After being bullish corn prices for the last 18 months I've turned the corner and am now bearish. The comments around the office have been interesting. Adjectives such as stranger and traitor have been accompanied with "who are you" and "how could you?" I've started establishing bearish corn positions for my clients. 

First off, the USDA surprised everyone with a larger than expected quarterly grain stocks report. These reports are beginning to show a theme, corn used for feed is steadily declining. This trend should not be taken lightly, in my opinion. Indeed, as a livestock analyst, I can nearly guarantee that livestock numbers in the U.S. will decline substantially during 2012. Major declines in livestock numbers are expected in the beef and poultry industries. In addition, DDG's and wheat will continue to be substituted aggressively in U.S. livestock rations. In fact, I believe it's fair to say one of the most bearish aspects of the corn market is wheat. Not only is wheat cheap and readily available in the States, but wheat supplies are burdensome globally and wheat is being fed instead of corn in livestock rations across the globe. This is also impacting the amount of corn our traditional export customers must buy. U.S. corn exports are projected to be down substantially in 2012. One final note on the demand side of the corn equation pertains to the ethanol business in the U.S. The ethanol crush margin has narrowed significantly over the last couple of months. It also must be noted that corn demand for industrial use has flattened out substantially. We'll continue to use a huge amount of corn for the production of ethanol this year, however, the rate of increase in this particular industry has flattened out.  It should also be noted that corn prices remain in the "upper quarter" of their historical range. The above discussion tends to demonstrate that high corn prices have indeed performed the function of rationing tight supplies by slowing consumption. 

Corn supplies, or ending stocks, appear to be bullish. This "appearance" has kept many in the bullish camp and will likely keep them there for a while longer. Remember that the function of the futures market is to "anticipate." It's my opinion the market is beginning to anticipate a vast change in projected ending stocks in the months ahead. First off, current tight projected ending corn stocks, at 846 million bushels, will likely be revised upward, as feed usage edges downward. There will not be any more adjustments to the size of the crop, pegged at 12.358 billion bushels. Production in South America has been revised downward as they experience dry conditions during their growing season. However, one must realize that producers in S. America expanded acreage devoted to corn production. Instead of having a huge corn crop, it appears they'll have a crop near recent levels. And finally, one should expect a substantial increase in acreage devoted to corn production in the U.S. this spring. It's possible that corn acreage could approach 95 million acres, record high, which compare to 92 million acres planted last year. As is always the case, weather conditions during spring and summer will determine the corn yield. However, corn yield has been below trend line for two consecutive years. Thus, the odds of corn yields coming in below trend line for a third consecutive year are fairly slim, based upon historical yield performance. 

In summary, if currently forecasted rains arrive in S. America and they avoid a crop disaster, and if we do not experience drought in the U.S. for our growing season, expanded corn acreage with trend line or higher yields will substantially change the corn supply outlook a year from now. As wheat and DDG's continue to be substituted for corn, with livestock numbers on the decline over the next year and with producers expanding acreage devoted to corn production across the globe, I've turned bearish toward corn prices. The major unknown at this time is the weather pattern in the U.S. this spring and summer. But isn't that always the case? My current downside target in the front month corn contract is $5.00. 

If you're looking for assistance in hedging/marketing your old crop corn or expected new crop production, please send me an email for give me a call at Dennis.smith@archerfinancials.com or 877.377.7905.