PRICES BREAK OUT OF THE RECENT RANGE?
have been in an extremely narrow range for the past three months.
On a closing basis, March 2002 futures have been between $2.04
and $2.21. The cash price of corn in central Illinois fluctuated
between $1.90 and $2.02. Cash and futures prices are currently
at the low end of that 3-month trading range. A narrow trading
range is not unusual during the winter months, but prices have
been more stable than normal this year. More volatile price patterns
typically emerge in the spring as the market begins to reflect
uncertainties associated with a new crop. In particular, production
uncertainty often results in period of higher cash prices in the
spring. It is not unusual to see the highest cash prices of the
year occur in May or June on the basis of weather scares. Summer
highs tend to occur if a short crop actually does occur.
pace of corn consumption and prospects for declining inventories
should add to any concerns about the new crop that do unfold.
After a very slow pace during the first quarter of the marketing
year, the U.S. corn export program has accelerated a bit in recent
weeks. Through February 7 (23 weeks into the marketing year) export
inspections were still running about 8 percent behind last year's
pace. At 328 million bushels, however, unshipped sales as of February
7 were 10 percent larger than outstanding sales on the same date
last year. With a smaller corn harvest in Argentina, and a projected
decline of 138 million bushels in Argentine corn exports, there
is still optimism that U.S. exports will reach the 1.975 billion
bushels projected by the USDA. That projection is 40 million bushels,
or about 2 percent, larger than last year's exports.
Japan, South Korea, and Mexico need to accelerate soon if the
market is to retain confidence in the USDA projection. Sales to
South Korea will be influenced by Chinese exports, which are expected
to slow significantly over the next few months. Mexico appears
to have substituted sorghum for some of its corn needs.
the most support for increased consumption is expected to come
from the ethanol market. Based on the pace of consumption to date,
and new production capacity coming on line, some believe that
the USDA is too low on the forecast of the amount of corn to be
used for ethanol production this year. On the other hand, the
slow pace of expansion in hog numbers and the declining number
of cattle in feedlots suggests that a slow down in feed and residual
use of corn is likely occurring. Some slow down is already reflected
in the USDA's projection of feed and residual use for the year.
The next reading on the rate of feed use will be available in
the USDA's March Grain Stocks report.
If corn planting
increases by about 3 million acres and the U.S. average yield
is in the 139 to 140 bushel range, the 2002 crop will be near
10 billion bushels. Therefore, if the record pace of consumption
of U.S. corn continues, a significant build-up in inventories
is not likely to occur in the 2002-03 marketing year. A short-fall
in production would result in some draw down in inventories and/or
require a reduction in the rate of consumption. It is the latter
case, a required reduction in the rate of use, that would suggest
the need for higher prices. How much higher would be a function
of the magnitude of short-fall in production and the strength
It is a little
early to speculate about growing conditions in the U.S. in 2002.
However, the relatively mild winter, the developing El Nino, and
the dry conditions in the eastern and western parts of the U.S.
are attracting some attention in the market. The last time that
widespread dry weather conditions significantly reduced the U.S.
average corn yield was 1995.
It is likely
that prices will continue in a narrow range for a few more weeks.
The relatively large carry in the market ($.35 from March 2002
to March 2003) suggests that spring price rallies could offer
an attractive opportunity for forward pricing a portion of the
2002 crop. The persistence of a $.15 premium of December 2003
futures over December 2002 futures would also provide an opportunity
for pricing some of the 2003 crop.
University of Illinois