Results of the 2014 corn market check-up - COLUMN

Posted January 7, 2014 14:45 by Reuters News Service

(The opinions expressed here are those of the author, a columnist for Reuters)

By Gavin Maguire

CHICAGO, Jan 7 - The results from the New Year corn market physical examination are in, and the prognosis is decidedly mixed.

On the one hand, it is clear that crop markets in general are having a tough time transitioning from the recent era of strong demand into a period of adequate supply, and look set to remain prone to price weakness in 2014 amid a heavy emphasis on rising stocks.

But on the other hand there is a real risk that corn market participants dwell too much on the prospect of rising supplies and ignore the likelihood of a strong rebound in demand. Indeed, with profit margins climbing for all major corn consumers, 2014 could be the year in which demand growth recaptures the limelight after supply dominated proceedings throughout 2012 and 2013.

RAPID ADJUSTMENT TO A NEW ERA
For all the major crops, 2013 was a year of adjustment, but especially so for corn. Front-month corn prices lost roughly 40 percent between the first and last trading days of 2013, which is the largest annual decline seen in more than 40 years.

A more than 100-percent jump in U.S. corn inventories from the year before (thanks to a record-large crop) was the chief culprit behind the price woes, and those large inventories continue to loom over prices as 2014 gets underway.

But an equally important development was the plateauing in corn demand from the ethanol sector as Renewable Fuel Standard alternative fuel production goals were reached.

Between 2005 and 2010, corn demand from ethanol manufacturers climbed by more than 20 percent annually to become the single largest corn consuming category on U.S. supply and demand balance sheets from 2010 to 2012.

But during the past 12-18 months, that rate of demand growth has ground to a halt, and indeed recorded its first notable year-over-year contraction in the 2012/13 crop year as record corn prices battered ethanol producer profit margins.

A modest rebound in total corn consumption from the ethanol industry is projected for the 2013/14 crop year, but the days of double-digit demand growth seem to be over as an era of stable consumption from that industry sets in.

OVERSTATING THE OVERSUPPLY?
Combined with the rebound in global inventories, this transition to stable demand from the ethanol industry has soured sentiment across the corn market, and has sent many speculators to the sidelines for 2014 as headlines about more-than-adequate crop supplies dominate the current market narrative.

However, much of the current bearishness is contingent on large crops emerging from South America, the Ukraine and elsewhere in 2014 – not to mention the United States.

But with question marks still lingering over the scope and quality of the current South American corn crop, and the all-important Brazilian safrinha second-crop still to be planted, the actual extent of supplies that can be expected from that part of the world in 2014 will not be known for several more months.

And even after the South American corn crop is harvested, it will have to run the infamous logistical gauntlet before it gets to consumers – and compete with soybeans for space on trucks and ships the whole way.

In other words, beyond the current U.S. crop, most of the fresh corn that is widely expected to rain on global consumers throughout 2014 is still actually some way off, and is still susceptible to the usual weather and pest problems that can greatly influence the amount that will ultimately be available for consumers.

At the same time, the prevailing obsession with trying to gauge the exact degree of oversupply in the year ahead overlooks the likelihood for a strong rebound in consumption.

The U.S. Department of Agriculture has already penciled in a 7.5 percent climb in world corn demand over the coming year, but that number could well prove to be understated as profit margins for all major corn consumers edge higher while corn prices remain under pressure.

Ethanol producers may have only limited demand potential given the already-attained RFS fuel production goal and sluggish total U.S. fuel demand growth. But even so, the USDA is projecting U.S. ethanol makers will lift their U.S. corn use by more than 300 million bushels in response to the robust profit margins currently prevailing in that industry.

Livestock feeding operations are expected to increase their corn use by nearly 1 billion bushels in 2013/14 over last year’s total for similar reasons.

But while U.S. ethanol demand may be capped somewhat, total feed demand for corn has far more upside room given the strong profitability opportunities currently facing most cattle, poultry and hog production operations.

Furthermore, while feedlot managers were forced to diversify their feed ingredient purchases in recent years due to high corn prices and the sporadic supply flows of that grain, many will be encouraged to increase the concentration of corn in 2014 feed rations due to corn’s well-documented advantages over other grains in terms of animal weight gain rates, ease of storage and transport, and widespread availability.

If this occurs on a widespread basis, it is likely that overall corn use by the feeding industry will outstrip current projections and lead to a general tightening in U.S. and world corn balances as the year unfolds.

Should any production issues take place around the same time, market sentiment could quickly reverse, and set the stage for a recovery in corn values from their currently stunted levels.

So even though the corn market has started out 2014 at its lowest price since 2010 amid widespread projections of oversupply, market trackers should not overlook the potential for demand growth to reclaim the limelight in the coming months as consumers capitalize on the current low cost of a critical input.

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