2014 Corn Outlook

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2014 Corn Outlook

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Grain Analyst sees 2013-2014 old crop corn trading in a

range between $3.75 and $4.50 for much of 2014. We also

see 2014-2015 new crop corn trading to $3.50 by 2014 har-

vest. During the course of the year, hedgers and speculators

will have opportunities to take advantage of this continued

multiyear bear market in corn. Our outlook and recommen-

dations are at the bottom of this report.

“The Best Cure for High Prices is High Prices”Grain Analyst believes that unless we have major weather or

production issues in 2014, we are facing a multiyear bear mar-

ket in corn. The U.S. Corn market has just experienced a five

year bull market and many of the key trends that lead to such

high prices are now reversing. While there are certainly select

arguments and potential causes for higher prices in 2014, as

we will discuss during this report, the odds are that the U.S.

corn market is in the midst of a multiyear bear market.

Going forward, the function of the market will be to send corn

prices low enough to cut global acreage which will likely only

be realized due to substantially lower prices. Corn acres will

first be low from Brazil Safrina, then Argentina, and then U.S.

marginal land. Ukraine will remain the low cost producer in

the world and therefore be the last to cut corn acres.

BIOFUELS & ETHANOL HAVE PEAKEDThe biofuels and ethanol market has peaked and Grain Analyst

believes we will see no further expansion going forward.

Since 2002, biofuels demand has grown 137mm tons of grain

production of the 400mm tons total. As the EPA raised man-

dates and demand for ethanol was growing, the U.S. farmer

had to keep on producing more corn to meet ethanol demand.

In 2008, the U.S. consumed 145 billion gallons of gasoline

per year. This year, we are on pace to consume 132 billion

gallons. That trend is going to continue as we drive less and

older vehicles come off the road and are replaced by those

with greater fuel efficiency. Given a now constant 10% ethanol

usage, the blend wall is also coming down (see chart below).

On Friday, November 15, 2013 the EPA released their long

awaited announcement on reducing the Renewable Fuel Stan-

dard (RFS) mandate. The proposal for ethanol reduction is from

14.4 billion gallons to 13.0 billion gallons, a 1.4 billion gallon

reduction in corn ethanol for 2014. This must be viewed as the

ethanol mandate is not growing, but actually decreasing.

To make matters worse for the corn demand driver, ethanol

can be made from natural gas for 70 cents per gallon versus

$2.50 per gallon if made from corn. While the farm lobby is

too strong to shift the usage from corn to natural gas, the

economics suggest sector growth is status quo at best. If the

government ever gets serious about using the United States’

abundant natural gas resources for energy use, look for con-

tinued industrial applications for natural gas based ethanol.

In our Supply & Demand projections for 2014-15, we see corn

use for ethanol being held constant at 4,900 million bushels.

This will be the fourth year in a row that corn ethanol demand

will be below the 5,021 million bushel mark set in 2010-2011.

2014 Corn Outlook

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UNITED STATES HAS LOST CORN EXPORT MARKET DOMINANCE

High prices over the past five years has taught the world how

to produce corn in places where they never did before and

how to adjust fee formulas to lower overall cost, both at the

expense of U.S. export demand.

For much of the last century the United States accounted for

50% to 75% of total exports. The high price environment we

have experienced since 2008 has brought about new compe-

tition and new supply sources for importers. Argentina, Brazil

& Ukraine (ABU) have grown corn exports from 18mm tons

in 2008 to 24mm tons in 2013. In the 2012-2013 marketing

year, they represented 65% of total exports versus 25% five-

years ago. For that time period, Brazil was the world’s largest

corn exporter. Oh how times have changed!!!

To make matters worse, Chinese growth is flattening and

there appears to be no new driver to take its place. The USDA

made a huge adjustment to their take on China’s corn sup-

plies in the November 2013 WASDE report. China’s 2013-14

ending corn stocks were raised by 13mm tons. This was due

to a 5mm ton reduction in corn for 2012-13 industrial use and

an 8mm ton reduction for industrial use in 2013-14. In our

opinion, these reductions are proof of flat lining demand due

to slowing growth.

The U.S. has been losing exporting share since 2007/08, as

indicated in the chart below. The extended period of high U.S.

corn prices have allowed Argentina, Brazil and Ukraine to

increase production and become major players in the global

export market.

Grain Analyst forecasts U.S. exports for 2014-15 at 1,500

million bushels, down almost 40% from the record made in

2007-2008. With forecasts of a strong U.S. Dollar and in-

creased international competition, we believe the days of the

U.S. representing more than half of the world export market

are in the past.

DOMESTIC FEED DEMANDMeat demand in the Western Hemisphere may have found

a generational peak as the population ages (requiring less

caloric intake), price rations demand, and people eat healthier.

Since 2006, U.S. meat consumption per person has dropped

from 222 lbs. per year to 204 lbs. per year. The chart below

shows that corn feed use has been in a downward trend since

2005. Feed is projected higher this year as low-priced corn

and high-priced wheat have begun to shift feed demand back

to corn. However, this should be just enough to keep feed de-

mand for corn at about 5 billion bushels per year, which is still

1 billion less than the feed demand for corn ten years ago.

