January corn reports offer something for bulls and bears
For the last six years, the March corn futures contract traded either limit higher or limit lower following USDA’s release of the January World Agricultural Supply and Demand Estimates (WASDE) and the January Grain Stocks reports. Despite these reports being released while the futures market was trading, the market didn’t trade to the limit last Friday when the reports were released.
That’s not because there weren’t significant changes to the supply and demand tables; rather, the reports offered both bullish and bearish figures.
USDA made several changes to the domestic supply and demand balance sheet for corn in the January WASDE report. Prior to the report’s release, many expected a reduction in harvested acres. In fact, USDA did reduce harvested acres by 300,000 acres. Interestingly, planted acres were also increased by 300,000 acres. This effectively increased the 2012 acreage abandonment from 9.5% to 10.0%, closer to what many had been expecting throughout the drought-stressed growing season.
USDA also increased national yield by 1.1 bu/a to 123.4 bu/a in its January crop production report, which is usually considered the final yield estimate for the marketing year (Table 1). This yield increase offset the reduction in harvested acres and raised total production for the 2012/13 marketing year by 55 million bushels. This production increase came as a bit of a bearish surprise to the market as traders were, on average, expecting little change in national yield and a reduction in harvested acres. So, total production ended up being 154 million bushels higher than the average expected prior to the report's release.
The bearish nature of the corn supply numbers were offset by larger-than-anticipated domestic use. USDA increased feed and residual usage of corn for the 2012/13 marketing year by 300 million bushels. This is based on its increase in beef, pork, and poultry production for the year. Additionally, it reflects stronger-than-expected livestock demand for corn from September through November 2012 as measured by the implied disappearance calculated from the quarterly Grain Stocks report, which was also released last Friday.
USDA’s survey of on-farm and off-farm grain inventory found 8.030 billion bushels of corn on December 1 (Table 3). After adjusting the September 1, 2012 corn stocks of 988 million bushels by imports and the crop production harvested last fall, the 8.030 billion bushels supply of corn on December 1 implied total disappearance from September 1 through December 1 was 3.74 billion bushels. Even though this was down about 200 million bushels compared to the same time period the year before, it was well above the trade’s pre-release expectations. Thus, total corn stocks on December 1 were 180 million bushels less than the average expected, as shown in Table 3.
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.
By bull spreading the old crop and new crop futures contracts, traders demonstrated their concern about a rise in corn prices through the spring and summer as well as some confidence that supplies would rebound with the 2013 crop. Should planted acreage in 2013 approach 99 million acres and national yields return to near trendline levels, this confidence would be well-founded. In such a scenario, ending stocks for the 2013/14 marketing year could comfortably surpass 1.5 billion bushels. However, if the drought continues across a large area of the Corn Belt in 2013 and yields are significantly impacted, old crop corn prices will rise as the market tries to increase the carry-in supply for the next marketing year to offset 2013 production shortfalls.
What does this all mean for corn sellers and buyers? In two words: uncertainty and volatility. For old crop corn sellers, last Friday’s reports re-ignited the bullish sentiment for old crop prices and were a reminder that much of the sell-off for the past month was a result of noncommercial (index fund) selling. So, corn sellers should be able to exercise patience for the market to retrace its losses and target the $7.40-$7.50/bu area for additional sales.
Similarly, sellers of new-crop corn will also likely find patience to be a virtue. Even though early-spring projections will likely call for 98-100 million acres of corn to be planted this year (which will pressure new crop prices), at some point during the growing season there is likely to be enough of a weather market ‘scare’ about drought to provide good selling opportunities.
For corn buyers, the procurement strategy that has been discussed in past columns seems to hold: buy one-to-two months of corn needs on breaks in prices (as we’ve seen in the past month) and buy only hand-to-mouth needs when the market has a bullish infusion of information (like following Friday’s USDA reports).
The information in this report is believed to be reliable and correct. However, no guarantee or warranty is provided for its accuracy or completeness. This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers. The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information. There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.