The markets can be a fickle creature; and sometimes it doesn't look anything like the view from your back porch step. Farmers know this, but this year, they're having a hard time believing their eyes. As ponds grew into lakes over rich, black dirt of Iowa and south central Minnesota's corn-growing sweet spots, the collective cry kept growing louder: the market isn't taking prevented planting into account!
There are no "official" estimates of how much prime corn ground will go unplanted this year, but I've heard estimates ranging from 2 million acres to 7 million acres. To be sure, some of that will go to soybeans, but the economics of taking a prevented planting payment on corn is an even more attractive option, a new wrinkle that's making this season a puzzler.
The immediate question in all of this is how USDA will account for land that never got planted in Wednesday's supply and demand outlook. (The report will be released at 11 a.m. CT., and if you're interested in the details of what's expected, please read Darin Newsom's preview story in Ag News.) Last year's June supply and demand report didn't change much to reflect the increasingly severe and widespread drought. At this time last year, the string of 100 degree days was undeniably damaging, yet USDA saved the number shuffle for July. So what's the likelihood they'll make changes to acreage or yield in this June's report?
Historically, USDA has only revised acreage four times in its June reports, in 1995, 1996, 2002 and 2011. Corn acreage increased three out of those four times, only dropping acreage by 1.3 million acres in 1995. Private analytical firm Informa Economics thinks USDA could knock 1.5 to 1.9 million acres off the corn acreage estimate tomorrow. While not unprecedented, it's an unusually bold move for USDA given it will be releasing its survey-based acreage report on June 28, a mere 17 days from now.
USDA's already shown it's willing to give a little on its yield expectations by dropping its yield estimate in May to 158 bushels per acre from its pie-in-the-sky 163.6 bpa initial estimate. Joel Karlin, who writes DTN's Fundamentally Speaking blog, loves math problems, and given the rest of the data available at the time, he figured USDA could have gone as low at 154.1 bpa in May. With all the trouble getting corn planted and with the excessive rain leaving seedlings with depleted nitrogen, it's possible USDA could lower yield estimates again tomorrow.
This brings us back to the big picture: has the market taken lost corn acres into account or is the prevailing new-crop price, $5.52 after Tuesday's close, too low?
DTN Senior Analyst Darin Newsom played with the supply and demand table earlier today, and I think his math provides some insight into the question above.
He started by taking 4.9 million acres off USDA's initial May acreage estimate of 97.3 million acres (to account for prevented planting). That's 92.4 ma planted. With an average abandonment rate (92% of what's planted gets harvested), and harvested acres comes to 85 ma.
Newsome drops yield to 154.1 bpa, what Karlin thought USDA should have projected in May, and total production still comes in at 13.1 billion bushels (as opposed to the 14.9 bb currently projected). If beginning stocks drop 11 million bushels (as analysts expect USDA to show on Wednesday) to 748 mb and exports are left unchanged, total supplies will be 13.8 billion bushels.
If demand for the year is unchanged at 12.9 billion bushels -- which Newsom said is unlikely if expected supplies decline by 1 billion bushels -- ending stocks come in near 950 million bushels with an the ending stocks-to-use ratio at 7.4%, larger than the current 6.8%.
Is that bullish?
"Market bulls would answer yes because it is a tighter situation than what was projected January through May," DTN Senior Analyst Darin Newsom said. "Market bears would say no because it still shows ending stocks and ending stocks to use growth from 2012-13. The only thing that matters from here on out is the weather. If the acres planted now produce at even reduced levels, it is hard to make the argument the U.S. will see a catastrophically tight supply situation."
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