Grains Week Ahead-Record US harvest could herald $4 new-crop corn

Sun May 13, 2012 9:59am EDT

* December corn could slide to $4 after July
    * Forecast for record US corn crop weighs December
    * July corn seen supported by tight supplies
    * Soybeans have fundamental support

    By K.T. Arasu	
    CHICAGO, May 13 (Reuters) - The forecast of a record corn
harvest this year in the United States by the U.S. Department of
Agriculture last week has set the new-crop December contract
 on a downward trajectory that could take the price to $4
per bushel, analysts said.	
    The December contract, the first month to typically reflect
the year's corn harvest, fell on Friday to the lowest level in
nearly 15 months, closing at $5.05-1/4 after breaking below $5
for the first time in 17 months.	
    A caveat to the downward spiral, analysts said, was weather
in the Midwest grain belt during the summer, especially in July
when plants pollinate and yields are set.	
    High heat coupled with dry weather could hurt plant
development and reduce yields.	
    "New crop corn will be about $4 probably after mid-July,"
said grains analyst Robert Bresnahan of Trilateral Inc. in
Chicago. "A large portion of the crop was planted early and they
received timely rains. I see a downtrend (in prices)."	
    The USDA's supply-demand report on Thursday forecast that
farmers in the United States will harvest a record corn crop of
14.8 billion bushels, up nearly 20 percent from last year.	
    The department also raised its corn yield estimate to 166
bushels per acre from the trendline projection of 164 bushels,
which analysts said was based on its historical trend of
revising the yield based on planting progress.	
    But some critics said the USDA was premature in raising the
yield by two bushels, especially when the critical development
stages of the plants lay ahead in the summer months.	
    "It seems like the USDA has gotten into the weather
business. They are forecasting good summer conditions," Scott
Irwin, professor of agricultural economics at the University of
Illinois in Urbana-Champaign said, jokingly.	
    He also said that the USDA surprisingly dropped the corn
yield for 2011 -- when yield fell to 147.2 bushels -- when
calculating the 166 bushel per acre yield stated in Thursday's
report. "Maybe they considered it an outlier year," he said.	
    	
    CORN DOWN, SOYBEANS UP	
    Investment bank Goldman Sachs also noted the USDA's
exclusion of the 2011 corn yield in its calculations.	
    The bank said in a note to clients that the USDA's 166
bushels per acre yield forecast was higher than its own of 160
bushels and "higher than we had expected it to forecast given
the historical forecasting methodology, as it decided to exclude
the low 2011 yield in forecasting."	
    Goldman Sachs said that while the USDA report would likely
weigh on corn prices in the near term, the bank believed
"further downside to prices from current levels will be limited
until we get a better idea of summer growing conditions."	
    Then bank maintained its six- and 12-month outlook for corn
prices to remain at $5.25 per bushel.	
    Traders and analysts said that while corn prices would be
under pressure, soybeans would continue to find support from the
USDA's forecast for ending stocks in the United States next
summer to be the smallest in four years.	
    A drought that devastated the soybean crop in Brazil and
Argentina which boosted demand for U.S. supplies was behind the
slump in stocks in the United States.	
    "Beans and corn are going to move in opposite directions,"
said Shawn Hackett, president of Hackett Financial Advisors and
publisher of the Hackett Money Flow report.	
    "Corn has already gone from $8 to $5," he said, alluding to
spot corn futures rising to an all-time high of $7.99-3/4
per bushel last summer amid concerns over the U.S. weather.	
    He too was expecting December corn futures to slide to
around $4 per bushel "in the next couple of months" but added
that summer weather would be a crucial factor.	
    	
    CASH CORN MARKETS TO LEAD FUTURES?	
    Traders said while new-crop corn futures head lower, the
story in old-crop CBOT contracts could be different story due to
a tightening of supplies held-over from last year.	
    Despite the USDA raising its estimate of old-corn ending
stocks by 50 million bushels in its report last week to 851
million bushels -- when analysts had expected a decline to 749
million -- traders are pointing to rising basis values in the
cash markets as a sign of tight supplies.	
    Some traders estimate that 1 billion bushels of corn from
this year's harvest could flow into the supply chain as early as
August, but added that they were uncertain if there were enough
supplies held over from last year to last until then.	
    "Cash markets always lead futures," said veteran grain
trader Glen Hollander, partner at grain merchandiser and
brokerage Hollander & Feuerhaken in Chicago.	
    "If demand in cash markets is still there next week, the
market will stabilize," he said, adding lower futures prices in
the July contract would stall grain sales by farmers.	
    He added that farmers sold plentiful corn recently, adding
that exporters and the ethanol sector likely covered their needs
for at least two weeks to up to a month.
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