February 8, 1999
PROSPECTS FOR A SPRING PRICE
RALLY FOR CORN
Corn prices have traded in a remarkably
narrow range for the past two months. On a closing basis, March
futures have ranged from $2.13 to $2.245 and December futures
have ranged from $2.365 to $2.50. The spot cash price in central
Illinois has been reported in a range of $1.995 to $2.115. A stable
price pattern during the winter months following a large crop
is typical. Occasionally, surprises in the January USDA reports
or weather concerns in Argentina will generate a mid-winter rally,
but that was not the case this year. Changes in USDA production
and use estimates in January 1999 were generally a little negative
for prices. While the Argentine crop will be down significantly
from the record crop of a year ago, widespread adverse weather
has not developed.
Seasonally, we have come to expect
more price volatility and generally higher prices in the spring
following a winter of low prices. In some years, set-aside programs
have provided some basis for higher prices. For the most part,
however, price strength reflects the weather and crop uncertainty
of the upcoming planting and growing season. The market tends
to build in a "weather risk" premium. If favorable weather
and crop prospects develop, the premium disappears. If crop problems
do develop, additional price strength follows. Price reaction
is greatest when carryover stocks are small and corn demand strong.
Large year-ending stocks and/or weak demand tend to reduce the
market reaction to periods of weather concern. In 1988, for example,
prospects for September 1 stocks of nearly 5 billion bushels softened
the price impact of a severe drought. In 1995, modest stocks and
strong demand multiplied the price impact of a small crop.
For the current year, carryover
stocks are expected to be moderate. At the projected level of
1.8 billion bushels, stocks would equal 19.5 percent of projected
use. In the past 10 years, the ending stocks to use ratio has
ranged from 5 percent to 25 percent. A carryover of 1.8 billion
bushels would provide some buffer against a production shortfall,
but is not a burdensome amount.
Current corn demand cannot be termed
strong, even though use is proceeding at a rapid pace. Depending
on how fast and to what extent hog producers reduce production,
feed use may stabilize in the year ahead. Corn exports continue
to be a little larger than expected. Shipments as of February
4 totaled 765 million bushels, about 18 percent above the pace
of a year ago. Outstanding export sales as of January 28 were
reported at 332 million bushels, 29 percent above the level of
unshipped sales on the same date last year. The increase over
last year has been primarily in sales to South Korea and Mexico.
As the marketing year approaches the half way point, it appears
that exports could exceed the 13 percent increase projected by
the USDA. A significant increase in exports from the level of
this year, however, may require a turn in the Asian economic situation
and/or further reductions in foreign grain production.
The market expects some reduction
in U.S. corn plantings in 1999. Less acreage is generally expected
in the south, with more uncertainty about acreage in the midwest.
Private estimates are in a range of 0.5 to 2.0 million acres less
corn in 1999. The USDA will release a Prospective Plantings
report on March 31.
IF corn acreage is reduced
by one million acres in 1999, area harvested for grain might be
reduced by only 0.5 million, to a total of 72.6 million acres.
The small reduction in harvested acreage would reflect the relatively
large unharvested acreage in 1998. If harvested acreage is at
72.6 million and corn use remains in the are of 9.3 billion bushels,
a national average yield over 128 bushels per acre (about 2 bushels
below trend) would result in a further build up in stocks in 1999-2000.
If use increases to 9.5 billion bushels, a yield above 131 bushels
would be required to build stocks. With harvested acreage of 72.6
million, and use of 9.3 billion bushels, an average yield below
117 bushels would be required to pull stocks below 1 billion bushels.
The persistence of the current La
Nina weather pattern beyond May would likely increase concerns
about a significant reduction in yield in 1999 and would likely
propel December futures above last falls high near $2.65.
If the La Nina weather pattern fades, so will crop concerns, at
least for the spring. In that case, December futures would have
difficulty moving above the $2.50 to $2.55 range on a spring rally.
Issued by Darrel
University of Illinois