Downside to Yields and Acreage in the US
Friday’s WASDE (World Agricultural Supply and Demand Estimates) maybe a positive catalyst for corn prices, albeit a short lived one. The first report of the year tends to have some volatility associated with it. It is a look in the rearview mirror, however, and the game is on when the new corn crop gets into the ground.
Current consensus looks for a slight increase in ending corn stocks (652 million metric tons, or MMT versus the December WASDE report of 647 MMT). We think there may be some risk to that number as both harvested acres (87.7 million, December WASDE) and yield (122.3 bushels per acre, December WASDE) may have to come down, lowering the production number beyond the decline contemplated by consensus (consensus of 10,675 million bushels versus a December number of 10,725 million). We don’t have a feel for any potential changes in the “use” estimates, so stocks to use (ending corn stocks as a percent of total corn use) should finish right around the 5.7% estimate we saw in December, but there is downside risk to that number, in our view.
Downside risk to South American Corn Production
Last month’s WASDE estimated corn production in Argentina and Brazil at 27.5 MMT and 70.0 MMT, respectively. Our consultant is well below consensus for Argentina at 22.5 million MMT, with consensus looking for a reduction of closer to 2.0 MMT. Our consultant’s primary concerns are the lateness of the crop and the amount of acreage that remains to be planted.
There may be some modest upside to the estimated production in Brazil, but almost certainly not enough to offset the weakness in Argentina. More likely is a stable estimate for Brazil. The net impact is obviously bullish for corn.
We remain bearish on corn
Despite what might be a noisy report this Friday, we retain our fundamental and quantitative bearish views on corn. With planting intentions likely to reflect still elevated corn prices and likely bounce back in yields (weather dependent, of course) we anticipate a continued decline in the price of corn (as already partially reflected in the futures curve).
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC