Corn futures rallied the daily, 30-cent trading limit Friday after the USDA predicted a smaller than expected harvest and said domestic supplies will fall to a 15-year low, underscoring escalating feed costs for U.S. pork, beef and dairy producers over the coming year.
American farmers will harvest an estimated 12.66 billion bushels of corn this year, down 3.8 percent from a September projection and down 3.4 percent from the record 13.11 billion-bushel crop of 2009, the USDA said in a report released Friday.
The projected harvest was about 31 million bushels below analysts’ expectations, sparking a flurry of buying at the Chicago Board of Trade that also sent soybean and wheat futures up the daily price limits. Additionally, the USDA trimmed its average corn yield estimate to 155.8 bushels an acre, down 4.1 percent from 2009 and about 2.6 percent below expectations.
Today’s USDA numbers were a “shocker,” BB&T Capital Markets analyst Heather Jones said. “Feed costs are “poised to surge further.”
“The trade had anticipated a cut” in corn yields, Jones said, “but nothing this drastic, as projections are generally revised at a more moderate pace.”
Harvest prospects deteriorated over the past two months after heavy rains and extreme heat during the second half of summer hampered crop development. In August, the USDA estimated the crop at 13.37 billion bushels and the average yield at 165 bushels an acre. Both would have been all-time highs.
Corn “stands out as the crop of disappointment for 2010,” Dan Basse, president of Chicago-based AgResource Co., said in a report earlier this week. A continued corn futures rally rising to $6.20 to $6.60 a bushel is likely, Basse said today, with an “outside chance” at $7 or higher.
“The U.S., nor world, can stand any additional crop loss,” Basse said Friday.
December corn futures Friday rose 30 cents, the maximum initial daily move allowed by the CBOT, to $5.28 ¼ a bushel. July futures also rose 30 cents, settling at $5.45 ¼.
On September 27, December corn reached $5.28 ¾ a bushel, the highest price for a closest-to-expiration contract since September 2008. December futures are up 41 percent since the end of June.
Corn prices probably will rise further as livestock feeders compete with exporters and ethanol producers for shrinking grain supplies, analysts say. By the end of the 2010-11 marketing year next August, U.S. corn stockpiles are expected to fall to 902 million bushels, the lowest since 1995-96.
The USDA raised its projected average 2010-11 U.S. corn price to $4.60 to $5.40 a bushel from $4 to $4.80 in a previous estimate.
Jack Scoville, a vice president and analyst with Price Futures group, Inc., in Chicago, said $5.50 to $5.75 a bushel are the next upside targets for corn futures. Today’s USDA figures were “very bullish” for corn, Scoville said.
Beef and pork producers have already seen margins come under pressure from surging corn costs in recent months, and the prospect of even higher prices next year poses a growing threat to the industry’s recent return to profit, analysts say.
In mid-2008, a spike in corn above $7.60 a bushel helped trigger a deep slump across the livestock industry, as billowing losses tied to soaring feed costs forced pork and beef producers to cut herds. This spring, producers started making money again as animal prices rose.
Declining corn stocks are “worrisome,” said Justin Gleghorn, a broker and analyst with Brock Thompson Trading, LLC, in Amarillo, Tex. Also, “the decrease in estimated yield is very concerning and has the potential to only worsen as we complete harvest. “
“We heard all summer that we would produce a large crop, and while that may be, we have to have these large crops to meet our demand,” Gleghorn said.
Gleghorn pegged $6 a bushel as the next resistance level for corn futures. If prices surpass that level, $6.65 is the next target, he said.
Livestock producers “have to lock in corn price,” Gleghorn said. “At these levels, it is wreaking havoc on cattle profitability and there is room for more damage to be done.”
Investors expect rising feed costs to pressure profits for the largest U.S. meat processors. Shares of Tyson Foods, Inc., the country’s biggest meat processor, fell 7.8 percent in early afternoon trading today. Top pork producer Smithfield Foods, Inc., dropped almost 6 percent.
Based on the USDA’s figures, the U.S. livestock industry’s corn feed expenditures will jump 48 percent in the 2010-11 marketing year, to $27 billion.
Climbing feed costs may slow recent expansion in the U.S. poultry industry, BB&T’s Jones said. For beef and pork, any expansion plans probably will be held in check, meaning cattle and hog prices probably will remain supported amid tight supplies.
“We believe the fundamental outlook for pork and beef is much more constructive” compared with poultry, Jones said in today’s report. “Supply, both domestically and globally, is much tighter with very little likelihood of expansion. There had been fears of domestic expansion in hog production, but we believe the surge in feed will result in restraint.”
At today’s close, December lean hog futures rose 2.8 cents to 74.1 cents a pound. December live cattle futures rose 2.025 cents to 99.125 cents a pound.