Drought Tightens Corn Supply Before Biggest Harvest on Record

(Bloomberg) – Droughts from Mexico to Argentina are shrinking corn stockpiles to a five-year low, raising the prospect of a bull market before U.S. farmers start reaping the biggest crop ever.

Global reserves will drop 4.2 percent to 123.43 million metric tons by Oct. 1, according to the average of 21 analyst estimates compiled by Bloomberg. That’s equal to 52 days of consumption, the fewest since 1974. Goldman Sachs Group Inc. expects prices to rise 8.9 percent to $7 a bushel before the U.S. harvest starts in September, 21 percent above the one-year closing low reached on the Chicago Board of Trade in December.

Prices fell 16 percent in the last four months of 2011 as the USDA predicted Brazil and Argentina, accounting for almost 10 percent of global supply, would produce their biggest crops ever. Futures then rallied as drought spread across Central and South America, spurring the USDA to cut its forecasts twice in as many months. While prices may keep rising for now, analysts anticipate declines by the end of the year as U.S. growers harvest the most acres planted since at least 1944.

“There is no doubt that crops in South America were hurt by the hot, dry weather and that means more demand for U.S. supplies,” said Alberto Alvarez, the managing director of Chicago-based grains brokerage Fintec Group Inc. “There is an imminent explosion in corn prices.”

Brazilian Crop

Corn rose 7.2 percent to $6.425 in Chicago since reaching this year’s low on Jan. 18, exceeding the 4.6 percent advance in the Standard & Poor’s GSCI Agriculture Index (SPGSAG) of eight commodities. The MSCI All-Country World Index of equities gained 6.8 percent, and Treasuries lost 0.3 percent, a Bank of America Corp. index shows.

The USDA probably will report tomorrow that U.S. reserves on Sept. 1 will drop to about 19.7 million tons (776.5 million bushels), the smallest since 1996, according to the Bloomberg survey of analysts. It will also forecast a combined Argentine and Brazilian crop of 81.3 million tons in the harvest that began this month, compared with a December forecast of 90 million tons, the survey showed.

Production will drop 6.2 percent to 21.1 million tons inArgentina, the world’s largest exporter after the U.S., the survey showed. In December, the USDA had forecast a 29 percent increase. Brazil’s output will rise 4.7 percent, down from a December estimate of 6.1 percent, the survey showed.

Futures markets are anticipating declines from September on record global supplies, with the December contract trading at a 12 percent discount to grain for delivery in May. U.S. output will jump 15 percent to a record 362.5 million tons, the USDA said Feb. 24. That will contribute to a 6.4 percent gain in worldwide production to an all-time high of 920.3 million tons, Informa Economics Inc., a Memphis, Tennessee-based research company, said March 2.

Wen Jiabao

Demand in China, the biggest corn consumer after the U.S., may decline after Premier Wen Jiabao lowered the annual growth target to 7.5 percent, the lowest since 2004, in a state-of-the-nation speech on March 5. The country won’t need “large imports” this year because it has ample supply, the State Administration of Grain said March 6. The government body manages grain reserves.

Rising gasoline costs will curb fuel consumption, in turn reducing demand for ethanol derived from corn, said Randy Mittelstaedt, the director of research at R.J. O’Brien and Associates in Chicago. It may also spur U.S. consumers to cut back on costlier groceries including grain-fed beef, pork and chicken, he said.

Pump Prices

The average pump price of gasoline in the U.S. rose 15 percent this year and reached a nine-month high of $3.767 a gallon on March 4, data from the American Automobile Association show. About 40 percent of the domestic corn crop last year went into ethanol refining, which also results in an animal-feed byproduct, according to the USDA.

For now, analysts are anticipating that demand will outpace supply for a second year. Consumption is forecast to rise to a record for a 16th consecutive year, according to data from the USDA, which begins surveying U.S. farmers later this month to update its planting forecast on March 30.

Wilting South American crops mean rising demand for U.S. grain, making corn Morgan Stanley’s top pick after gold at least through early 2012, the bank’s analysts, led by New York-based Hussein Allidina, said in a March 5 report. Goldman’s New York-based analysts Lindsay Drucker Mann and Robert Koort said in a note the same day they are “increasingly comfortable that prices will approach $7.”

U.S. Harvest

Hedge funds and other speculators are the most bullish since mid-January and raised bets on higher prices by the most in almost two months in the week ended Feb. 28, Commodity Futures Trading Commission data show. The most widely held options on grain for delivery before the U.S. harvest gives owners the right to buy at $7 by April and June, CBOT data show.

Temperatures were as much as 3 degrees Celsius above normal during January and February in most of Argentina, said Joel Widenor, the director of agricultural services at the Commodity Weather Group in Bethesda, Maryland. Some areas received less than 50 percent of normal rainfall from Dec. 1 to Feb. 8, when crops were developing, he said.

Brazilian temperatures were 1 degree Celsius above normal in the past two months, with much of the southern and central growing regions receiving about 60 percent of normal rainfall, Widenor said. It was the driest and warmest growing season since 2009, when corn output fell 30 percent in Argentina and 13 percent in Brazil.

The government in Mexico, the world’s largest corn importer after Japan, said Jan. 25 that last year’s drought was the worst ever and led to the smallest crop since 2005.

Grain Traders

Prices may rise 12 percent to $7.20 by July 1 as Mexico and Asian importers boost purchases, said Alvarez of Fintec, whose clients include two of the largest grain traders in Argentina and the biggest in the Brazilian state of Parana.

Imports (CNIVCORN) by China rose to the highest since at least 2005 in December and January, customs data show. The nation may buy a record 7 million tons in the year that will start Oct. 1, up from 4 million tons a year earlier, Rabobank International said in a December report.

The premium that exporters are paying for corn delivered this month at terminals near New Orleans is the highest in at least five years and almost double the average from 2007-2011, USDA data show. The premium in Decatur, Illinois, the headquarters for corn processor Archer Daniels Midland Co. (ADM), is the highest for March since at least 2007, Bloomberg data show.

“The cash markets are saying that corn supplies are going to get very tight this year,” said Kent Jessen, the director of grain merchandising for Des Moines, Iowa-based Heartland Co-Op, which stores crops at 52 locations in the state. “We have been selling corn as fast as we can buy it from producers. It’s a big demand monster, and it just never seems to go away.”

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