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Corn prices - will their rout extend into 2014?
By Agrimoney.com - Published 06/01/2014

Corn futures suffered a dismal 2013, falling 40% in Chicago on a front-contract basis – making it the worst annual performance on record.

The slide reflected the marked recovery in US production, from the drought-hit levels of 2012, when yields hit a 17-year low, to the record harvest of 2013.

Extra supplies meant buyers were no longer forced into the competition which drove prices to record highs above $8 a bushel in August 2012.

As a further dent to price hopes, the Environmental Protection Agency proposed slashing the mandated level of corn-based ethanol which needs to be blended into US gasoline.

But will the EPA's proposal actually have such a drastic impact? Will low prices prompt lower corn production ahead and foster some price recovery?

Leading brokers give their views. 

Bank of America Merrill Lynch

"US corn stocks-to-use ratios are scheduled to double in the 2013-14 harvest season from the prior year to 14.6%, according to the US Department of Agriculture.

"True, the corn acreage in 2014 runs below 2013 planting as acres are shifting away from low-priced corn towards soybeans.

"However, even after accounting for that we find that US corn ending stocks could be up to nearly 1.9bn bushels in 2013-14, the highest since 2004-05. This suggests further price weakness ahead.

"Of course, our view does not come without risks. Dry weather conditions in Argentina could reduce corn acreage planted in favour of soybeans until the planting season ends in January.

"Also, northern hemisphere plantings of corn in spring, affecting 2014-15 production, will likely be lower than this year.

"If corn loses an inordinate amount of acreage to soybeans in the upcoming growing season in both South and North America, then corn prices could start to find support. However, in our view, even with lost acreage, stocks will remain high, posing a bearish outlook for prices."

Commerzbank

"The negative price performance of corn since the beginning of 2013 has been far more pronounced than for wheat or soybeans, in view of an expected harvest increase of 30% in the US and a jump in US corn stocks from a 16-year low to an eight-year high.

Commerzbank forecasts for corn, 2014

Q1: $4.30 a bushel

Q2: $4.60 a bushel

Q3: $4.80 a bushel

Q4: $4.80 a bushel

Forecasts for quarter average, front Chicago futures contract

"This is likely to reduce the incentive to sow fields with corn in early 2014. The [5%] decline in US corn acreage predicted in the USDA's long-term forecast appears realistic from a current perspective.

"Assuming normal weather conditions, the relative availability of corn will probably decline again compared with wheat in 2014-15, leading to a narrowing of the price difference between corn and wheat

"We expect corn to recover in absolute terms, even if the high prices of 2011 and 2012 are likely to remain a long way off.

"It remains unclear what will be the impact of the US Environmental Protection Agency's proposal to cut back on the mandatory addition of ethanol to gasoline, because of auto industry fears of damage to engines.

"The EPA is still waiting for government approval. Even if the proposal is approved, in which case it is estimated that 200-250m fewer bushels of corn will be needed to produce ethanol, the matter will initially become the subject of legal disputes."

Goldman Sachs

"While record-high calf-cow margins will incentivise a gradual rebuilding of the US cattle herd, this remains a slow process, limiting the growth in 2014-15 feed use.

"Further, the recently leaked draft of the EPA RFS biofuel targets for 2014 suggests that the agency has dramatically reconsidered its goals of supporting greater biofuel consumption, pointing to limited growth in ethanol use in 2014 and 2015 because of the slow adoption of non-mandated higher ethanol-gasoline blends.

"Finally, we expect stronger corn exports on the likely decline in South American production, especially for the Brazilian safrinha corn crop.

"Under our base-case scenario presented in Exhibit 15, we expect US corn inventories to approach 2.3bn bushels in 2014-15, for a stocks-to-use ratio of 16.9% up only modestly relative to our 2013-14 forecast of 15.8%.

"With crude oil prices fairly stable over the past few years, corn prices have increasingly reflected US inventory levels and our forecast for corn prices declining to their lowest levels since 2010 [$3.75 a bushel] is a simple reflection of our expectation for US corn stocks."

Morgan Stanley

"Record 2013-14 supply will have long-lasting effects, provided global weather remains 'normal' in 2014-15.

Morgan Stanley forecasts for corn prices

2013-14 average: $4.60 a bushel

2014-15 average: $4.20 a bushel

Forecasts for year average, front Chicago futures contract

"Even with global corn consumption hitting new highs and US production falling as much as 3% year on year, a 29m-tonne (23%) year-on-year increase in 2014-15 beginning stocks will make it hard to keep the stocks-to-use ratio from building again.

"Our base case scenario envisions 2014-15 stocks-to-use at a five-year-high of 18%, 100 basis points above the 10-year average of 17%.

"With this inventory backdrop, and with soybean prices competing less for global acreage in 2014-15, there is little that should keep corn prices from falling further year on year to encourage South American farmers to consolidate their corn plantings."

Rabobank

"Corn prices are expected to trend slightly lower in 2014 as a record US harvest combines with rising production from increasing global acreage.

Rabobank forecasts for corn, 2014

Q1: $4.30 a bushel

Q2: $4.20 a bushel

Q3: $4.30 a bushel

Q4: $4.10 a bushel

Forecasts for quarter average, front Chicago futures contract

"The combination of low interest rates, low commodity prices and historically strong access to cash will incentivise US farmers to store a significant portion of the 2013 corn harvest into 2014.

"The expected consequence… is slow downward price erosion as stocks trickle out.

"Key selling periods are usually triggered in the spring, when fertilizer is purchased, and land rent payments are made. Other triggers are likely to be after January 1 2014, when taxes are accrued to 2014 rather than 2013, and towards the end of July through mid-September, when storage is cleared for the next harvest.

"Also factored into our base case price outlook is stable trade demand with China imports totalling 7m-10m tonnes."

University of Illinois

"The large US corn crop in 2013 has resulted in a substantial decline in prices and will result in an increase in consumption during the current marketing year. 

"Still, inventories will be much larger by year-end.   High corn prices have resulted in a 45% increase in corn production in the rest of the world since 2005, providing prospects for ongoing competition for US corn.  In addition, the era of rapid growth in ethanol production has passed.

"A small decline in US acreage and a trend yield would result in a US crop near 14.5bn bushels in 2014, allowing a further build-up of inventories next year. 

"Prices are expected to average in the low- to-mid $4.00-a-bushel range for the 2013-14 marketing year and in the low $4.00 range in 2014-15."

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