The quarterly report published on 31 March by the US Department of Agriculture about quarterly reserves of grains that were significantly lower than forecasted values resulted in spiking growth of corn futures and determined the next price target in the 2010/11 marketing year. As a result, on Thursday trading was suspended and opened on Friday from $730.
On Monday, 4 April, the price broke a local high at $744.25 which served as a resistance since 22 February. The next resistance is at $779, a June 2008 level.
Dow Jones analysts are of the opinion that the price can reach $800 within the next 3 months as this is a strong psychological barrier. It should be noted, however, that such forecasts were also made in 2008 but the price never reached this level.
Conditions for stronger corn prices are based on fundamental data analyzed in this overview.
1. Warehouse reserves of corn fell 15.2% as of 1 March 2011 compared to March 2010. A similar situation occurred in 2007. But it should be remembered that consumption growth rates increased since that time. The figure below represents the dynamics of quarterly balances since 2002 (million tons) in the US.
2. The dynamics of quarterly balances should be looked at together with consumption growth in major consumer countries and crops harvesting in major producer countries.
Consumption in the 2009/10 m.y. was 815.7 mln. tons or 4.3% more than in the 2008/09 m.y. and 12% more than in the 2006/07 m.y. In the 2010/11 m.y. the March consumption forecast is 835.2 mln. tons, or 2.4% more than in the 2009/10 m.y. It should be noted that the consumption forecast has been upgraded from the August 2010 forecast at 831.5 mln. tons.
Production in the 2009/10 m.y. was 812.4 mln. tons or 1.7% more than in the 2008/09 m.y. and 13.8% more than in the 2006/07 m.y. In the 2010/11 m.y. the March production forecast is 813.8 mln. tons, or 0.2% more than in the 2009/10 m.y. The production forecast has been downgraded from the August 2010 forecast at 831.6 mln. tons.
It follows from the information above that in the 2009/10 m.y. corn production does not meet demand which reduces carryover stocks in the world. In the 2010/11 m.y. corn production forecasts provides for only 99.6% of forecasted demand or the carryover stocks for the 2012/13 m.y. will be reduced by 21.4 tons.
Global imports. As officially forecasted by the US Department of Agriculture, imports in the 2010/11 m.y. will reach 92.1 mln. tons. This forecast was published before events in Japan whose imports were forecasted at 16.1 mln. tons making it the largest importer. But lack of certainty about when the disaster consequences could be liquidated as well as difficulty in forecasting the country’s development rates in the near future cast doubts over reliability of forecasts.
The official forecast of imports in the 2010/11 m.y. is 1.08 mln. tons or 1.15% less than in the 2009/10 m.y. This shows that economies of major producer countries increase corn consumption.
Carryover global stocks of corn in 2011 will fall to a low since 2006 according to analysts’ forecasts and a historical low in the US. Forecasted global reserves are at 123.1 mln. tons, the US - 17.1 mln. tons, China - 60.1 mln. tons, Brazil - 8.8 mln. tons. Dow Jones analysts expect US carryover stocks to be at 15.1 mln. tons.
Because of such developments in the market, players strongly react to any news, rumors, official reports and forecasts. The following official releases that can affect the market – the April report of the US Department of Agriculture on forecasted demand and offer in the 2010/11 m.y.
3. Corn crops. Based on increased demand and growing prices, major producer countries stimulate the agrarian grains sector as much as possible. In 2011 farmers increased land under corns, and not only in the US. But analysts estimate that this year’s crops will not be enough to meet increased demand and replenish carryover stocks.
The US Department of Agriculture published its official report on expected areas under crops in the US on 31 March. It practically reflected expectations of major market players that farmers maximize use of areas under corn and cotton.
In 2011 US farmers are planning to increase areas under corn to 37.3 mln. ha or 4.5% more than in 2010. The reported data confirmed analysts’ forecasts and didn’t affect the market strongly. They rather gave the price an additional support in the medium term as such an increase in areas under crops will not meet a rapid growth in demand.
It is obvious from data that farmers reacted to low reserves in 2006 and increased areas under crops in 2007. A similar situation is in place in 2011 (currently data is available only for the US). Today’s situation is different in that demand exceeds the 2006/7 m.y. demand by 12%.
4. Weather conditions. Unfavorable weather conditions in major corn-producing states of the US should be allowed for. Rainy weather leads to delays in sowing which could result in smaller crops. Drought in Argentina and South Africa will also result in smaller crops in 2011. Strong rains in Brazil resulted in a late completion of sowing.
5. Related sectors and markets.
• Increased demand in the meat market should be allowed for. As the bulk of corn is used to prepare forage for cattle and pigs (mainly), demand from the livestock sector will also grow in 2011.
• Higher petroleum and petroleum product prices result in higher consumption of bio ethanol which is made in the US from corn.
• Major drivers of corn prices have recently included news on Chinese demand. High growth rates of this country’s economy are accompanied by growing corn consumption. The US Department of Agriculture forecasted that in the 2010/11 m.y. China would import some 1 mln. tons of corn. But in the context of a growing economy and concerns about further growth of prices there are rumors in the market that China will additional import up to 2-3 mln. tons of corn in this m.y. It should also be noted that according to official statements of the US Grains Council, China’s corn reserves are 10 mln. tons less than planned before which provides an additional support to the price.
According to analysts of the Derivatives Trading Department within the , the market is characterized by strong bullish sentiment. In the near term no strong growth of prices should be expected as the market has already adjusted for major data. However, one should allow for data in the report of the US Department of Agriculture related to expected demand and offer in the 2010/11 m.y. to be published on 8 April.
