April 19, 1999
CORN MARKET FUNDAMENTALS IMPROVED
Last weeks newsletter outlined
the fundamental concerns about the soybean market large
supplies, a slowing rate of consumption, and plans for more acreage
in 1999. The fundamental picture for the corn market is somewhat
stronger. This difference is currently reflected in the futures
market. The soybean/corn price ratio is relatively low, 2.23 to
1 for May futures and 2.14 to 1 for new crop futures. Corn and
soybean prices have, to some extent, disconnected.
The March 1 Grain Stocks
report showed larger corn inventories than expected. On the surface,
this report suggested a dramatic slow down in domestic feed and
residual use during the second quarter of the 1998-99 marketing
year. As a result, the USDA lowered its projection of feed and
residual use for the year by 75 million bushels, to a total of
5.625 billion bushels. A slow down in feed and residual use during
the second quarter is not consistent with animal numbers, and
more likely points to an upward revision of the 1998 crop estimate,
or smaller than expected inventories in the June or September
Grain Stocks report.
The current rapid placement of cattle
into feedlots will continue to support feed use of corn through
the summer months. Placements during March were 18 percent larger
than during March 1998 and April 1 feedlot inventories were 3
percent larger than on the same date last year. The rapid rate
of placement cannot be sustained, but will support feed demand
for the near term. Hog numbers are expected to remain large through
June. After that a cycle decline in production is projected through
much of 2000. The June Hogs and Pigs report will provide
an update on the magnitude of the likely decline in numbers. In
the meantime, feed use will be supported by relatively heavy feeding
For the year ahead, feed use of
corn may get some support from smaller supplies of other feed
grains. Combined planting intentions for sorghum, barley, and
oats (for harvest) in 1999 are down nearly 2 million acres (10.5
percent) from the level of seedings in 1998.
Corn exports are also recovering
from the extremely low level of 1997-98. For the current marketing
year, the USDA projects exports at 1.8 billion bushels, 16.4 percent
larger than exports of a year ago. Through April 15 (32 weeks
of the marketing year) corn exports were running 22 percent larger
than exports of a year ago. Outstanding sales as of April 8 were
32 percent larger than on the same date last year. South Korea
and Mexico have accounted for much of the increase. These countries
have benefitted from USDA export credits and credit guarantees.
It appears that exports could exceed the USDAs projection
for the year.
For the 1990-00 marketing year,
U.S. corn exports are expected to benefit from the smaller southern
hemisphere corn harvest this spring (24 percent), continued support
from USDA subsidy programs, and a likely recovery in Asian economies.
Exports are not likely to recover to the 2.2 billion bushel level
of 1995-96, but may challenge the 2 billion bushel level in 1999-00.
The size of the Chinese crop, now projected to be 19 percent larger
than last years crop, will be important in influencing the demand
for U.S. corn.
The size of the 1999 U.S. crop will
ultimately determine the level of corn prices. The National Weather
Service Outlook for May shows generally very favorable conditions
for the midwest. However, the apparent strengthening of the La
Nina weather pattern in April raises concerns about higher than
normal summer temperatures in parts of the midwest. We are reluctant
to project corn yields above the long term trend value of 130
bushels per acre. Based on March planting intentions, a trend
yield would produce a 1999 crop of 9.32 billion bushels, 440 million
bushels smaller than the current estimate of the 1998 crop. A
crop of that size would likely result in a modest reduction in
stocks at the end of the 1999-00 marketing year.
The market is already offering a
premium for the 1999 crop. The May 1999 to May 2000 spread in
the futures market stood at nearly $.35 (16 percent) on April
16. Assuming a normal basis pattern, the market is currently offering
the central Illinois producer a seasons average price of
about $2.30 for the 1999 crop. That is $.30 above the average
expected for the current marketing year.
The current corn market fundamentals
do not point to sharply higher prices, but do open the door for
a respectable weather related rally sometime during the growing
Issued by Darrel
University of Illinois