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Morgan Stanley’s Hussein Allidina is out with his latest agricultural commodities update.The news: We are in for a big burn on prices, as record heat and drought roasts corn and soybean crops into oblivion.
“We are raising our 2012/2013 corn and soy forecasts to account for tighter-than-expected balances. Our new price deck implies 3% and 4% upside to the corn and bean curves, respectively. While we expect that corn and soybean prices to average $7.85/bu and $16.00/bu, respectively, in the coming year, we expect that the inelastic nature of demand for these products, and the prospect of record tight inventories could send prices significantly higher for short periods of time in 2H12. Indeed, we anticipate periods of time in the coming months where corn trades in double-digits.”
The USDA’s current forecasts, he says, are way too optimistic.
“With US weather forecast to remain hot and dry through at least end-July and likely into August, the direction of yield estimates and production is likely lower still. Our yield forecasts, which assume July weather averages roughly as it has to date, with August’s weather deviation from normal half as strong as July, pegs corn and bean yields at 135.0 bu/acre and 40.0 bu/acre, respectively — versus the USDA at 146.0 bu/acre and 40.5 bu/acre.
“The USDA’s above-normal assumption of harvested/planted (H/P) area will likely prove too optimistic, with reports already emerging that fields are being abandoned; we forecast the H/P ratio flat YoY at 91.4%. History portends further downside to this estimate, as years with severe droughts also see greater abandonment (see Exhibit 8). Each 100bp decrease in the H/P ratio will temper production by 130 mln bu (assuming yields average 135.0 bu/acre).
And we haven’t begun talking about what the effect will be for livestock. The feed reduction implied by the crop yield drop will translate into the largest-ever decline in livestock herds.
“Even assuming an incremental 46 mln bu (23%) of US wheat feeding YoY in 12/13, our feed demand model suggests that this degree of corn feed rationing would require a nearly 10.17 mln unit decline in the USDA’s grain consuming animal unit (GCAU) index from its current estimate of 92.93 mln.
“While these cuts will have to be spread across the entire livestock industry, this decline in GCAU, if taken in one sector alone would translate into a 5.09 bln head (60%) YoY reduction in chicken production, a 6.6 mln head (48%) reduction in cattle on feed YoY or a 44 mln head (40%) reduction in the US pig crop.
“It would also represent the largest single-year reduction in the livestock herd (from a grain-demand perspective) in history. To achieve the magnitude of rationing needed, in the limited amount of time available, corn and and bean prices will need to move higher yet, in our view.”
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