The USDA has always been full of surprises in crop estimates, and the Jan. 12 crop report fit the bill. With a previous estimated corn yield of 162.9 bu./acre, USDA officials pegged this year's crop yield at 165.2. This is a number based on actual yields and not just estimates, as previous reports were. At this point, whether anyone wants to believe it or not, it's a fairly hard number and if anything will only increase from this point on.
What this report shows is the increases in yield due to improved genetics are growing at a more rapid rate than demand for corn for ethanol. Carryover supplies over the next couple of years could increase at an alarming rate. At the same time, while corn for ethanol is still increasing, the rate of increase is going to slow significantly.
As the table indicates, our estimate is that this year's carryover will be 1.709 billion bushels vs. last year's 1.67. With corn still being a much more profitable crop to grow than soybeans in the central Corn Belt, we would estimate a 3-million-acre planted-acreage increase this coming year. If yields continue to climb, with a conservative estimate of 168 bu./acre, carryover supplies by the end of the 2010-2011 marketing year will exceed 2.2 billion bushels.
SHOULD THIS TREND actually occur, the words LDP will be back in our vocabulary — sooner than expected.
The good news: Corn production will continue to be profitable. Producers need to adjust their profit formula, however, to one of planning on bigger yields rather than higher prices.
I think in another six months to a year, we will look back on the rally in the last quarter of 2009 as an echo bubble that is nothing other than a retracement of the bull market that peaked in 2008. While inflationist and demand-driven gurus believe that $4 is now the norm in the corn market, it is my opinion that will not be the case. I will grant the bulls that corn has shifted to a new plateau. But that plateau is not $4-5 — it is more likely to be $2.75-3.75.
It is unlikely, with current fundamentals, that the cash market will be able to hold the $3 mark throughout the Corn Belt. Areas not close to ethanol plants where basis levels are wide could well see corn prices start with a 2 before harvest of this coming year.
PUTTING IT ALL TOGETHER
Market trends change, and the corn market is no different. Producers have been given excellent profit opportunities both late in 2009 and early in 2010 for both this year's and next year's crop. We advised subscribers to The Brock Report to sell at least 80% of the 2009 crop and at least 50% of the 2010 crop prior to Jan. 10. From a management point of view, locking in record profits on this percent of the production appeared to us to be a logical move.
From this point on, rallies in the corn market are selling opportunities. Markets will almost always give you at least two reasonable chances to sell a crop. We've seen one opportunity. Now it is time to wait for the next one — if you missed this one.
Richard Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.