Tuesday, May 3, 2011

Corn Spreads - May 3rd

Corn Spreads
May 3rd, 2011

New Crop Corn

Farmers in the United States are having a difficult time planting their crops so far this year, with very little progress made over the past week, which is typically the peak of the corn planting season.  Cold and wet weather is largely to blame, keeping machinery out of the fields.  Yesterday’s USDA update on planting progress indicated that a mere 13 percent of the corn crop has been seeded, as compared to the 10 year average of 43 percent, and last year’s excellent 66 percent.  The worst year on record was in 1984, when only 6 percent was seeded at this point.  Late-planted corn generally results in yield losses, and looking back at ’84 we see that yields came in 18.7 percent below trend.  A similar loss in yield this year would be catastrophic, as the tight supply and demand does not allow for much in the way of a reduced crop size.  Taking a closer look at the individual states, we see that the 5 largest corn growing regions are all significantly behind schedule as compared to the average:  Nebraska is behind by 20 percent, Indiana by 29 percent, Illinois by 36 percent, Iowa by 40 percent, and Minnesota is behind by 45 percent with only 1 percent reported to be planted.  The two states that were responsible for the bulk of this year’s increased acreage, North and South Dakota, have planted 0 and 2 percent of the crop, respectively.  Weather forecasts are calling for drier weather in the Corn Belt, which could help farmers, and it is important to remember that with modern farm technology, the crop can be planted in an astonishingly short period of time.  As usual for this time of year, Mother Nature is driving markets.

Old Crop Corn

The supply situation is extremely tight, as discussed in earlier posts, and in order to maintain sufficient stocks through the end of the crop year, demand must cool off.  The record high price of old crop corn does seem to have brought about the rationing the market so desperately needs, and export sales have been slowing down.  Weekly export inspections showed exports at 34.63 million bushels last week, down from 36.58 million the week earlier.  This compared to the 44.09 million tonnes required each week to meet the USDA’s export projections for the year.  Cumulatively, 59.3 percent of the USDA forecast has been exported, compared to 63 percent on average for this time of year. 

Old-New Corn Spread

In recent years, December futures have tended to trade at a 15-30 cent premium to July futures.  This year however, due to extremely tight physical supply, old-crop July futures have been trading at a steep premium to the new-crop December futures.  The spread peaked earlier this year at $1.33 ½ July over, and has since been declining.  Given recent developments, namely the difficulties planting the corn crop and thus the possibility of a smaller crop, and the waning demand for old-crop corn, this spread could continue to narrow. 

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group


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