Corn Supply Dropping Most Since 1995 Signals U.S. Rally

(Bloomberg) – U.S. corn supplies, the world’s biggest, are dropping at the fastest pace in 17 years as drought damage exceeds government forecasts and five months of declining prices spur demand from livestock producers.

Inventories on Dec. 1 were 15 percent lower than a year earlier at 8.22 billion bushels (208.8 million metric tons), the smallest post-harvest stockpile since 2003, according to the average of 26 analyst estimates compiled by Bloomberg. Goldman Sachs Group Inc., Morgan Stanley and Macquarie Group Ltd. expect prices to rebound at least 17 percent to $8.14 a bushel in 2013.

While futures surged to a record $8.49 in August as the drought spread, they then tumbled 18 percent as U.S. exports slowed and buyers sought cheaper supply from Brazil and Ukraine. Prices will rebound because the government overestimated the harvest and probably will lower the figure when it reports tomorrow, the analysts said. The U.S. Department of Agriculturealready expects global stockpiles on Oct. 1 to be the smallest relative to consumption since 1974.

“Consumers have become too complacent waiting for lower prices,” said Christopher Gadd, an analyst at Macquarie inLondon who expects prices to reach $8.50 this year. “The story going forward will be an improvement in U.S. exports. Buyers have nowhere else to turn.”

Corn rose as much as 68 percent from June 15 to mid-August on the Chicago Board of Trade before retreating. It ended the year up 8 percent, compared with a 0.3 percent gain in the Standard & Poor’s GSCI gauge of 24 commodities. The MSCI All-Country World Index of equities jumped 13 percent. A Bank of America Corp. index shows Treasuries returned 2.2 percent.

Exceptional Drought

About 55 percent of the nine-state Midwest region where most of the nation’s crop is grown had moderate to exceptional drought on Jan. 1, compared with 13 percent a year earlier, according to the U.S. Drought Monitor. In Nebraska, the third-largest producer, extreme to exceptional conditions covered 96 percent of the state, compared with none a year earlier.

The worst U.S. crop conditions since at least 1988 probably reduced the area harvested to 89.6 percent of what was planted, according to the average of 31 analyst estimates. Farmers reaped 10.65 billion bushels, a 14 percent decline that exceeds the 13 percent drop forecast by the USDA on Dec. 11. Domestic supply before the 2013 harvest will retreat to the lowest since 1996, the survey showed.

Farm Silos

While the USDA probably will increase its estimate for production in Brazil, the second-biggest exporter, by 400,000 tons, that will be more than offset by a 1.6 million-ton cut in the forecast for Argentina, the third-largest shipper, the medians of estimates from 22 analysts showed.

Stockpiles are getting harder to predict because growers are favoring silos on their farms for storage rather than commercial grain elevators, increasing the amount of data that must be collected. Storage on U.S. farms climbed 1.9 percent to 12.775 billion bushels in December 2011, the most since at least 1989, USDA data shows. It also raises the risk that prices could keep dropping as more bushels are added to inventory estimates.

Analysts and traders’ estimates for inventories on Dec. 1 missed the USDA tally by an average of 188 million bushels over the past six years, according to data compiled by Bloomberg. Futures moved by the maximum allowed by CBOT on the day of the USDA report in each year, evenly divided by gains and losses.

Corn averaged a record $6.89 in 2012 and that may spur farmers to plant more this year, easing concern about supply. U.S. production will expand to 14.83 billion bushels in 2013, 38 percent more than in the previous season, Informa Economics said in a report Dec. 19. The Memphis, Tennessee-based research company previously forecast 14.64 billion bushels.

Least Bullish

Domestic supply also may exceed analysts’ expectations because sales of cargoes for export before Sept. 1 fell 48 percent since Oct. 1, cutting the amount of grain that normally is in transit and not counted as inventory, according to USDA data. Hedge funds and other speculators cut bets on higher prices by 51 percent in the past four weeks and are now the least bullish since the end of June, U.S. Commodity Futures Trading Commission data show.

“I sold grains in September for significant profits,”said Jeffrey Sica, who helps oversee more than $1 billion of assets as the president and chief investment officer of Sica Wealth Management LLC in Morristown, New Jersey. “I anticipate buying again toward the end of the month.”

Prices will average $8.14 through Aug. 31, Hussein Allidina, the head of commodity research at Morgan Stanley inNew York, wrote in a Jan. 8 report. Goldman, in a Dec. 5 report, forecast $8.25 in six months. Corn for delivery in March traded at $6.9775 in Chicago today.

Livestock Producers

Demand from livestock producers rose to 1.9 billion bushels in the three months ended Dec. 1, from 1.823 billion a year earlier, according to Dan Cekander, the director of grain market analysis at Newedge USA LLC in Chicago.

The U.S. hog-breeding herd has expanded at a time when analysts said higher feed costs would cause a contraction. The government said Dec. 28 that the herd rose 0.2 percent to 5.817 million head on Dec. 1, compared with a 0.8 percent drop expected on average by analysts surveyed by Bloomberg. Poultry production rose 5.9 percent to 5.405 billion pounds in the first 11 months of the year.

Spot Demand

U.S. cash markets for corn are signaling strengthening demand, with exporters in New Orleans paying a premium of 62 cents a bushel over Chicago futures on Jan. 7, USDA data show. That’s 58 percent more than the average over the past five years. Chicago grain merchants were paying a 19.5-cent premium for deliveries before the end of this month, compared with a five-year average discount of 29 cents.

The premiums that exporters are paying for corn delivered to ports in New Orleans and to processor Archer-Daniels-Midland Co. (ADM) in Decatur, Illinois, are the highest ever for this time of the year, said William Tierney, the chief economist for AgResource Co., a Chicago-based research company.

That’s “an indication of tightening supplies relative to demand,” the former USDA analyst said. “We’re looking for higher prices after this report.”

To contact the reporter on this story:Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net