2014 Corn Outlook

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As for this chart itself, since the 1990s we have not had

much expansion in feed demand for corn (the orange bars

on the bottom). On low demand years, feed usage has been

just over 4 billion. On high demand years feed has reached

6 billion. Given our current demographics in the U.S., we

expect feed demand to hover around 5 billion bushels for the

foreseeable future. The blue bars on the top represent Food,

Seed and Industrial (FSI). This number has stayed relatively

consistent for decades and we see no reason why it should

change from the usual 1.4 billion bushels for years to come.

That leaves the middle yellow section, which is ethanol.

Without a new demand driver or an expansion in corn based

ethanol (which is not likely in the next few years), Total Do-

mestic Usage will flat line at best or recede at worst.

PRODUCTION & WEATHERU.S. corn production has seen sub-trend line yields 4 years in

a row. Since 1850, the U.S. has never seen five; the odds are

high for above trend line yields for the 2014-15 crop.

With normal weather and another year of 90+ million acres,

the potential supplies coming online have the capability to

dwarf forward demand, bringing stocks to use to all-time

highs. This is happening as the U.S. is expected to decrease

acreage low enough to remove acreage from production,

until a new demand engine is discovered, population growth

exceeds current production, or adverse weather cycles tem-

porarily create a reduction in supplies.

We feel that the only way the corn markets will see major

price appreciation is through production loss due to weath-

er or other unforeseen acts of God. That said, the stocks

on hand are currently large enough to weather any storm

limiting upward price movement. The weather rally of 2012

came during a time of very tight old crop supplies; this is not

the case going into 2014.

In our Supply & Demand projections chart below, the blue

column is the USDA estimates for the 2013-14 old crop as of

the November 2013 WASDE report. The next five columns

in yellow are Grain Analyst’s 2014-15 new crop Supply and

Demand Scenarios based on projected yields. Understand-

ing that weather will be the great unknown variable for next

year’s corn crop; we generated projections based on national

yields of 145, 150, 155, 160 and 165 so you can see what

poor production does to ending stocks. A trend line yield for

2014-15 will most likely be just under 165. You can see the

yield numbers highlighted in orange.

A 165 yield, which signifies a normal weather growing year,

gives the U.S. a carryout around 2,700 million bushels. This

type of carryout could lead Dec 14 Corn to $3.50 by the end

of the year. If there are weather issues and yield reduces, we

have projected higher prices. A growing season like 2011-12

when the yield was 147.2 could get prices back towards $6.00.

2014 Corn Outlook

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2013-14 OLD CROP OUTLOOKGrain Analyst sees cash Corn trading as high as $4.50 before

making its way towards $4.00 as plantings become success-

ful. If the March planting intentions shows corn acreage

above 90 million, we expect corn to break the $4.00 level

due to the outlook of the 2014/2015 carryout shown in our

USDA chart.

We encourage speculators to look for opportunities to sell

front month corn on rallies. We like hedgers looking for op-

portunities to sell covered calls on grain, going a few months

out to capture premium to add to final sales.

2014-15 NEW CROP OUTLOOKFor both speculators and hedgers alike, we like selling rallies

in Dec 14 corn as it could be a full dollar lower between

November 13 and November 14. We feel the sweet spot

for selling new crop comes in between $4.75 to $5.00, as

we see 2014 harvest prices between $3.75 and $4.00. We

also encourage traders and hedgers to evaluate put option

strategies to take advantage of potentially much lower prices

in the next year if we have a normal growing season. Options

sellers should be looking to sell Sept 14 and Dec 14 $5.00

calls to collect premium while option buyers would look to

build floors with the $4.50 Sept 14 & Dec 14 puts.

2014 Corn Outlook

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DISCLAIMERTHIS MATERIAL IS CONVEYED AS A SOLICITATION FOR

ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A GRAIN ANA-

LYST BROKER WHO PROVIDES RESEARCH MARKET COM-

MENTARY AND TRADE RECOMMENDATIONS AS PART OF

HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICI-

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OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK

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TIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNI-

CAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER

FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION

OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT

FROM OR CONTRARY TO THE OPINIONS AND RECOM-

MENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE

OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRAD-

ING FUTURES CONTRACTS OR COMMODITY OPTIONS

CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS

SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING

LEVERAGED POSITIONS AND MUST ASSUME RESPONSI-

BILITY FOR THE RISKS ASSOCIATED WITH SUCH INVEST-

MENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH

TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR

CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU

SHOULD READ THE “RISK DISCLOSURE” WEBPAGE AC-

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TRADING DOES NOT GUARANTEE OR VERIFY ANY PER-

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THE RISK OF LOSS IN TRADING COMMODITY FUTURES

AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL.

THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES

TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS.

THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS

FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS

LARGE GAINS.