Kub's Den

In the wild panic to sell off corn futures positions since USDA's Quarterly Stocks report implied a slower-than-previously-assumed pace of corn usage, the other big government grain report released last Thursday -- the annual Prospective Plantings Survey -- has been largely overlooked or shrugged off by traders.

So here's what it said: Farmers intend to plant 97.3 million acres of corn in 2013, which will be the largest amount of ground covered by corn in the United States since 1936. There was also a large increase in the intentions for sorghum (milo) acreage -- now 7.6 million acres in 2013 -- and a little bump in spring wheat acreage compared to 2012, and also 77.1 million acres of soybeans, which is nearly unchanged since the previous season. Overall, however, losses in the acreage intentions for cotton, sunflowers, barley, rice, canola, flax, peanuts, sugarbeets, and potatoes outweighed the year-over-year gains, so the total non-hay crop acreage intended in 2013 isn't even as large as it was a year ago.

But it's still pretty big! Especially in the case of corn, these planting intentions sound bearish enough. Consider that if farmers succeed in planting this many acres and are then able to harvest about 92% of them (89.5 million acres) and achieve a nationwide average of 164 bushels per acre, that would be a 14.6-billion-bushel crop coming to market at the end of 2013. That would be 35% more corn than we had to work with after 2012's crop, and far and away the largest crop in history. Those are the kinds of assumptions that could start showing up in USDA's monthly supply and demand estimates in May (but not yet in the April report due out a week from today, on the 10th).

So with all that considered, I think it seems kind of impressive that new-crop December corn futures have only dropped 48 1/4 cents from the March high to Monday's low, being relatively more supported than the front-month corn futures, which experienced a maximum peak-to-valley loss of $1.03 3/4 per bushel ... so far. New-crop November soybean futures have only sloughed off 44 1/2 cents from their March peak.

To understand the relative strength of these new-crop contracts, consider the context in which these acreage numbers were shown. As few as five months ago, just as soon as the previous crop was harvested and put away, private estimators were throwing around guesses for the 2013 crop that sincerely believed 100 million acres of corn -- or more! -- was a realistic possibility. The USDA estimates the previous record large corn acreage from 1936 was 102 million acres. But remember there wouldn't have been as many soybean acres eight decades ago, nationwide average corn yield was about 25 bushels per acre in the 1930s, and domestic corn usage back then was a fraction of what it is today, to say nothing of global feed demand.

So our prospective 2013 corn acres aren't as extreme as some traders were once expecting to see, and the total crop acreage isn't even a new record since 2012. But as crop acres have grown in recent years, some people have wondered where exactly those acres are coming from. "Invest in land -- it's the one thing they can never make more of," a banker once told me. But "they" have, in fact, made more of it in recent years, and anyone who has driven around the Corn Belt with their eyes open can tell you where and how.

When I was a kid, I can remember exactly which quarters along the seven-mile stretch of country road between the farm and the highway were prairie, because that was where we could go to find native plants for various 4-H projects. Now, however, about four of those quarters along the road have been turned into corn or soybean fields, and a similar phenomenon could be noted pretty much anywhere in the Midwest where farmers have been plowing or reconditioning bottom ground, the corners of pivot-irrigated fields, and any odd-shaped little chunks of previously-unplanted soil.

But here in Edmunds County, S.D., we are basically a case study of "new" crop acres being created during the past few decades. This county is about as far west as a farmer can reasonably expect to grow corn, with a strong population of livestock around to require grassland and hay, but also an ethanol plant and a few shuttle-loading rail facilities to demand row crops. The region previously grew mostly small grains, especially wheat, but the excellent yield prospects of short-season corn and the chemical technology now available have won over farmers' hearts and minds and checkbooks.

The pace of repurposing prairie to crop land has more than doubled during the past 10 years in this county, from 2,486 acres torn up in 2003 to 5,767 acres in 2012.* There was relatively more of this activity during recent dry years rather than during wet springs, but the total over the past 10 years has been at least 33,000 acres ... which is 4.5% of the entire acreage of the county!

An article in the Proceedings of the National Academy of Sciences published in February shows a wider picture of just where and how intensely these additional crop acres were being "created" between 2006 and 2011 ("Recent land use change in the Western Corn Belt threatens grasslands and wetlands." Christopher K. Wright and Michael C. Wimberly). Wright's and Wimberly's illustrations show the change from grassland in 2006 to corn or soybeans in 2011, with hot spots centered along the East River's South Dakota/North Dakota border and also in south-central Iowa.

But when I added up all the crop land other than hay shown in the Prospective Plantings report from 10 years ago and compared it to this most recent Prospective Plantings report for a broader selection of grain-growing states, you can see that our overall acreage has been growing just about everywhere but the South. You can also see why U.S. hay stocks could be at their lowest levels since the '80s even if there weren't a multi-year drought still bearing down on the western United States.

So the real question is now: What does this mean for new-crop prices? And that's a question that needs to be made more fundamental. We should really be asking: What does this mean for yield? Other market analysts have been pointing out for years that these additional, "marginal acres" have relatively lower yield potential and are an overall drag on our nationwide yield trends for corn and soybeans. I think it will take a longer period of study, and preferably a number of control years without serious drought, before we can really see whether or not that effect is actually canceled out by the rapid improvement in crop genetics.

But if we only look at 2013, well now we're definitely looking at the Western Corn Belt for all these additional corn acres, and the view looking west isn't pretty. For another red- and yellow-spotted map, refer to the U.S. Drought Monitor and notice how similar it looks to the 2012 drought scene. So that is why I suspect the new-crop corn and soybean prices may be able to recover back into their sideways trends and may eventually make a run toward $6 and $13, regardless of their acreage, if the drought situation doesn't change. Looking at how the November-soybean-to-December-corn price ratio flopped around last spring, I'm reminded how changeable the market's opinion can be during the months of April and May. Even if our start this year is a little late, I have no doubt 2013 planting will eventually be fast and soybeans may have to shout their "bids" for acres pretty loudly if they want to be heard.

*Thank you to the Edmunds County USDA for researching this data, and especially Paula Petersen, County Executive Director, and Valeree DeVine, District Conservationist.

Elaine Kub can be reached at elaine@masteringthegrainmarkets.com

The risk of loss in trading futures and options on futures can be substantial. Each investor must carefully consider whether this type of investment is appropriate for them.

(CZ\SK)

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