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Rabobank reports growing uncertainty in new crop corn prices

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According to the latest Agri Commodity Markets Research report by agribusiness banking specialist Rabobank , new crop corn prices appear undervalued, with near record low inventory levels leaving little room for another production setback.  

Based on Rabobank’s below-consensus forecast for 2011/12 ending stocks and new crop yield expectations, the December ’12 corn prices are expected to have upside bias in the coming months. Favourable growing conditions combined with about 94 - 95 million planted acres will likely apply bearish pressure on prices from current levels.  

However, with plantings only just underway amid dry conditions, stock-to-use at threadbare levels and a robust demand outlook, the price for new crop corn is skewed to the upside from current forward curve levels.  

The current low inventory levels versus the potential for record US corn production in 2012/13 will result in an extremely wide range of possible price outcomes. Using historical benchmarking of stocks-to-use ratios against prices, one confidence level spans from USD 4.50 to 8.00/bushel corn this season.  

The price uncertainty is the result of low carryout stocks from the 2011/12 marketing year, which was forecast at 608 million bushels. Secondly, trend yield expectations are too high with the USDA baseline estimate of 164 bushels/acre proving the second highest on record and is anomalous, given yields of 154 bushels/acre have been exceeded only twice in US history.  

An yield estimate of 156 bushels/acre is more justified at this stage of the season, considering the likely drag on the national yield average from marginal planted area in peripheral areas of the Corn Belt. Finally, demand is likely to be increasingly inelastic as high gasoline prices and the RFS2 mandate joust with stagnating US gasoline demand while Chinese import demand for US corn continues to rise.  

Current December CBOT corn futures are undervalued

Given these fundamentals, the current December CBOT corn futures are undervalued by USD 0.53/bushel compared to Rabobank’s median estimate of USD 6.10/bushel. This analysis also suggests that implied volatility in CBOT corn options is too low and fails to represent the risks this particular crop year poses when put in historical context.  

Price risks for new crop corn are skewed to the upside

The asymptotic relationship between stocks-to-use and prices suggests higher prices in view of an expected modest recovery in stock levels. Holding demand constant and varying yields in six increments of 5 bushels/acre from 146 bushels/acre to 171 bushels/acre produce an average implied price of USD 5.59/bushel, much higher than the forecast implied by the average stocks-to-use ratio of USD 4.95/bushel.  

Corn yields an important swing factor

Corn yields will prove an important swing factor with Rabobank’s midpoint estimate of 156 bushels/acre the key differential between the price forecast and USDA’s baseline forecast. The USDA’s baseline yield estimate of 164 bushels/acre results in a production differential of 700 million bushels compared to Rabobank’s forecast of 156 bushels/acre across the 95 million acres planted. With corn yields having surpassed 154 bushels/acre only twice in the last 10 years, the forecast of 156 bushels/acre provides a better baseline estimate for 2012-13 corn yields.  

Corn prices to be supported by low soybean inventories and elevated soybean prices 

Given their recent rally, soybeans are likely to buy back a small portion of US acreage post the USDA’s 30 March Prospective Plantings survey and report. The new crop soybean-to-corn price ratio rose from 2.27 at end-February to peak at 2.58 in the first week of April, a level at which soybeans are more profitable than corn-on-corn in Iowa. However, corn-on-soybean remains USD 83/acre more profitable than soybean-on-corn.  

Corn‐on‐corn versus soybean profitability equivalence

The soybean‐to‐corn price ratio of 2.37 will be a key fundamental point as acreage swings from corn to soybeans. The dynamics of the soybean‐to‐corn relationship are changing with 2.37 providing a low point for this ratio as soybeans remain the price leader in the agri complex in the coming 12 months until the 2012/13 South American crop can reduce some of the pressure in soybean inventories.  

Rapid pace of planting suggests corn acres may meet forecast

The sheer size of the USDA’s March Prospective Plantings report acreage estimate of 95.9 million acres of corn in the US and the rapid pace of plantings suggest that corn acres may not fail to meet the forecasted 94 million acres. Some late switching may occur from corn to soybeans generating swings of 1 million to 2 million acres based on a 1% to 2% nationwide readjustment, and a swing of a million acres towards soybeans is quite realistic.

However, overall effects of movements in acreage should be around 150 million bushels corn crop reduction for each 1 million acres reallocated from corn back to soybeans, significantly lower in balance sheet impact than the variability in corn yields.  

US corn use forecast for 2012/13 is 13,055 million bushels  

At 13,055 million bushels, the US corn use forecast for 2012-13 is 226 million bushels higher than that for 2011-12, but significantly lower than the informal assessment of current trade estimates. Increased wheat feeding leaving feed and residual use will be roughly flat YOY at 4,650 million bushels and ethanol production will be up 85 million bushels to 5,125 million bushels in 2012/13 due to positive margins and expectations of sustained high energy prices.  

Global corn exports to rise 6.3 million tonnes to 100.3 million tonnes in 2012-13 

As China increases their net imports to 8 million tonnes from 5 million tonnes in 2011-12, the global corn exports are expected to rise to 100.3 million tonnes in 2012-13, creating a bullish environment for corn. There should be incremental import demand increases as private Chinese feedlots buy dips in CBOT corn.


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