Monday, July 8, 2013

Corn price to fall to low $4s a bushel - Macquarie


Macquarie signalled that prices are on course to fall to the low $4 a bushel as it warned investors against foreseeing a steep downgrade to the US acreage estimate which shocked investors two weeks ago.

The bank, already one of the more downbeat commentators on corn prices, in May forecasting Chicago corn prices averaging $4.50 a bushel in the October-to-December quarter, said that values were for a time likely to fall well below that level.

"We are likely to test significantly below this [$4.50-a-bushel] level in the October-to-November period," Macquarie analyst Chris Gadd said.

The forecast reflected an "increasingly negative outlook", after the US Department of Agriculture stunned investors on June 28 by estimating domestic corn sowings at 97.4m acres – 2.1m acres more than expected by analysts who had reckoned on extensive losses to a wet US spring.

Many commentators continue to believe in a further downgrade to the US corn sowings forecast ahead, with the lateness of sowings seen questioning the accuracy of the US data.

'Lose a little area…'

However, while "at the headline level this thesis seems to have merit, once you breakdown into the detail of the plantings the USDA's current forecasts look all the more reasonable", Mr Gadd said.

He acknowledged that there were instances of corn sowings ending up far smaller than USDA June reports have indicated, with the recent peak in 2008, when the briefing was revealed to have overestimated sowings by well over 1.0m acres.

"But whilst we do see variation from the June report to final plantings, the area change has normally been less than 1m acres and on average only 300,000 acres," he said.

In years such as 1995 and 2011, similar to this year in showing delayed plantings, the declines had been close to this average level.

"The conclusion should be that we will most likely lose a little area from June report to the final plantings estimate, but the area shift is unlikely to be material enough to change a bullish or bearish call."

Supply hopes

Furthermore, hopes for the crop have been raised by the improving condition of the crop, which has continued to improve from a somewhat below-par start to stand at 67% good or excellent as of a week ago.

"Corn condition ratings have increased to what would be considered a normal level for this stage of the year," and warranting a yield estimate of 158.8 bushels per acre.

These figures suggested a crop of 14.229bn bushels, and carryout stocks at the end of 2013-14 of 2,338bn bushels, more than three times those of the end of this season.

Carryout stocks, in indicating the level of supplies and the degree of competition buyers face to obtain supplies, are an important pricing influence.

"As it now looks more likely that we will have a large US corn crop the bearish outlook becomes more certain," Mr Gadd said.

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