By Tony C. Dreibus and Jeff Wilson
U.S. corn production is rebounding the most in two decades as farms recover from last year’s drought-plagued harvest. Hedge funds are bearish on prices for the first time since 2010.
Output this year will jump 30% to a record 13.983 billion bushels (355.2 million metric tons), according to the average of 20 analyst estimates compiled by Bloomberg. That will add enough grain to supply the 28-nation European Union and Japan for a year and more than double U.S. inventories before the harvest in 2014. Futures (CBOT:CU13) will drop 9% to $4.75 a bushel in three months, the lowest since October 2010, Goldman Sachs Group Inc. estimates.
Farmers planted the most acres since 1936 this season as some Midwest fields got three times their normal rainfall, including a record soaking in Iowa, the top growing state. Corn tumbled 18% in the cash market from the peak during last year’s drought, reducing costs for buyers including Archer- Daniels-Midland Co. and JBS SA and helping drive global food prices lower in six of the past nine months.
“The crop is going to be big,” said Hal Reed, the chief operating officer at Maumee, Ohio-based Andersons Inc., which owns terminals in seven states capable of storing 145 million bushels and produces 350 million gallons of ethanol from corn annually. “Conditions are looking very good right now. We will have lots of bushels to merchandise, more bushels to store, and cheaper corn for ethanol.”
U.S. Harvest
Futures for delivery in December, after the harvest, fell 13% to $5.22 this year on the Chicago Board of Trade. The Standard & Poor’s GSCI gauge of 24 commodities slipped 0.5% since the end of December, while the MSCI All-Country World Index of equities rose 8%. Treasuries lost 3.3%, a Bank of America Corp. index shows.
U.S. stockpiles on Sept. 30, 2014, will reach 1.895 billion bushels, from 715 million a year earlier, the analyst estimates show. The U.S. Department of Agriculture updates its forecasts today at noon in Washington.
Hedge funds turned bearish last week for the first time since April 2010, U.S. Commodity Futures Trading Commission data show. The net-short position reached 19,943 futures and options, the most since February 2009. Speculators were net-long 98,380 contracts as recently as May 28.
“We don’t see demand keeping up with the increase in supply,” said Chris Gadd, an analyst at Macquarie Group Ltd. in London who anticipates $4.50 or less before the end of the year. “Once you build that surplus, you have to sell it, and the only way to sell it is to sell it cheap.”
Wet Weather
With most of the Midwest harvest still three months away, yields can still be eroded by extreme weather. Last year’s drought, the worst since the 1930s, cut U.S. production by 13% and drove prices to a record $8.49 on Aug. 10.
Crop planting accelerated in the past month as fields dried out after unusually wet weather earlier in the season that curbed sowing to the slowest pace since 1980, USDA data show. Rainfall in parts of Illinois, Iowa, Nebraska, Kansas, Missouri and South Dakota was less than 50% of normal in the 30 days ended July 9, National Weather Service data show.
“We continue to watch dryness and building heat in the western Corn Belt, which could pressure yields,” said Bennett Meier, an analyst at Morgan Stanley in New York. Most of the crop was seeded two weeks later than normal, so plants will pollinate during the hottest, driest part of the year, he said.
Early Frost
There’s also an increased risk that corn won’t mature before freezing weather arrives, usually beginning by late September to mid-October, said Fred Gesser, the senior agricultural meteorologist for Planalytics Inc. in Berwyn, Pennsylvania. The chance of an early Midwest cold spell increased after volcanic eruptions in Russia and Alaska during the past month sent gases and ash into the atmosphere, he said.
“We’re behind normal, so right now I would say my main concern would be an early frost,” said Dave Pollock, the manager of Wiota Elevator Inc., which operates grain terminals in Wiota and Anita, Iowa.
Crop conditions improved in each of the past four weeks, with 68% rated good or excellent by July 5, USDA data show. That’s above the five-year average of 63%. A year earlier, the rating was 40% and by September had dropped to 25%.
Fields in Iowa were soaked by 17.67 inches of rain from March 1 to May 31, the wettest in records going back to 1873, according to the state climatologist. That improved conditions for the 97.4 million acres the USDA estimates was planted with corn this year.
Illinois Counties
Yields may average 190 to 200 bushels an acre in the central Illinois counties from 148 in 2012 and the 10-year average of 182.9 bushels, said Kim Craig, the head grain merchandiser for Deer Creek, Illinois-based Bell Enterprises Inc., which owns four storage facilities.
The record U.S. crop will help boost global production 12% to 962.58 million tons, while consumption expands 8.3% to 935.06 million tons, the USDA said June 12. Stockpiles will jump 23% to 152.36 million tons in the year that starts Oct. 1, the highest since 2001, according to the estimates in the Bloomberg survey.
After three years of prices above $5, or 63% more than the average over the previous decade, farmers boosted output in Argentina, Brazil, Ukraine, Europe and Canada.
Profit Boost
Ample corn supplies will help boost profit in grain handling and ethanol production for Decatur, Illinois-based ADM. Shares of the company rose 31% to $35.90 in New York trading this year. ADM will report a 12% gain in profit to $1.56 billion this year, according to the mean of six analyst estimates compiled by Bloomberg.
Lower grain prices will help JBS, the Sao Paulo-based meat producer whose businesses include the Pilgrim’s Pride Corp. poultry unit. Feed should cost “much less” in the U.S., Chief Executive Officer Wesley Mendonca Batista said in a conference call in May.
The United Nations’ cereal-price index dropped in eight of the past nine months, declining 10% since September. Global food costs are now 11% below the record they reached in February 2011.
“Markets that go high and stay high too long will endure a longer trough in prices to reach equilibrium,” said Michael Swanson, a senior agricultural economist in Minneapolis for Wells Fargo & Co., the largest U.S. farm lender. “It’s going to take a couple of years of $4 to $4.50 corn to knock this market back to reality.”
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