Analysis: High U.S. corn prices warn of summer shortage
WASHINGTON (Reuters) - From Ohio to Kansas, corn is selling at startlingly high prices, so high that they are signaling the United States will run short of corn this summer.
If it does run short, the impact could be felt worldwide. Sales to big export customers like Mexico, Japan, South Korea, and China could take a hit as America grows 40 percent of the corn sold on the world market.
Domestically, sky-high prices could have U.S. millers suspending operations. If corn for feed costs too much than milk, egg and meat farmers could curtail production leading to higher food prices.
These continued high prices have also sharpened arguments by analysts that the government may not have a reliable picture of the shrinking stockpile. Some analysts say the Agriculture Department has over-estimated the supply, so that the situation is worse than it looks.
Their argument is built around the "basis," which is the difference between the local price for corn and the futures price in Chicago.
A strong basis is a signal to growers to sell their corn now, especially with a record corn harvest expected in the fall. But, this year farmers are not selling.
Prices on the cash market, where processors and livestock feeders buy corn for use today, have been unusually high for months. They are well above Chicago futures prices and much higher than historically at this time.
"Either farmers aren't selling or the corn isn't there," said Glenn Hollander, co-owner of Hollander-Feuerhaken, a Chicago brokerage and cash merchant. Even with strong basis, it was difficult to buy corn for domestic use, he said in late May.
In central Illinois, the basis was 53 cents a bushel above futures prices on Monday, half a dollar higher than a year ago. In Cincinnati, the basis was 30 cents above Chicago. In western Kansas, home to ethanol makers and cattle feeders, the basis from January-May was the highest in four years.
Scott Irwin, agricultural economist at the University of Illinois, says the corn isn't there. Irwin and Illinois colleague Darrel Good say the persistently high basis is evidence from the marketplace that USDA has over-estimated the corn supply.
"Basis is still screaming shortage," said Irwin in mid-May. "The problem is getting worse."
USDA TO OPTIMISTIC?
USDA estimates the corn supply at the end of August, the annual low point before the fall harvest, will be adequate for exporters, millers, and livestock feeders, although at 851 million bushels it will be the smallest in 16 years.
There are ways to stretch the supply. Livestock producers could feed wheat instead of corn to their animals and the early spring planting season means some of this year's corn crop will hit the market early.
Regardless, traders and analysts have complained since June 2010 that USDA is too optimistic about stocks and USDA's estimates of stocks are less reliable than they used to be. The disagreement in viewpoints can jolt the markets.
In one day in June 2011, corn futures prices plummeted a record 10 percent, or 69 cents a bushel, when USDA said corn supplies were 10 percent larger than expected. This year, the next USDA corn stocks estimate will be released June 29.
"I suggest treating all USDA corn data as if it were infected with a deadly virus," said one of the sharpest critics, John Macintosh of Rand Financial Services Inc in Chicago after USDA's stock estimate in March. He says USDA was slow to account for drought losses in South America and under-estimated corn usage at home.
Macintosh says corn stocks are headed for unprecedented tightness and cites the "extraordinarily strong" basis as a corroborating signal.
Not everyone agrees that local prices are an iron-clad gauge. Bill Tierney of AgResource Co in Chicago sees more factors in the corn supply picture than suggested by basis.
Farmers erected enough grain bins since 2006 to expand their storage capacity by 10 percent and, thanks to high crop prices and record-high income, have less need to sell grain to pay their spring-planting bills. From May 2011, USDA has projected unusually tight corn supplies, which could inspire farmers to wait for high prices.
Tierney maintains that corn prices are much more sensitive to tight supplies since the ethanol boom began in 2006. The biofuel's share of the corn crop doubled in five years while U.S. corn production rose by less than one-fifth. Corn reserves are much smaller than they used to be. Disappointing harvests in 2010 and 2011 thinned supplies as well.
"Why all the focus on corn? For the past two years, we've had below-trend line yields and record prices," said Tierney.
USDA SURVEYED 84,500 FARMERS
USDA says its survey and estimating methodology, honed by decades of experience, produces reliable stocks data. For all the grumbling, in the end the trade adopts USDA's figures as the starting point for calculating supplies.
For its latest corn stocks estimate, USDA surveyed 84,500 farmers and all 8,900 commercial facilities, such as warehouses, terminal elevators, processors and feed mills, that hold corn.
In conducting its farmer survey, USDA tries to contact all large farms with exceptional storage, which it calls extreme operators, and for the rest employs a systematic sample plan. While all farmers have an equal chance of being selected for the survey, growers have a higher chance of being contacted as their storage capacity goes up.
When it has replies in hand, USDA weights responses to reflect a farm's size and proportional share of storage usually held by its peers as it builds state and national totals. It imputes a figure for nonresponses by commercial facilities.
For March, USDA said the corn stocks figure had a margin of error of 4.4 percent for the on-farm total, roughly the same margin as previous years. USDA sets its sample size to assure its desired level of precision. Joseph Prusacki, director of the statistics division at USDA's agricultural statistics agency, said farmers seem less willing to participate in surveys.
Analysts often say the government ought to monitor distillers dried grains, an ethanol byproduct and a livestock feed substitute for corn, but in budget-cutting times, a new report seems unlikely.
"I think you would have to say we are headed to worse reports," said Chris Hurt, agricultural economist at Purdue University, pointing to cancellation of Census Bureau reports on soybean crush and soyoil use. Because of that, USDA no longer estimates soyoil for biodiesel.
"Those who do not have market power are not going to have it (information)," said Hurt. "If you're a believer in commodity markets, you really don't want to get it second or third hand."