By Jeff Wilson – Oct. 10 (Bloomberg) — Drought damage to corn and soybean fields in the U.S., the world’s top grower and exporter, is eroding supplies of the nation’s two largest crops to below year-earlier consumption levels for the first time since 1974.
The government probably will say tomorrow that the U.S. corn harvest and inventories on Sept. 1 will be a combined 11.604 billion bushels, less than the 12.33 billion consumed and exported last year, according to a Bloomberg survey of 31 analysts. Soybean supplies will be 2.932 billion bushels, below the 3.157 billion used in 2011. Supplies failed to top usage from the previous year only twice since 1960 for corn and five times for soybeans, U.S. Department of Agriculture data show.
Record heat in June and July sparked the worst drought since 1956, sending corn and soybeans prices to record highs. Morgan Stanley predicted corn may rally 35 percent in a year, while Barclays Plc sees soybeans gaining 16 percent. Higher costs for dairies, grain processors and livestock producers helped send global food prices in September to the highest since March, United Nations data show.
“Supplies of both corn and soybeans will be tight, and we expect prices to rebound after the report,” said Bill Tierney, the chief economist for Chicago-based AgResource Co. and a former USDA grain analyst. “There is no evidence that current prices are rationing soybean supplies, and there will be less supply relief for corn” from South American harvests that start in February, he said.
Corn futures have jumped 15 percent this year to $7.415 a bushel on the Chicago Board of Trade, and soybeans surged 28 percent to $15.425 a bushel. The 24 commodities tracked by the Standard & Poor’s GSCI Spot Index rose 3.2 percent in the period, led by wheat’s gain of 33 percent. The MSCI All-Country World Index of equities climbed 11 percent, and Treasuries returned 1.9 percent, a Bank of America Corp. index shows.
In its report tomorrow at 8:30 a.m. in Washington, the USDA probably will cut its domestic corn-production forecast to a nine-year low of 10.616 billion bushels, down 1 percent from 10.727 billion estimated in September and the fourth straight monthly reduction, according to the average of estimates in the Bloomberg survey. As recently as June, the government predicted a record harvest of 14.79 billion bushels.
Combined with the government’s Sept. 1 estimate of reserves at 988 million bushels, total U.S. supply will 6.3 percent below estimated consumption last year. Inventories before next year’s harvest may fall to 656 million bushels, the lowest since 1996, a Bloomberg survey showed.
About 25 percent of the corn crop was in good or excellent condition as of Sept. 30, compared with a five-year average of 52 percent, USDA data show. The dry weather also sped up the harvest, which was 69 percent complete as of Oct. 7, compared with a five-year average of 28 percent.
Plunging output in the U.S. is expected to erode global corn reserves before the Northern Hemisphere harvest to the lowest since 2007, a separate Bloomberg survey showed. The average U.S. cash price was $7.3027 on Oct. 8, 26 percent higher than a year earlier, boosting costs for meat companies including Sanderson Farms Inc. and ethanol makers including Valero Energy Corp.
Prices have dropped from the record of $8.49 on Aug. 10, as exports slowed and farmers increased sales from newly-harvested fields. Corn futures for December delivery touched $7.05 on Sept. 28, the lowest since July 12. Soybean futures that reached an all-time high of $17.89 on Sept. 4 slipped as low as $15.04 on Oct. 3.
There are still signs that farmers will store more of their remaining supply in a bet prices will increase. Premiums paid on Oct. 9 above Chicago futures for corn delivered to export terminals near New Orleans and in Decatur, Illinois, were the highest since at least 2008, a sign that grain merchants are increasing inventories from this year’s harvest, said Tim Emslie, the research manager for Country Hedging Inc. in Inver Grove Heights, Minnesota.
“The cash markets are already reflecting tightening supplies and will lead the rally to slow usage,” said Emslie, who predicted corn would reach $8.50 in the next six months.
Corn, the primary source of livestock feed in the U.S., may reach $10 before this time next year because cattle and hog producers may not have culled herds even as feed costs rose, Hussein Allidina, head of commodities research at Morgan Stanley, said Oct. 3 in an interview at Bloomberg News offices in London.
With the drop in prices during the past two weeks, cattle and hog producers could have bought corn and sold livestock futures to lock in small profits, the Chicago-based Linn Group said in a report Oct. 5.
Domestic feed, food and fuel production will account for almost 89 percent of total usage, the highest in 40 years, USDA data show. Corn exports by the U.S. may fall to the lowest since 1975 as overseas buyers shift to other grains and suppliers, the government estimates. World inventories as a percentage of use before next year’s harvest will drop to the lowest since 1974, government data show.
“Exports are less important for corn prices than the demand for feed and ethanol,” AgResource’s Tierney said. Soybean farmers may see a smaller reduction in their harvest than the USDA predicted last month, after August rain improved yields. Production may be 2.763 billion bushels, or 4.9 percent more than the 2.634 billion estimated a month earlier, the Bloomberg survey of analysts showed. That’s still below the 2011 harvest of 3.093 billion.
Rising export demand will erode reserves before next year’s harvest to 135 million bushels, down from the 169 million the USDA estimated for Sept. 1, the survey showed.
U.S. exporters sold 1.297 million metric tons of soybeans in the week ended Sept. 27, the most since Nov. 25, 2010, the USDA said Oct. 4. Sales commitments for delivery before Aug. 31 rose to 23.47 million tons, 40 percent higher than a year earlier and equal to 82 percent of what the government forecast last month for the marketing year, USDA data show.
Sales of soy-based animal feed for delivery in the year that began Oct. 1 rose 54 percent to 2.53 million tons from 1.64 million a year earlier, the USDA said last week. Last month, the government said reduced production would cut U.S. exports 28 percent this year and soymeal sales by 17 percent.
“USDA export projections are too low, and possibly significantly too low,” said Randy Mittelstaedt, the director of research at R.J. O’Brien & Associates in Chicago. “Demand is not slowing, and any increase in production will be offset by an increase in export projections.” He predicted soybeans will rise to a record.
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–Editors: Steve Stroth, Patrick McKiernan
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