January corn reports offer something for bulls and bears
Even though feed and residual use was increased by 300 million bushels, total domestic use was only increased by 100 million bushels. That’s because exports were lowered by 200 million bushels. Although that’s a bearish change, it was well-anticipated prior to the report based on abysmal foreign corn sales and shipments so far this marketing year. With the 100-million-bushel net increase in total use and 55-million-bushel increase in total supplies, ending stocks declined by 45 million bushels since USDA’s December estimate. Thus, 2012/13 ending stocks are now projected to be 602 million bushels, 387 million bushels less than last marketing year and the smallest since August 31, 1996. Of note, it is about 65 million bushels less than the average expected prior to the report’s release. With the changes in the supply and demand balance sheet, the ending stocks-to-use ratio dropped to 5.3% from 5.8% last month.
The continued reduction in 2012/13 domestic ending stocks and tightening of the stocks-to-use ratio further illustrates how tight U.S. supplies are and how sensitive the market will be to drought or other production problems in 2013. Global demand for corn will shift to South America this spring and summer while U.S. exports remain lackluster. Even the U.S. will import much more corn than usual. As the trade has focused more on South America to supply corn until the availability of the 2013 crop in the U.S., many worried that adverse weather conditions during planting in November and early December would lower crop yields in the southern hemisphere.
In fact, many were expecting USDA to further lower Argentine corn production. However, in last week’s WASDE report, USDA actually increased Argentine corn production by 0.5 mmt from its December estimate to 28 mmt, which was 2.1 mmt more than the average trade expectation (Table 2). In its revision, USDA cited improved growing conditions that were expected to carry forward through the remainder of the growing season. USDA also raised Brazilian corn production by 1 mmt this month, which was more than the 0.4 mmt increase expected.
Despite the potential for South American production to ease supply concerns through the spring and summer, the WASDE and Grain Stocks report illustrate the tenuous nature of the old crop corn market. With an extraordinarily tight stocks-to-use ratio, support is well-established at current levels. And, some upside potential remains, although it is limited due to the lack of profitability in the ethanol processing and livestock feeding sectors. The futures trade on Friday following the reports’ release showed these concerns as the old crop futures contract months were buoyed by the bullish items in the reports, while new crop futures months were pressured by the bearish supply increases.