CHICAGO: The corn story of 2012 may still be unfolding as drought and searing temperatures sap yield potential, but many traders are already turning their attention to next year's crop after December 2013 prices bolted to life-of-contract highs lately to score a hefty advantage over soybeans that may heavily skew planted acres in corn's favor next spring.
Indeed, corn's early claim on next spring's acreage may be so strong that it could potentially threaten an oversupply of the crop next year if growing conditions avoid another drought and demand contracts as expected.
2013 FOCUS NOT PREMATURE
It may seem a bit early to worry about 2013 production potential when planting season is still over nine months away.
But given the dramatic production losses besetting the 2012 crop - which looks set to deteriorate further as high temperatures and limited rains cause entire fields to wither and abandon ear development — it is certain that this year's supplies will be far tighter than consumers would like. Also prices will need to carry a premium going into next year in a bid to ration demand and encourage high production levels in 2013.
Further, US farmers have a tendency to lock down seed, fertilizer and chemical purchases soon after harvest in order to use harvest-time revenues to pay for a chunk of the following year's production (and to lower tax bills by as much as possible.)
This means that US growers will be sizing up seed and input costs within a matter of weeks, as whatever portion of this year's crop makes it through to harvest, which could come as early as the first week of September.
In addition, regardless of the state of this year's crop, those growers still holding grain over from the 2011 harvest will be looking to offload at least some of those reserves while current prices approach record levels and consumer interest remains relatively intact. And again, those proceeds will likely be steered towards offsetting expenses for 2013 production.
SOY/CORN RATIO ON THE MOVE
The recent out performance of corn versus soybeans has sent the 2012 new-crop soybean/corn ratio plummeting from roughly 2.6:1 (soybean price versus corn) in mid-June to 2:1 recently.
The ratio is typically used as a planting guide for farmers, and the higher the number the more soybean-friendly the price ratio is from a farmer's perspective. But given that farmers have long since finished planting both crops in 2012, the current ratio has greater repercussions for next year's crops, which have also seen an aggressive downward swing in the soy/corn ratio in recent weeks.
Indeed, the 2013 new-crop soybean/corn ratio has recently slipped to near the multi-year lows it plumbed in late 2011, when a disappointing US corn harvest coupled with the prospect of high South American soy production had last put corn and soy prices on diverging paths.
But given that corn end-users seem to be on the verge of panicking as prices surge ever higher on fears of further crop damage, corn prices may still push high enough to shunt next year's soy/corn ratio to all-time lows for those contracts, and cement corn's status as the go-to crop for 2013 at this stage in the planning process.
SOYBEANS YET TO MAKE THEIR PLAY
Since mid-June the agriculture markets have been all corn, corn, corn as December futures soared more than $2 a bushel in a month. This roughly 45 percent price advance overshadowed all other crop market developments, including the 18 percent rise in new-crop soybean values over the same period.
However, due to the soy plant's lagged planting and development rates relative to corn, the soy crop's deterioration has not yet been as evident as corn's, which is still in the midst of its most delicate growth phase.
But the soy crop's most critical development phase lies just ahead, and recent signs of soy plant stress have already alarmed crop surveyors to set off a fresh round of yield projection reductions in recent days that are sure to continue for the next month or so.
Such additional yield cuts are likely to help underpin soy values for that period, and help the soy market stage a more noteworthy response to corn's recent march higher than seen so far.
That said, it'll take an aggressive out performance of the corn market to reverse the recent trend in the soybean/corn ratio, so soybean prices have their work cut out if they are to counter corn's recent claim for 2013 spring plantings.
But given the tightness of US and global soy inventories, any steep drop in consensus US yield estimates will likely generate substantial price support for soybeans for the foreseeable future, at least until South American plantings get underway and world supply focus shifts to what Argentine, Brazilian and Paraguayan growers will likely serve up in 2013.
As a result, a sustained stretch of soybean strength relative to corn cannot be ruled out before the end of the current U.S. growing season, which could result in another swing in the soy/corn price ratio back in soy's favor before farmers finalize their 2013 spring planting intentions.
DEMAND CONCERNS
While additional price strength in both corn and soybeans looks likely as the US growing season struggles on amid searing temperatures and severe drought, trader focus should start to turn to how end users of both crops are faring in the newly elevated price environment.
Already the US Department of Agriculture has acknowledged that over 1 billion bushels of corn use should be pared in the United States over the coming months (versus June estimates) as a result of the higher prices, with additional usage cutbacks likely if prices continue higher.
US soybean demand also looks set for a cut in the wake of the soy market's rally to date, and again more demand destruction will be expected if prices embark on a fresh push higher over the final stages of the growing season.
The higher overall crop and feed ingredient prices - which include wheat, rice, soybean meal and distiller's dried grains as well as other grains — look set to strain not only traditional crop consumers, but also broader food and raw material purchasers as the elevated prices set off a fresh round of food and feed inflation.
And as the sharply higher prices start to bite such buyers over the coming months, broader attention is likely to be paid by political entities looking to fend off the social upheaval associated with rising food costs, which may lead to unexpected market intervention that could exacerbate price responses even more.
So while the current emphasis remains on 2012 crop development and the resulting push higher in crop prices, it may not take long for market participants to turn their attention to the longer-term impact on demand, which is set to contract amid the prevailing high-price environment, and in certain cases could be shut off entirely if prices spike high enough.
And should that demand attrition unfold just as farmers gear up to increase crop output in 2013 - in response to the current and forthcoming prices - there is a strong likelihood that today's corn and soybean famine could turn into a feast by this time next year as production rebounds just as consumption fades away.
— Gavin Maguire is a Reuters market analyst. The views expressed are his own. To get his real-time views on the market, please join the Global Ags Forum.)
Current corn famine may lead to a feast in 2013
