What is to blame for the recent collapse of corn prices?

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The grain markets were rising from mid-December until the USDA’s Final 2011 Crop Production Report, Supply Demand Report, and Quarterly Grain Stocks Report, which were all released on Jan. 12. Declining yields in Brazil and Argentina had been pushing up values at the CME, until last Thursday, until the USDA released data that surprised the market. Corn closed down the 40-cent limit, and both bean and wheat markets also collapsed with abandon. Was the market drop the result of USDA finding a lot more available grain to supply the domestic and global demand, or was it the result of something else?

After closing limit down on Thursday and dropping another 12-cents on Friday, many farmers were less than pleased with the USDA’s numbers, wondering how they could be so much higher than what the grain traders were expecting. But someone watching numbers for many years contends that USDA numbers were probably close to reality, and the traders who estimated what the USDA would say were more optimistic than they should have been. University of Illinois grain marketing specialist Darrel Good says the surprises in the report would not have been such a shock, had the traders been looking for numbers that were closer to reality. Consequently, he suggests that the traders were more to blame for the market declining than anything else.

In his weekly newsletter, Good says the Dec. 1 corn stocks of 9.642 billion bushels were 425 million less than 2011, the least in five years, and only 240 million bushels larger than the average of the guess of the market. He said even three of the 15 companies offering an estimate were in the neighborhood of what the USDA reported.

Good said part of the reason corn traders were surprised was that the stocks numbers were above their expectations, along with their expectations for the size of the 2011 corn crop. He says the market does not have to offer any justification of why it thought there would be a 30 million bushel reduction in crop size, compared to the last estimate. Instead, the USDA raised its November estimate by 48 million, which as only 0.4% larger than the November forecast. He calculated the spread of the change as one-third of the surprise in the stocks estimate.

Good said the market was apparently looking for a high level of use that would correct the estimated use of the prior quarter, which the market thought underestimated feed and residual use. He said when you consider the total use of corn during the September to December quarter, the percentage of total use was an unusually large 43.2 percenr, which compares to a range of 38.2 percent to 40.7 percent over the prior 4 years.

Good says there are still problems with estimating feed use during a quarter along with the production of ethanol and the production of distillers’ dried grains that are also fed. He says there is still no explanation for USDA’s sharp decline in feed use of corn, use of all grains, and all feeds per animal unit in the last half of the marketing year for the 2010 crop.

Summary:
Grain prices, and particularly corn prices, collapsed after the USDA reported its final production estimates and stocks on July 12. But, curiously, the market was expecting numbers that were not all that different from what was reported by USDA. Nevertheless, the small increases were seen as negative by the market since it was expecting small decreases. Since the USDA numbers were in line with its prior reports, the collapse of the market was more of a function of traders not guessing properly, instead of the USDA being incorrect in its estimates.

Source: FarmGate blog


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