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CME: Shrinking Corn Crop Expected to Shrink Further

by 5m Editor
12 January 2011, at 12:02am

US - Today's USDA Crop Production report will provide the feds’ final estimate of US corn and soybean crops and, according to the results of DowJones’ monthly pre-report survey, analysts expect the corn crop estimate to be lower and the soybean crop estimate to be higher than those of December, write Steve Meyer and Len Steiner.

The range and average of analysts’ estimates appear in the table below.

The “incredibly shrinking 2010 corn crop” is expected to continue to shrink a bit more with an expected yield of 153.9 bushels per acre. That number is only fractionally lower than the December estimate but is 6.6 per cent smaller than the 2009 yield. Analysts expect the estimated average soybean yield to rise 0.1 bushels from December to 44 bushels per acre, equal to last year’s yield

Those yield levels would push the corn crop down to 12.491 billion bushels, 0.4 per cent lower than December’s 12.54 billion bushels and 4.7 per cent lower than last year’s 13.110 billion bushels. Analysts still expect a record-large soybean crop of 3.376 billion bushels, slightly higher than USDA’s December estimate and 0.5 per cent higher than last year’s crop.

USDA’s quarterly Grain Stocks report will also be released tomorrow. This report is important because it will provide the first checkpoint for usage levels for the 2010 crops. The result of DowJones’ survey of analysts appear above. As expected given the crop estimates above, analysts expect significantly tighter corn stocks and roughly the same level of soybean stocks as were on hand on 1 December 2009.

Our argument last week that cattle prices are still too low relative to corn prices put us in such good stead with our producer readers that we thought we would try to gain the favor of hog producers this week using the same argument. As can be seen in the chart at right, it is not a difficult one to make.

The chart shows the ratio of nearby monthly hog futures to corn futures from 1972 to date. Note that there is one complication of this chart relative to the cattle chart: The change from the original Live Hogs contract to the new Lean Hogs contract priced on a carcass weight basis beginning with the Feb 1997 contract. That change, of course, increased the apparent level of the hog:corn ratio but really just re-defined the critical levels of the number. Where 20:1 was once the critical level for expansion, a ratio of 26.7 would now be required.

As was the case with the fed cattle:corn ratio, the hog:corn ratio has been very low since 2008 when corn prices originally took off as a) oil prices rose and b) ethanol began using a higher and higher percentage of the U.S. corn crop. Since that time, the hog:corn ration has never been very close to the historical relationship — now 26.7:1 based on carcass pricing — required to entice producers to expand output. In fact, the ratio has hardly touched the OLD required level of 20:1 during that time period. But you might say “Yes, but summer LH futures are trading at $93-plus.” True. But July corn futures closed yesterday at $6.20, meaning that the July hog:corn ratio is still only 15.1:1. If these corn prices persists, look for hog prices to move higher yet in order to bring the industry back into a profit position that begets growth.