In light of the softer market regarding futures prices, extreme heat across the corn belt this week should add some strength to the sector with widespread warmer temperatures and a drier pattern in the southern belt for several days potentially limiting yields.  With season to date weather now figured into our models coupled with the forecast weather through harvest, the WTI outlook for US corn (18 major states) is for 2011 yield numbers to come in just above trend line (7 year) yields.  We also feel that USDA crop numbers will start to reflect these limitations on the crop. 

this morning’s September chart below

The table above from this week’s USDA Crop Progress report underscores the effect that delayed planting this year has exerted on emergence of the crop.  In spite of planting progress that has picked up over the last 10 days, some regions may start to run into situations where there will not be enough growing degree days in the season to make a decent yield, and as a result, acres in some regions may start to shift to soybeans which have a shorter the maturation cycle.

Here is an excerpt from the note sent to clients early this week:

…we have been highlighting the delayed start to the corn season in the US as a result of the cold and wet conditions, inhibiting planting progress.  Over the last couple of weeks, we have seen planting progress close the gap between the pace set last year and the 5 year average; in Monday’s USDA Crop Progress update, the major growing states were now 79% planted, vs. 92% this time last year and the 5 yr ave of 87%.  While some lost time has been accounted for in recent weeks, the crop is still behind.  The emergence chart above from yesterday’s report shoes that 45% of the crop is emerged, vs. 69% last year.  In any other year, this might not be a cause for concern, but with such a tight supply balance this year, which is expected to remain tight into early 2012 due to strong demand expectations, this will likely translate to a bullish outlook for  corn futures at least through September.  In spite of the recent decline, we advised clients that this dip may be a favorable entry point for July/Sep corn contracts, and our forward view still supports a constructive market…

This note in the Farmgate Blog echoes what we have been discussing, supporting our expectations that Weather Trends has been pointing to as risk factors for the last two months.  Mid-crop weather will become VERY important this season.

Our biggest weather concern in the US at the moment is on the corn side.  A cold and wet start to planting in the US has put planting pace well behind last year.  The week ending May 15th saw some significant planting progress, narrowing the gap that has been present since the season started.  But even though the planting pace has picked up, the crop is still delayed (21% of corn emerged vs. 53% last year in the 18 major growing states).  We may start to see a shift in acres from corn to beans.  This coupled with sustained demand we feel will place upside risk to costs on the feed side, which we feel will continue to rise through the end of 2011.

In the USDA Foreign Agriculture Service May 2011 World Agricultural Production Report, it was noted that projected corn production in the US for the 2011/12 season is currently at 343.04 mmt, which would be an 8.5% increase over last year.  The increase in planting acres (roughly +1.4 mm ha) is largely responsible for the favorable supply outlook as yields are anticipated to increase only slightly.  Globally, the production balance is estimated by USDA to come in +6.42% higher than last year.  Our summer outlook is hinting at some y/y dryness in the western corn belt in July (see map below), while in the east, we are expecting a favorable pattern.  We have noted in previous columns that numerous analysts are stressing the need for ‘perfect weather’ in order to generate the supply needed to keep pace with corn demand, coming from both the food and fuel sectors.  The current flooding along the southern belt has already delayed crop plantings, and looking at anticipated dryness creeping in during August, we are betting against a perfect summer.

The NASS Crop Production Report from May 11th highlighted the April flooding up an down the Mississippi River.  In addition, the wet (and cool) weather delayed planting of the corn crop which was reflected again by the planted acres status as of May 8th, highlighted in the following table.  The first map below shows the late April y/y precip, and the second underscores the %soil moisture for the same period.  For the top corn growing states, planting progress was 40% complete, vs. 80% this time last year.  It follows that only 7% of corn had emerged by that date, compared to 36% in 2010 and a five year average of 21%

With the longer maturity cycle required for corn, as the planting window begins to narrow, growers may start to be faced with the decision to switch acres to another crop with a shorter growing cycle such as soybeans, but some may also opt for planting cotton and groundnuts, particularly in the southeastern states.  Despite macroeconomic uncertainty, the general outlook is for sustained demand, so after corn futures have been pulled back along with the broader ags/softs commodity complex, the outlook may start to turn constructive in the coming weeks.  In addition, the recent surge in beef and dairy demand will strengthen the feed market in the US.

According to yesterday’s USDA/NASS Crop Progress report, only 1% of the beet crop in North Dakota had been planted by May 1st, vs. 94% last year; similarly, Minnesota was 2% complete, vs. 96% last year.  The top 4 sugarbeet producing states were at 15%, while last year progress was at 95% for the same date. 

The April weather summary for average temperature and total precipitation (Y/Y) are shown below in the Weather Trends maps, with the primary corn counties shaded.  The pattern does start to look more favorable next week (week of 08 May), so we are expecting planting progress to pick up by mid May.

 In addition to the weather impact to US corn, this pattern also will affect wheat crops for both the US and Canada.  With tight stocks, the weather premium in grains futures can add significantly to the volatility over the next month.

The April World Agricultural Supply and Demand Estimate Report (WASDE) was issued a couple of weeks ago, and it underscores the concerns that we have around the US cotton crop, which were highlighted in our post from earlier this week.  The table below from the April WASDE shows the USDA projections for the US cotton supply scenario for the 2010/11 marketing year which runs from August to July. 

In spite of favorable production estimates, in part due to a significant increase in acres devoted to cotton, the concerning statistic is around the projected ending stocks.  Even with a strong production outlook, this is not keeping pace with demand from the export side, and the result is a very thin margin as it relates to stockpiles.  Projected ending stocks for 2010/11 are now estimated at 1.6 mm (480 #) bales, compared to 2.95 and 6.34 for the previous two marketing years.  The result is an average price which has nearly doubled in two years, and any weather disruptions going forward will add significantly to the upside price risk – the current chart from one of the widely traded cotton ETFs (BAL) is shown in the stockcharts graphic below.

US corn is getting off to a slower start compared to last year; the table above from yesterday’s USDA NASS Crop Progress report shows that planting progress as of April 17th was at 7%, vs. 16% this time last year.  The current week will not help much, but we are looking at better conditions for growers to make up for lost time during the last week in April (see Weather Trends forecast maps below – primary corn regions shaded).

Wheat is up again in overnight activity (currently up 2%) as analysts continue to figure in suboptimal crop conditions leading to a shorter US winter crop; in addition, the cooler pattern has been delaying spring plantings, adding to the uncertainty surrounding adequate supplies.  In yesterday’s NASS crop progress report, US spring wheat plantings were only 5% complete as of April 17th, compared to 18% for the same date last year and the 5 year average of 12%.  Further, according to the most recent crop surveys, US winter wheat conditions in the 18 major growing states have 38% of their current crop classified as either poor or very poor, compared to only 6% for this time in 2010.  Weather Trends noted in our report to clients issued yesterday that the current week will continue to produce unfavorable conditions, before things start to improve over the last week in April.

As a result of the poor US weather, many crop analysts are calling for significant yield reductions (below 40 bu/acre), which will curtail supply from the world’s largest exporting country.