swing factors will be: plantings; growing season weather; and managed fund positions. The following table outlines the price potential we presently expect by first notice day for each of the respective contracts. We are assuming normal weather, trend yields, the usual summer crop scares and normal harvest weather.
March 21, 1997 Prudential Securities, Inc.
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